HH Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah

Transcription

1 Annual Report 2011

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4 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Table Of Contents Table Of Contents Board of Directors Chairman s Message Board of Director's Report Independent Auditort Report Financial Statements Takaful Insurance Company

5 HH Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah Amir of the State of Kuwait HH Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah Crown Prince of the State of Kuwait HH Sheikh Jaber Mubarak Al-Sabah Prime Minister of the State of Kuwait 3

6 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Board of Directors Dr. Ahmed Bin Saleh Al-Dehailan Chairman Mr. Abdulrazaq M. Al-Wohaib Managing Director - C.E.O. Mr. Ayham Y. Gharaibeh Vice Chairman Mr. Sameer A. Al-Gharaballi Board Member Mr. Mostafa H. Khalifa Board Member 4

7 Chairman s Message In the name of Allah the Merciful Dear shareholders, The Takaful concept has been established on solid values of synergy and cooperation to face the potential risks through the real and effective participation in creating effective solutions to those risks. We are proud at t azur that these values represent the main principle in our business under the provision of Islamic Shariaa. This was confirmed by our Prophet Muhammad - peace be upon him - on the principle of Takaful in his Hadeeth and said: He who reliefs a musilim Allah will relieve him of distress on the Day of Qeyama (Narrated by Muslim). One of the main responsibilities of t azur takaful insurance company to the community and its members is promoting the awareness of insurance products compliant with the provisions of Islamic Shari'a by introducing products and services & innovative insurance solutions that serves the individual and society. We at t azur are committed to uphold the values of Takaful in the community through mutual support and sharing of resources as t azur aims to support the communities and raise the insurance awareness to achieve the true principle of Takaful. We at t azur have made the efforts to put our vision on track of being leaders in building the company as leading takaful group with international aspirations and we have made the procedures to achieve high professionalism through risk management, strengthening the internal audit control and application of the international standards. I here assure that we will continue in moving forward to achieve our goals, support our economy, develop our human resources and commit to our values. Regards, Dr. Ahmed Bin Saleh Al-Dehailan Chairman 5

8 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Dear Shareholders, Board of Directors Report In the name of Allah the Merciful It is with great pleasure, and on behalf of my colleagues, members of the board of t azur Takaful Insurance Company, that I submit the annual report of the company for the financial year ending December 13, 2011 to document our company s growth by the efforts its management and employees. The keenness of the Board of Directors over the past year to focus the efforts on increasing the company s share of premiums written in the insurance market, and the exploitation of surplus funds available to the shareholders and the policyholders has allowed us to make higher profits for shareholders and policyholders, which achieved due to the well-studied strategies and market research. The Board of Directors of t azur was keen to take the necessary steps to implement the international standards concerning policyholder s protection and risk management in line with our strategy to take a leading role of the Takaful insurance market. Dear Shareholders, Due to our commitment to our studied strategy and highest technical standards for Takaful activities, and our commitment to provide the highest level of services, t azur has succeeded in writing good results and achieving its goals. t azur Takaful has achieved the first place in terms of technical results between the takaful companies and is considered as one of the most prominent companies achieving operational profits. t azur has also succeeded in obtaining 7.6% of the total premiums in the takaful market in Kuwait. The message that t azur Takaful Insurance formulated in writing the takaful concept has also included its responsibility toward the community by supporting the sectors of health, education and insurance awareness. t azur is also focusing on the localization of the jobs where it succeeded in exceeding the required rate for national employment and is willing to recruit and support the newly graduated Kuwaitis. 1.Investment Activity The management of the company was conservative in the investment activities by investing in low-risk financial products for the best management of the capital by choosing safe investment opportunities in line with t azur s policy to diversify the investment portfolio. 2.Insurance Activity At the level of insurance activity, the company had the efforts to acquire a share of the insurance market and managed to obtain a good market share that we are willing to increase in the coming 6 التقرير السنوي لسنة املنتهية في 31 ديسمبر 2011

9 years. The company has succeeded to increase the contribution rate underwritten by 50% and reached total contributions Written in 2011 of 2,949,355 while the claims paid for 2011 reached the amount of 980,760 as our believes in protecting our policyholders and to fulfill our commitment towards them. 3.Financial Results In terms of financial results, the company has achieved a total profit of 204,294 for the fiscal year 2011 with an increase rate of 74%. The total assets in 2011 reached 6,104,399 with an increase rate of 3.5%. The earnings per share amounted 4.09 fils, an increase of 74% Dear Shareholders, After presenting the company s achievements, we at t azur promise you with more development of our company to fulfill a pioneering role in the Takaful market, to raise the insurance awareness to the public and commit to delivering the highest quality products and services by which we seek to repay a part of our country s giving under the leadership of His Highness the Amir and His Highness the Crown Prince and the wise government and people of Kuwait. We here express our sincere thanks to our Shairaa advisory board for their efforts and cooperation and we also extend our thanks to the company s executive management and all the employees for their efforts in achieving t azur s goals. And we here recall with pride and appreciation the role of Ministry of Commerce & Industry in supporting us. Finally, I take this opportunity to extend my sincere thanks and gratitude to our shareholders and policyholders for their trust and support. Regards, Dr. Ahmed Bin Saleh Al-Dehailan Chairman 7

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12 Takaful Insurance Company K.S.C. (Closed) State of Kuwait The financial statements as at 31 Decmber 2011 Contents Page Statement of financial position 11 Statement of comprehensive income 12 Statement of changes in equity 13 Statement of cash flows 14 Notes to the financial statements Reporting entity Basis of preparation Significant accounting policies Wakala receivables Amounts due from policyholders fund Qard Hassan to policyholders fund Investment deposits Equity Investment income General and administrative expenses Policyholders takaful operations Policyholder s statement of assets and liabilities Policyholders statement of takaful operations Related party Risk management Fair value Earnings prohibited under Shari a Contingencies and commitments 35 10

13 Statement of financial position as at 31 Decmber 2011 Assets Cash and bank balances 166,375 36,575 Wakala receivables 4 4,533,867 4,828,973 Amounts due from policyholders fund 5 487, ,640 Qard Hassan to policyholders fund 6 748, ,699 Other assets 3,194 2,929 Investment deposits 7 165, ,000 Total assets 6,104,399 5,899,816 Note Liabilities Other liabilities 5,621 5,332 Total liabilities 5,621 5,332 Equity Share capital 9 5,000,000 5,000,000 Statutory reserve 9 110,592 93,197 Voluntary reserve 9 110,592 93,197 Retained earnings 877, ,090 Total equity 6,098,778 5,894,484 Total liabilities and equity 6,104,399 5,899,816 The notes on following pages are an integral part of these financial statements. Dr. Ahmed Bin Saleh Al-Dehailan Chairman Abdulrazaq Mohammed Al-Wohaib Managing Director 11

14 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Statement of comprehensive income for the year ended 31 Decmber 2011 Note Investment income 9 182, ,110 General and administrative expenses 10 (8,386) (22,373) Profit for the year before Board of Directors remuneration, contribution to Kuwait Foundation for the Advancement of Sciences ( KFAS ) and Zakat Distributions to shareholders of surplus from takaful operations 173, , ,653 - Board of Directors remuneration - (3,000) Contribution to KFAS (1,566) (1,105) Zakat (1,739) (1,227) Profit for the year 204, ,405 Other comprehensive income - - Total comprehensive income for the year 204, ,405 The notes on following pages are an integral part of these financial statements 12

15 Statement of changen in equity for the year ended 31 Decmber 2011 Share capital Statutory reserve Voluntary reserve Retained earnings Total Balance at 1 January ,000,000 80,923 80, ,233 5,777,079 Total comprehensive income for the year , ,405 Transfers (note 9) - 12,274 12,274 )24,548( - Balance at 31 December ,000,000 93,197 93, ,090 5,894,484 Balance at 1 January ,000,000 93,197 93, ,090 5,894,484 Total comprehensive income for the year , ,294 Transfers (note 9) - 17,395 17,395 )34,790( - Balance at 31 December ,000, , , ,594 6,098,778 The notes on following pages are an integral part of these financial statements. 13

16 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Statement of cash flows for the year ended 31 Decmber Cash flows from operating activities Profit for the year 204, ,405 Adjustments for: Investment income (182,332) (145,110) Settlement of Qard Hassan (33,653) - Changes in: - Other assets (265) 40,548 - Other liabilities 289 (8,791) Net cash (used in) / generated from operating activities (11,667) 4,052 Cash flows from investing activities Decrease / (increase) in wakala receivables 295,106 (2,889,881) Decrease in financial assets carried at fair value through profit or loss - 2,819,245 Investment income 182,332 55,579 Net cash generated from / (used in) investing activities 477,438 (15,057) Cash flows from financing activities Movement in due from policyholders fund (53,748) (178,529) Movement in Qard Hassan (315,876) (184,521) Distributions to shareholders of surplus from takaful operations 33,653 - Net cash used in financing activities (335,971) (363,050) Net increase / (decrease) in cash and cash equivalents 129,800 (374,055) Cash and cash equivalents at 1 January 36, ,630 Cash and equivalents at 31 December 166,375 36,575 The notes on pages 7 to 29 are an integral part of these financial statements. 14

17 1) Reporting entity Notes to the financial stataements for the year ended 31 Decmber 2011 T azur Takaful Insurance Company K.S.C. (Closed) ( the Company ) is a closed Kuwaiti Shareholding Company incorporated in the State of Kuwait on 17 July The Company was previously called Waseal Takaful Insurance Company and is registered under the Insurance Companies and Agent Law No. 24 of 1961, as amended. The Company is a subsidiary of T azur Company B.S.C. (c) ( the Parent Company ) and is engaged in: Carrying out all types of takaful activities and related activities, including takaful and retakaful; Investing the funds available to the Company in various activities that commensurate with the Company s objectives and not in conflict with the provisions of the Islamic Shari a and established rules and regulations; Providing takaful and retakaful consultancy and technical studies to companies involved in similar activities; and Investing the contributed funds from policyholders and returns thereon. Takaful is an Islamic alternative to a conventional insurance and investment program, based on the mutual funds concept, where each policyholder will receive his share in the surplus arising from takaful activities, in accordance with the Company s articles of association and the approval of the Fatwa and Shari a Supervisory Board. The Company conducts business on behalf of the policyholders and advances funds to the policyholders operations as and when required. The shareholders are responsible for liabilities incurred by policyholders in the event the policyholders fund is in deficit and the operations are liquidated. The Company holds the physical custody and title of all assets related to the policyholders operations; however such assets and liabilities together with the results of policyholders lines of business are disclosed in the note 13. The Company maintains separate books of accounts for policyholders and shareholders and income and expenses that are clearly identifiable are recorded in the respective books of accounts. The Fatwa and Shari a Supervisory Board determines the basis of allocation of common expenses. All takaful and investment activities are conducted in accordance with Islamic Shari a, as approved by the Fatwa and Shari a Supervisory Board. These financial statements were authorized for issue by the Board of Directors of the Company on 15 January The shareholders of the Company have the power to amend these financial statements at the Annual General Assembly meeting. The Annual General Assembly held on 28 April 2011 approved the financial statements of the Company for the year ended 31 December 2010 and approved the Directors fees of 3,000. 2) Basis of preparation a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) and the requirements of the Kuwait Commercial Company Law of 1960, as amended, Ministerial Order No.18 of 1990 and the Company s articles and memorandum of association. b) Basis of measurement The financial statements have been prepared on the historical cost or amortized cost basis. 15

18 Takaful Insurance Company K.S.C. (Closed) State of Kuwait c) Functional and presentation currency These financial statements are presented in Kuwaiti Dinars ( ), which is the Company s functional currency. d) Amended standard adopted by the Company IAS 24 Related party disclosures (Revised) The amended Standard clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government related entities. e) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which estimates are revised and in any future periods affected. Information about critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements is included in the following notes: Note 3 (c) Impairment Note 3 (d) Provisions Note 13 Policyholders operations. f) Standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2011 and have not been applied in preparing these financial statements. The management anticipate that the adoption of these Standards and Interpretations once become effective in future periods will have no material financial impact on the financial statements in the period of initial application except for the adoption of IFRS 9, which becomes mandatory for the Company s 2015 financial statements and may change the classification and measurement of financial assets. IFRS 9 is the first standard issued as part of a wider project to replace IAS 39. The new standard retains but simplifies the mixed measurement model and establishes two primary measurement categories for financial assets: amortised cost and fair value. The basis of classification depends on the entity s business model and the contractual cash flow characteristics of the financial asset. The guidance in IAS 39 on impairment of financial assets and hedge accounting continues to apply. Management of the Company are in the process of assessing the impact of the adoption of IFRS 9 on the Company s financial statements. 16

19 3) Significant accounting policies The accounting policies set out below have been consistently applied by the Company. a) Financial instruments i. Non-derivative financial assets The Company classifies non-derivative financial assets into the loans and receivables category. The Company initially recognizes loans and receivables on the date that they are originated. All other financial assets are recognized initially on trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expires, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks of ownership of the financial asset are transferred. Any interest in such transferred financial assets that is created or retained by the Company is recognized as a separate asset or liability. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective profit method, less any impairment losses (see note 3(c)). Loans and receivables comprise of cash and bank balances, investment deposits, wakala receivables, amounts due from policyholders, Qard Hassan to policyholders fund and other receivables. ii. Non-derivative financial liabilities Financial liabilities comprises of other liabilities. All financial liabilities are recognized initially on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged, cancelled or expire. The Company classifies non-derivative financial liabilities into the other financial liability category. Such financial liabilities are recognized initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using effective profit method. b) Cash and cash equivalents Cash and bank balances comprise cash balances and call deposits with original maturities of three months or less. c) Wakala receivables Wakala receivables comprise amounts invested with financial institutions in various investment products. Wakala receivables are stated at the gross amount receivable, net of deferred profit receivable and provision for impairment. Profit receivable is recognised on a time apportionment basis taking account of the profit rate attributable and the balance outstanding. d) Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. 17

20 Takaful Insurance Company K.S.C. (Closed) State of Kuwait e) Impairment A financial asset not classified as at fair value through the statement of comprehensive income is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event(s) had an impact on the estimated future cash flows of that asset that can be estimated reliably. The Company considers evidence of impairment for financial assets measured at amortized cost (loans and receivables) at both a specific asset and collective level. All individually significant assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risks characteristics. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective profit rate. Losses are recognized in the statement of comprehensive income and reflected as an allowance account against loans and receivables. When an event occurring after the impairment was recognized causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the statement of comprehensive income. f) Provisions A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle that obligation. Provisions are measured at the management s best estimate of the expenditure required to settle the obligation at the reporting date and are discounted to present value where the effect is material. g) Employee benefits Kuwaiti employees Pensions and other social benefits for Kuwaiti employees are covered by the Public Institution for Social Security Scheme, to which employees and employers contribute monthly on a fixedpercentage-of-salaries basis. The Company s share of contributions to this scheme is charged to the statement of comprehensive income in the year to which they relate. Expatriate employees Expatriate employees are entitled to an end of service indemnity payable under the Kuwait Labor Law and the Company s by-laws based on the employees accumulated periods of service and latest entitlements of salaries and allowances. h) Revenue recognition Revenue represents income from wakala receivables, bank balances and investment deposits. Revenue from these items is recognized on a time apportionment basis using the effective profit rate of return on outstanding balances. Shareholders share of takaful surplus is determined based on the Company s bylaws and takaful practices and is recognized in the statement of comprehensive income upon approval by the Board of Directors and the Fatwa and Shari a Supervisory Board. 18

21 i) Kuwait Foundation for Advancement of Sciences ( KFAS ) Contribution towards KFAS is computed at 1% of taxable profit of the Company after deducting Board of Directors remuneration in accordance with the modified calculation based on the KFAS s Board of Directors resolution which states that the income from associates and subsidiaries, Board of Directors remuneration, transfer to statutory reserve should be excluded from the profit for the year when determining the contribution. j) Zakat Contribution towards Zakat is computed at 1% of the net profit for the period and provided for in accordance with the requirements of Law No. 46 of 2006 and charged to the statement of comprehensive income. 4) Wakala receivables Gross amount 4,572,826 4,869,496 Deferred income (38,959) (40,523) 4,533,867 4,828,973 The average profit rate attributable to wakala receivables is 3.58% (31 December 2010: 2.22%) per annum 5) Amounts due from policyholders fund At 1 January 433, ,111 Policyholders deficit absorbed by Qard Hassan (note 7) (349,529) (184,521) Distributions to shareholders of surplus from takaful operations (note 3(n)) 33,653 - Net movement of amounts due from policyholders 335, ,050 Settlement of Qard Hassan (note 6) 33,653 - At 31 December 487, ,640 19

22 Takaful Insurance Company K.S.C. (Closed) State of Kuwait 6) Qard Hassan to policyholders fund At 1 January 432, ,178 Policyholders deficit absorbed by Qard Hassan 349, ,521 Settlement of Qard Hassan )33,653( - At 31 December 748, ,699 In accordance with the article of association, the deficit from takaful operations of the previous year is covered by Qard Hassan from the shareholders. The Qard Hassan given by the shareholders will be settled from the surplus from the takaful operations in future years at the discretion of the Company s Directors and the Fatwa and Shari a Supervisory Board. 7) Investment deposits In accordance with Insurance Companies and Agent Law No. 24 of 1961, as amended, an amount of 165,000 (2010: 165,000) has been deposited with a Kuwaiti financial institution as security to underwrite general and takaful business. The average rate of profit earned on the deposits during 2011 was 3.4% (31 December 2010: 3.2%) 8) Equity 8.1 Share capital The authorized share capital of the Company is 10,000,000 comprised of 100 million shares of 100 fils each (31 December 2010: 10,000,000 comprised of 100 million shares of 100 fils each). The issued and paid-up share capital of the Company is 5,000,000 comprised of 50 million shares of 100 fils each (31 December 2010: 5,000,000 comprised of 50 million shares of 100 fils each). 8.2 Statutory reserve In accordance with the Kuwait Commercial Companies Law of 1960, as amended, and the Company s articles of association, 10% of the profit for the year is to be transferred to the statutory reserve until the reserve totals 50% of the paid up share capital. Distribution of this reserve is limited to the amount required to enable the payment of a dividend of 5% of paid up share capital to be made in years when retained earnings are not sufficient for the payment of a dividend of that amount. 8.2 Voluntary reserve In accordance with the Company s articles of association, 10% (2010: 10%) of the profit for the year before contribution to KFAS, Zakat and Directors remuneration is to be transferred to a voluntary reserve. 20

23 9) Investment income Wakala profit 170,130 84,551 Profit from investment deposits 12,202 2,475 Gain on sale of investments at fair value through profit or loss - 57,629 Other income ) General and administrative expenses 182, , Staff costs 571, ,515 Rent 57,146 64,717 Advertising expenses 46,114 25,537 Professional fees 43,458 92,219 Stationery and computer expenses 30,139 13,550 Depreciation 22,552 12,277 Others 106, ,039 Total 877, ,854 General and administrative expenses allocated to policyholder s operations (note 13) (869,115) (831,481) 8,386 22,373 The general and administrative expenses have been allocated to policyholders operations based on a decision of the Fatwa and Shari a Supervisory Board (note 13). 11) Policyholders takaful operations a) The significant accounting policies used in accounting for the takaful operations are set out below. All other accounting policies are consistent with those relating to the Company and have been consistently applied. i. Contributions written Gross contributions are credited to income at the inception of the policy and over the period of the takaful coverage, which represent the total contribution written in the year, including contributions on annual policies covering part or all of the following year. Unearned contribution represent the portion of contributions written related to the unexpired period of coverage. A minimum of 25% of the contributions collected are deferred for marine 21

24 Takaful Insurance Company K.S.C. (Closed) State of Kuwait takaful contracts and minimum of 40% of the contributions collected are deferred for all other types of takaful contracts except for life takaful as per the insurance law. Unearned contributions are reported under liabilities under policyholders liabilities. Contributions ceded to retakaful operations are deducted from gross contributions to arrive at net contribution. ii. Net claims incurred Claims incurred in the period are charged to policyholders statement of takaful operations. iii. Retakaful ceded Retakaful ceded are the contracts entered into by the Company with retakaful operators under which the Company is compensated for losses on policies issued. The benefits to which the Company is entitled under its retakaful contracts held are recognised as retakaful assets and included in policyholders statement of assets and liabilities. These assets consist of retakaful operator s share of outstanding claims that are dependent on the expected claims and benefits arising under the related retakaful policies. Amounts recoverable from or due to retakaful operators are recognised consistently with the amounts associated with the underlying takaful contracts and in accordance with the terms of each retakaful contract. The retakaful liabilities are primarily contributions payable for retakaful contracts and are recognised as an expense when due in the policyholders statement of assets and liabilities. Retakaful assets are assessed for impairment on an ongoing basis. If there is objective evidence that the retakaful asset is impaired, the carrying amount of the retakaful asset is reduced to its recoverable amount and an impairment loss is recognized in the policyholders statement of takaful operations. Objective evidence for impairment is assessed as a result of an event that occurred after initial recognition of the retakaful asset that the Company may not be able to receive all the amounts due under the terms of the policy and that the event has a reliably measurable impact on the amounts that the Company will receive from the retakaful operator. iv. Contributions receivable Contributions receivable represent contributions under collection on account of policies underwritten and are carried at its nominal value less impairment losses and provision for doubtful debts, if any. v. Outstanding claims reserve Estimates have to be made for both the expected ultimate cost of claims at the reporting date and for the expected ultimate cost of claims incurred but not reported at the reporting date. Outstanding claims reserve is based on estimates of the loss which will eventually be payable on each unpaid claim, established by management based on available information and on past experience and modified for changes in current conditions, increased exposure, rising claims cost and the severity and frequency of recent claims as appropriate. Incurred But Not Reported ( IBNR ) claims are provided based on statistical information related to actual past experience. Outstanding claims from prior years are reviewed periodically and adjusted based on current circumstances. vi. Liability adequacy test At each reporting date, liability adequacy tests are performed to ensure the adequacy of the takaful liabilities using current estimates of future cash flows under takaful contracts. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses are used. Any deficiency is immediately charged to the policyholders statement of takaful operations by establishing a provision for losses. 22

25 b) Use of estimates and judgements Key sources of estimation and uncertainty i. The ultimate liability arising from claims made under takaful policies The estimation of the ultimate liability arising from the claims made under takaful contract is the most critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimate of the liability that will be ultimately payable for such claims. Estimation of the ultimate cost of certain claims is a complex process and cannot be done using conventional techniques and therefore it is estimated based on management assessment. In the opinion of the management, the liability for takaful claims carried at the reporting date is adequate. i. Allowance for contributions receivable The recoverable amount of contributions receivable is calculated as the present value of the expected future cash flows, discounted at the original effective profit rate. Short-term balances are not discounted. Specific provision for impairment is established if there is objective evidence that all the amounts due will not be collected. The amount of specific provision is determined as the difference between the carrying amount and the recoverable amount of the receivable. If in a subsequent period the amount of impairment loss decreases and the decrease can be linked objectively to an event occurring after the write down, the write-down or allowance is reversed through the policyholders statement of takaful operations. 23

26 Takaful Insurance Company K.S.C. (Closed) State of Kuwait 12) Policyholder s statement of assets and liabilities Assets Cash and bank balances 111,640 80,296 Investment deposits 797, ,421 Contribution receivables 1,096, ,092 Other receivables and prepayments 69,276 85,647 Retakaful share of outstanding claims 650, ,559 Property and equipment 96,409 36,270 Total assets 2,821,821 1,492,285 Liabilities Takaful reserves: Unearned contribution 637, ,296 Outstanding claims reserve 931, ,999 Life mathematical reserve 22,099 29,682 Incurred but not reported reserve 131,750 10,983 Total takaful reserves 1,722, ,960 Retakaful payable 406, ,250 Amount due to shareholders 487, ,640 Other liabilities 205, ,964 Net surplus / (deficit) for the year - (349,529) Total liabilities 2,821,821 1,492,285 24

27 13) Policyholders statement of takaful operations 2011 Marine and aviation General accident Motor vehicles Fire Life & Medical Total Revenue Gross contribution written 239, ,503 1,183, , ,665 2,949,355 Less: Retakaful share of gross contribution written (222,940) (250,996) (55,986) (240,123) (165,565) (935,610) Net contribution written 16,190 66,507 1,127,862 46, ,100 2,013,745 Unearned contribution 1,951 14,113 (189,493) (9,117) (25,840) (208,386) Net contribution earned 18,141 80, ,369 36, ,260 1,805,359 Policy issuance fees 1, , , ,754 Retakaful commission 15,342 11,601 8,164 32,296 1,478 68,881 Other income 6,844 5,612 46,006 14,648 22,045 95,155 Total revenue 41,719 98,497 1,275,334 84, ,282 2,256,149 Expenses Claims incurred 25,096 11, , , , ,760 Less: Retakaful share of claims incurred (23,077) (17) )37,363( (147,066) (21,979) (229,502) Net claims incurred 2,019 11, ,154 14, , ,258 Outstanding claim reserve & incurred but not recorded reserve 590 3,573 52,245 (2,233) 127, ,126 Life mathematical reserve (7,583) (7,583) Policy acquisition cost 13,802 6, ,306 5,521 15, ,927 Surplus by segments 25,308 76, ,629 66,601 15, ,421 Allocation of general and administrative expenses (note 10) (59,500) (80,949) (541,220) (73,530) (113,916) (869,115) Net (deficit) / surplus from takaful operations (34,192) (4,112) 211,409 (6,929) (98,870) 67,306 Distribution to shareholders (note 3(n)) (33,653) Settlement of Qard Hassan (note 6) (33,653) - 25

28 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Marine and aviation General accident Motor vehicles Fire Life & Medical Total 2010 Revenue Gross contribution written 134, , , , ,439 1,966,443 Less: Retakaful share of gross contribution written (106,030) (261,384) (52,109) (151,104) (70,480) (641,107) Net contribution written 28, , ,656 17, ,959 1,325,336 Unearned contribution (2,500) (18,000) 3,000 7,000 (42,000) (52,500) Net contribution earned 25,874 85, ,656 24, ,959 1,272,836 Policy issuance income 383 4, , , ,359 Retakaful commission 10,678 36,223 3,424 14,185 64,510 Other income 532 1,367 1, ,115 7,597 Total revenue 37, , ,134 40, ,302 1,496,302 Expenses Claims incurred , ,489 6, , ,639 Less: Retakaful share of claims incurred Net claims incurred , ,489 6, , ,639 Outstanding claim reserve & incurred but not reported reserve ,177 1,410 2,747 10,983 Life mathematical reserve ,994 17,994 Policy acquisition cost 5,975 8, ,937 1,972 27, ,734 Surplus by segments 30, , ,531 30,579 59, ,952 Allocation of general and administrative expenses (note 10) 83,575 (132,894) (196,889) (88,190) (329,933) (831,481) Net (deficit) / surplus from takaful operations (52,728) (27,591) 58,642 (57,611) (270,241) (349,529) 26

29 14) Related party Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operating decisions. Related parties include significant shareholders, directors and executive officers of the Company, close members of their families and companies of which they are the principal owners or over which they are able to exercise significant influence Significant related party balances and transactions are as follows: Balances Shareholders Wakala receivable 1,775,051 3,525,123 Board of Directors remuneration - 3,000 Transactions Shareholders Investment income 148,342 82,674 Board of Directors remuneration - 3,000 Policyholders Gross contributions written - 257,622 15) Risk management a) Governance framework The Company s risk and financial management framework is to protect the Company s shareholders and policyholders from events that hinder the sustainable achievement of financial performance objectives, including failing to exploit opportunities. Key management recognises the critical importance of having efficient and effective risk management systems in place. The Company is establishing a risk management function with clear terms of reference from the Board of Directors and the associated executive management committees. This will supplement with a clear organisational structure with documented delegated authorities and responsibilities from the Board of Directors to executive management committees and senior managers. Also, a Company policy framework is being put in place to set out the risk profiles for the Company, risk management, control and business conduct standards for the Company s operations. b) Regulatory framework Law No. 24 of 1961, Law No.13 of 1962 and Decree No. 5 of 1989, and the rules and regulations issued by the Ministry of Commerce provide the regulatory framework for the insurance industry in Kuwait. All insurance companies operating in Kuwait are required to follow these rules and regulations. The following are the key regulations governing the operations of the Company: For the life and capital insurance contracts issued in Kuwait, the full mathematical reserves are to be retained in Kuwait 27

30 Takaful Insurance Company K.S.C. (Closed) State of Kuwait For marine insurance contracts, at least 15% of the contributions collected in the previous year are to be retained in Kuwait. For all other types of insurance, at least 30% of the contributions collected in the previous year are to be retained in Kuwait. The funds retained in Kuwait should be invested as under: A minimum of 40% of the funds are to be in the form of cash deposits in a bank operating in Kuwait A maximum of 25% could be invested in foreign securities (foreign government bonds or foreign securities - bonds and shareholding companies) A maximum of 30% should be invested in Kuwaiti companies shares or bonds A maximum of 15% should be in a current account with a bank operating in Kuwait The residual value may be invested in bonds issued or guaranteed by the Government of Kuwait, properties based in Kuwait or loans secured by first mortgage of properties based in Kuwait. The management is responsible for monitoring compliance with the above regulation and has a delegated authorities and responsibilities from the Board of Directors to ensure compliance. c) Takaful risk Takaful risk is the risk that actual claims payable to policyholders in respect of insured events exceed the carrying amount of takaful liabilities. This could occur because the frequency or amounts of claims are more than expected. Frequency and amounts of claims The frequency and amounts of claims can be affected by several factors. The Company underwrites mainly marine and aviation, fire and general accident, motor and life risks. These are regarded as short-term takaful contracts as claims are normally advised and settled within one year of the insured event taking place. This helps to mitigate takaful risk. Non-life takaful contracts The Company principally issues the following types of general takaful contracts: Marine-Cargo, Hull Comprehensive & Third Party Liability, Fire, House-holders Comprehensive, Contractors All Risks, Erection All Risks, Machinery Breakdown, Electronic Equipment, Burglary, Personal Accident, Cash in Transit, Fidelity Guarantee, Plate Glass, Workmen Compensation, Third Party Liability, Professional Indemnity, Bankers Blanket, Travel Assistance, Motor Comprehensive, and Motor Third Party Liability. Healthcare contracts provide medical expense cover to policyholders. Risks under non-life takaful policies usually cover twelve month duration. Marine and aviation For marine takaful the main risks are loss or damage to marine craft and accidents resulting in the total or partial loss of cargoes. The underwriting strategy for the marine class of business is to ensure that policies are well diversified in terms of vessels and shipping routes covered. The Company has retakaful cover to limit losses for any individual claim. Fire and accident For property takaful contracts the main risks are fire and business interruption. The Company has only underwritten policies for properties containing fire detection equipment. These contracts are underwritten by reference to the replacement value of the properties and contents insured. The cost of rebuilding properties and obtaining replacement contents and the time taken to restart operations which leads to business interruptions are the main factors that influence the level of claims. The Company has retakaful cover for such damage to limit losses for any individual claim. Motor For motor contracts the main risks are claims for death and bodily injury and the replacement or repair of vehicles. The Company has only underwritten comprehensive polices for owner/drivers over 21 28

31 years of age. The Company has retakaful cover to limit losses for any individual claim to 30,000. The level of court awards for deaths and to injured parties and the replacement costs of, and repairs to motor vehicles are the key factors that influence the level of claims. The Company has also limited its exposure by imposing maximum claim amounts on certain contracts as well as the use of retakaful arrangements in order to limit exposure to catastrophic events (e.g. hurricanes, earthquakes and flood damages). The table below sets out the concentration of non-life takaful outstanding claims by type of contract. 31 December December 2010 Gross liabilities Retakaful share of liabilities Net liabilities Gross liabilities Retakaful share of liabilities Net liabilities Marine and aviation General accident Motor vehicles 66,363 61,657 4,706 33,030 26,963 6, , ,043 41, , ,554 51, , , , ,531 85, ,043 Fire 633, ,334 18,259 97,523 86,148 11,375 1,625,238 1,061, , , , ,070 All non-life takaful contracts are in Kuwait, the analysis above would not be materially different if based on the countries in which the counterparties are situated. Key assumptions The principal assumption underlying the estimates is the head departments past claims development experience. This includes assumptions in respect of average claim costs, claim handling costs and claim numbers for each accident year. Additional qualitative judgments are used to assess the extent to which past trends may not apply in the future, for example once-off occurrence, changes in market factors such as public attitude to claiming, economic conditions, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures. Judgment is further used to assess the extent to which external factors such as judicial decisions and government legislation affect the estimates. Other key assumptions include variation in profit rates, delays in settlement and changes in foreign currency rates. Life takaful contracts For life takaful the main risks are claims for medical, death or permanent disability. The underwriting strategy for the life of business is to ensure that policies are well diversified in terms of type of risk and level of insured benefit. This is achieved through the use of medical screening in order to ensure that pricing takes account of current health conditions and family medical history. For healthcare contracts the most significant risks arise from lifestyle changes, epidemics and medical science and technology improvements. These risks do not vary significantly in relation to the location of the risk insured by the Company, type of risk insured and by industry. Life takaful contracts offered by the Company include group whole life takaful and group medical takaful. The main risks that the Company is exposed to are as follows: Mortality risk - risk of loss arising due to policyholder death experience being different than expected. 29

32 Takaful Insurance Company K.S.C. (Closed) State of Kuwait Morbidity risk - risk of loss arising due to policyholder health experience being different than expected. Longevity risk - risk of loss arising due to the annuitant living longer than expected. Investment return risk - risk of loss arising from actual returns being different than expected. Expense risk - risk of loss arising from expense experience being different than expected. Policyholder decision risk - risk of loss arising due to policyholder experiences (lapses and surrenders) being different than expected. These risks do not vary significantly in relation to the location of the risk insured by the Company as life business mainly written in Gulf countries. 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 industry sectors and geography, the use of medical screening in order to ensure that pricing takes account of current health conditions and family medical history, regular review of actual claims experience and product pricing, as well as detailed claims handling procedures. Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Company has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of fraudulent claims. Takaful contracts also entitle the Company to pursue third parties for payment of some or all costs. The Company further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Company. For contracts where death or disabilities are the insured risks the significant factors that could increase the overall frequencies of claims are epidemics, widespread changes in lifestyle and natural disasters, resulting in earlier or more claims than expected. The takaful risks described above are also affected by the contract holders right to pay reduced or no future contributions, to terminate the takaful contract completely. As a result, the amount of takaful risk is also subject to contract holder behaviour. The table below sets out the concentration of life takaful outstanding claims by type of contract. Type of contract Gross liabilities 31 December December 2010 Retakaful share of liabilities Net liabilities Gross liabilities Retakaful share of liabilities Net liabilities Group Medical 490,056 5, , ,696 14, ,649 Group Life 33,574 9,180 24,394 60,826 31,144 29,682 Total life takaful contract 523,630 15, , ,522 45, ,331 All life takaful contracts are in Kuwait, the analysis above would not be materially different if based on the countries in which the counterparties are situated. Key assumptions Material judgment is required in determining the liabilities and in the choice of assumptions. Assumptions in use are based on past experience, current internal data, external market indices and benchmarks which reflect current observable market prices and other published information. Assumptions and prudent estimates are determined at the date of valuation. Assumptions are further evaluated on a continuous basis in order to ensure realistic and reasonable valuations. Life takaful contract estimates are either based on current assumptions or calculated using the assumptions established at the time the contract was issued, in which case a margin for risk and adverse deviation is generally included. Assumptions are made in relation to future deaths, voluntary 30