ANNUAL REPORT 2006
ANNUAL REPORT 2006 TABLE OF CONTENTS Shari ah Supervisory Board 5 Our Mission 7 Board of Directors 9 Chairman s Statement 10 Independent Auditor s report 13 Balance sheet 16 Statement of income 17 Statement of changes in equity 18 Statement of cash flows 19 Notes to Financial Statements 20
ANNUAL REPORT 2006
ANNUAL REPORT 2006 7
ANNUAL REPORT 2006 BOARD OF DIRECTORS Bader Sulaiman Al-Othman Sameer Abdulmousen Al-Gharabally Abdullatif Fahad Ben Shakr Abdullah Saud Al-Bader Ahmed Ismail Mousa Chairman Vice Chairman Board Member Board Member Board Member
Gulf Takaful Insurance Company K.S.C.C. CHAIRMAN S REPORT For the Year ended December 31st 2006 Dear shareholders, In the name of allah, the most compassionate, the most merciful. (Peace, mercy and blessings of allah may be upon you ) On behalf of the board of directors of Gulf Takaful Insurance Company, I would like to welcome you all to our second ordinary general assembly and to present to you a brief report about the activity and major accomplishments achieved during the financial year ending 31-12-2006. The company continued to move ahead with its strategic planning, and was able to achieve its objectives set during the year 2005. The quality of business underwritten by the company continued to improve in line with our underwriting philosophy, which helped us to achieve excellent technical results and also strengthen our relations with reinsurers. The company succeeded in renewing all of its Proportional and nonproportional reinsurance treaties with exceptional and competitive terms through top class rated reinsurers. Follows are some of the major achievements accomplished during the year 2006: 1 Insurance Operations Total written contributions during the year 2006 amounted to KD 5,059,982, representing an increase of KD 4,048,587 in comparison with the year 2005, which helped boost technical results, where Gulf Takaful was able to achieve an technical surplus of KD 824,578 during the year 2006 compared to an technical deficit of KD 780,770 during the year 2005. 2 Technical Reserves As one of the company s strategic objectives, technical reserves were increased during the end of 2006 to reach KD 2,077,149 in comparison to KD 940,897 as of the end of 2005, representing an increase of 121%, in which shall strengthen the company s position and ability to meet all of its obligations and future liabilities towards its contributors, as well as reduce the fluctuation and volatility in future results, therefore increasing the potential for future growth and development. 3 Claims Total paid and outstanding claims during the year 2006 were KD 1,712,054 during the year 2006 and confirms the company s ability to meet its obligations. 4 Re Takaful / (reinsurance) As one of the top most priorities, Gulf Takaful has a panel of top class rated reinsurers leading its treaties and was able to further raise the confidence of reinsurers supporting the company. 5 Investment activities Despite the volatility in various money markets all through out the region, Gulf Takaful Insurance compay have been able to achieve a gross investment return of KD 327,691, which have been achieved by adopting prudent investment policy. 6 Policy Holders Account Despite the continuous stiff competition in the insurance market in general and the takaful in particular, Gulf Takaful was able to achieve positive 10
ANNUAL REPORT 2006 results on its takaful operations, mainly because of the constant monitoring and streamlining of its business. Total technical surpluses for the year totaled KD 824,578, and it was decided that to pay off the payment of the free profit loan, which is appositive precedent in exceptional period. 7 Results for the shareholders account Despite the stiff competition in the local insurance market in view of the increasing number of takaful operators during the past three years, the company has achieved net profits of KD 197,194 during the year 2006, compared to KD 1,352,173 during the year 2005. Therefore the board of directors recommended the following: Transfer the amount of KD 19899, 10% of the profits for the year, to statutory reserves. Transfer the amount of KD 19899, 10% of the profits for the year, to voluntary reserves. Transfer the remainder of the profits, amounting KD 157,396 to the retained earnings of previous years to total the amount of KD 1,174,237 as of 31-12-2006. At Gulf Takaful Insurance Company, we are committed to continue enhancing our performance and to improving our quality services to our customers. We extend our sincere thanks and appreciations to his highness The Emir Shiekh Sabah Al-Ahmad Al-Jaber Al-Sabah, for the continued support to the national institutions. And to his highness Crown Prince Sheikh Nawaf Al Ahmad Al-Jaber Al- Sabah and to his highness Prime Minister Sheikh Nasser Al- Mohamed Al- Ahmed Al- Sabah. We also express our sincere thanks to the ministry of commerce and others for their support and cooperation. We also take this opportunity to thank and appreciate the staff and the management of Gulf Takaful Insurance Company for their continued efforts, hard work and sincerity, we also express our sincere thanks to the company s shareholders, clients and all those institutes and individuals with whom the company deals with in Kuwait, in the region and the international community. Bader Sulaiman Al-Othman Chairman 11
Gulf Takaful Insurance Company K.S.C. (closed) State of Kuwait Independent Auditor s Report to the Shareholders Report on the financial statements We have audited the accompanying financial statements of Gulf Takaful Insurance Company (K.S.C. - Closed) The Company which comprise the balance sheet as at 31 December 2006 and the statements of income, changes in equity and cash flows for the year then ended and a summary of significant accounting policies and other explanatory notes. Management s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as at 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Other matters The financial statements of the Company as at 31 December 2005 were audited by another auditor, whose report dated 29 March 2006 expressed an unqualified opinion. Report on legal and other regulatory requirements Bader & Co. PricewaterhouseCoopers P.O. Box 20174, Safat 13062 Dar Al-Awadi Complex, 7th Floor, Ahmad Al-Jaber Street, Sharq - Kuwait Telephone (965) 2408844 Facsimile (965) 2408855 e-mail: pwc.kwt@kw.pwc.com Furthermore, in our opinion, proper books of account have been kept by the Company and the financial statements, together with the contents of the report of the Board of Directors relating to these financial statements, are in accordance therewith. We further report that we obtained all the information and explanations that we required for the purpose of our audit and that the financial statements incorporate all information that is required by the Commercial Companies Law of 1960, as amended, and by the Company s Articles of Association, that an inventory was duly carried out and that, to the best of our knowledge and belief, no violations of Commercial Companies Law of 1960, as amended, or of the Articles of Association have occurred during the year ended 31 December 2006 that might have had a material effect on the business of the Company or on its financial position. Bader A. Al-Wazzan Licence No. 62A Kuwait 4 June 2007
ANNUAL REPORT 2006 Gulf Takaful Insurance Company K.S.C.C. FINANCIAL STATEMENTS 31 DECEMBER 2006
Gulf Takaful Insurance Company K.S.C.C. (Closed) BALANCE SHEET As at 31 December 2006 Kuwaiti Dinars Note 2006 2005 (Restated) Assets Cash and cash equivalents 3 382,938 142,791 Murabaha and investment deposits 4 2,803,750 3,860,000 Investments at fair value through profit and loss 5 7,907,089 5,267,201 Investments available for sale 6 5,162,368 6,798,697 Free profit loan to the policyholders fund 7-780,770 Due from policyholders fund 8 94,444 322,040 Other debit balances 9 240,053 237,151 Other assets 554,353 282,525 Total Assets 17,144,995 17,691,175 Liabilities and Equity Liabilities Policyholders deficit reserve 7-780,770 Other credit balances 267,665 248,832 267,665 1,029,602 Equity Share capital 10 15,106,500 15,000,000 Statutory reserve 11 187,565 167,666 Voluntary reserve 11 187,565 167,666 Change in fair value reserve 221,463 309,400 Retained earnings 1,174,237 1,016,841 Total equity 16,877,330 16,661,573 Total Liabilities and Equity 17,144,995 17,691,175 Bader Sulaiman Al-Othman Chairman Sameer Abdul Mohsen Al-Gharaballi Vice Chairman The accompanying notes from (1) to (22) form an integral part of these financial statements 16
ANNUAL REPORT 2006 STATEMENT OF INCOME For the year ended 31 December 2006 Kuwaiti Dinars Note The year The year ended ended 31 December 31 December 2006 2005 (Restated) Revenues Murabaha and investment deposits income 233,232 259,180 Investments income 12 94,459 1,175,549 Shareholders share of insurance surplus 8 21,904 - Total revenues 349,595 1,434,729 Expenses General and administrative expenses (150,610) (67,466) Contribution to Kuwait Foundation for the Advancement of Science (KFAS) (1,791) (15,090) Total expenses (152,401) (82,556) Net profit for the year/ period 197,194 1,352,173 Earnings per share (fils) 13 1.31 9.01 The accompanying notes from (1) to (22) form an integral part of these financial statements 17
Gulf Takaful Insurance Company K.S.C.C. (Closed) STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006 Kuwaiti Dinars Share Statutory Voluntary Change in fair Retained Total capital reserve reserve value reserve earnings Share capital subscription 15,000,000 - - - - 15,000,000 Net change in fair value of investments available for sale - - - 309,400-309,400 Net profit for the period (restated) - - - - 1,352,173 1,352,173 Transfer to reserves - 167,666 167,666 - (335,332) - Balance as at 31 December 2005 (restated) 15,000,000 167,666 167,666 309,400 1,016,841 16,661,573 Balance as at 1 January 2006 (as previously reported) 15,000,000 167,666 167,666-1,326,241 16,661,573 Previous year adjustments - - - 309,400 (309,400) - Balance as at 31 December 2005(Restated) 15,000,000 167,666 167,666 309,400 1,016,841 16,661,573 Proceeds from increase in share capital 106,500 - - - - 106,500 Net change in fair value of investments available for sale - - - (87,937) - (87,937) Net profit for the year - - - - 197,194 197,194 Transfer to reserves - 19,899 19,899 - (39,798) - Balance as at 31 December 2006 15,106,500 187,565 187,565 221,463 1,174,237 16,877,330 The accompanying notes from (1) to (22) form an integral part of these financial statements 18
ANNUAL REPORT 2006 STATEMENT OF CASH FLOW For the year ended 31 December 2006 Kuwaiti Dinars 2006 2005 (Restated) Cash flows from operating activities Net profit for the year/ period 197,194 1,352,173 Adjustments: Murabaha and investment deposits income (233,232) (259,180) Investment revenue (94,459) (1,175,549) Cash dividends (135,944) (3,030) Depreciations 89,207 11,507 Operating loss before changes in operating assets and liquidity (177,234) (74,079) Due to/ from policyholders fund 227,596 (322,040) Increase in other debit balances (66,015) (97,296) Increase in other credit balances 18,833 248,832 Net cash from/ (used in) operating activities 3,180 (244,583) Cash flows from investing activities Paid for Murabaha and investment deposits (6,675,000) (3,860,000) Proceeds from Murabaha and investment deposits 7,731,250 - Investments at fair value through profit and loss (2,545,429) (4,091,652) Payment for purchase property and equipment (361,035) (294,032) Payment for purchase of investments available for sale - (6,489,297) Proceeds from sale of investments available for sale 1,548,392 - Murabaha and investment deposits income received 296,345 119,325 Cash dividends received 135,944 3,030 Net cash from/ (used in) investing activities 130,467 (14,612,626) Cash flows from financing activities Share capital subscription - 15,000,000 Proceeds from increase in share capital 106,500 - Net cash from financing activities 106,500 15,000,000 Net increase in cash and cash equivalents 240,147 142,791 Cash and cash equivalents at beginning of the year/ period 142,791 - Cash and cash equivalents at end of the year/ period 382,938 142,791 The accompanying notes from (1) to (22) form an integral part of these financial statements 19
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 1. Incorporation and activities Gulf Takaful Insurance Company K.S.C (closed) The Company which is in comply with Nobel Islamic Sharia principles incorporated by an incorporation contract No. 7526 file no.1 dated 6 September 2004, and registered with Ministry of Commerce in accordance with the Insurance Companies and Agent Law No. 24 of 1961. The objects of the Company are to underwrite takaful and other insurance activities such as fire, general accidents, car, marine and aviation in accordance with Takaful insurance (Co operative), which includes re-insurance and investing in permitted activities. The Company organizes, the insurance activities in accordance with Takaful Insurance (Co operative insurance) This co-operative insurance secures that the subscribers receive a share from the net insurance surplus. Arising from the insurance operations and which are recorded in the books of the policyholders fund. This share is determined based on company s articles of association and the approval of Fatwa and Sharee a Supervisory board provided that, policyholder s fund share from the net insurance surplus will not to be less than 50%. The registered office of the company is P.O. Box 29279 Safat, 13153, Kuwait. These financial statements have been approved for issue by the Board of Directors on 4 June 2007 and are subject to shareholders approved in the General Assembly. 2. Basis of preparation and significant accounting policies 2.1 Basis of preparation The accompanying financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS). The financial statements are prepared under the historical cost convention as modified by the revaluation of investment available for sale to reflect its fair value as per the accounting policies stated below. The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that may affect amounts reported in these financial statements, as actual results could differ from those estimates. It also requires management to exercise its judgment in the process of applying the Company s accounting policies. The areas where estimates and assumptions are significant to the financial statements, or areas involving a higher degree of judgement, are disclosed in Note 22. International Accounting Standards Board (IASB) Standards issued but not adopted International Accounting Standards Board (IASB) issued IFRS 7 Financial Instruments: Disclosures, which will be effective for the year ending 31 December 2007. This will result in amendment and additional disclosures relating to financial instruments and associated risks. 2.2 Policyholders and shareholders accounts The Company maintains separate books of accounts for policyholders and shareholders. Transactions relate to the insurance activities or reinsurance are recorded in the policyholders accounts. Policyholders assets, liabilities, revenues and expenses do not form part of the primary financial statements. These assets, liabilities, revenues and expenses are disclosed in the notes (16, 17). The Company holds the physical custody and title of all assets related to the policyholders and shareholders operations. Other transactions which do not pertain to policyholders are recorded in the shareholders books. Management determines the basis of allocation the expenses from joint operations between the policyholders and the shareholders. According to the Articles of Association, Article No.(51), the insurance surplus which achieved in policyholders account from insurance operation will be divided between shareholders and policyholders according to rules The accompanying notes from (1) to (22) form an integral part of these financial statements 20
ANNUAL REPORT 2006 Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) have been set by Board of Directors, where policyholders share not less than 50% from surplus. The Company has the right to give its share to policyholders. 2.3 Financial instruments classification, recognition and measurement Classification The management classifies its financial assets upon acquisitions. The Company had classified its financial assets as financial assets at fair value through profit and loss, receivables and investments available for sale. Financial assets at fair value through profit and loss The category is divided into two sub categories: financial assets held for trading, and those designated at fair value through profit and loss at inception. Financial assets held for trading are those assets acquired principally for the purpose of selling in the short term. The financial assets designated at fair value through profit and loss at inception are classified in this category, if they are managed and their performance is evaluated and internally reported on a fair value basis in accordance with a documented and approved investment risk management policy. Receivables These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are subsequently re measured and carried at amortized cost using the effective yield method, less any provision for impairment. Assets available for sale These are non-derivative financial assets that are either designated in this category or not included in any of the above categories and are principally, those acquired to be held for indefinite period of time which could be sold when liquidity is needed or upon changes in rates of profit. Recognition and De-recognition Financial assets are recognized when the Company enters into contractual agreement on those assets. Purchases and sales of financial assets are recognised on the trade date, on which the Company commits to deliver or receive the asset. Financial assets are derecognised when the right to receive cash flows from the assets has expired or has been transferred and the Group has substantially transferred all risks and rewards of ownership. Measurement Financial assets are initially recognised at fair value plus transaction costs for all assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit and loss are initially recognised at faire value and transaction costs are expensed in the income statement. Subsequently, available for sale financial assets and financial assets at fair value through profit and loss are remeasured at fair value. Receivables are carried at amortised cost using the effective yield method. Realised and unrealised gains and losses arising from changes in the fair value of the financial assets at fair value through profit and loss are included in the income statement for the year in which they arise. Changes in fair value of financial assets classified as available for sale are recognised in equity. When available-for sale financial assets are sold or impaired, the accumulated changes in fair value recognised in equity are included in the income statement. Fair value The fair value of quoted investments is based on current bid prices. The fair value of unquoted investments is determined by the market value of similar investment, discounted cash flows, or using other pricing alternative. Available for sale investments that their market values can not be determined are recorded at cost less impairment in value. The accompanying notes from (1) to (22) form an integral part of these financial statements 21
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) Impairment in value The Company assess at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available for sale financial assets, the cumulative losses-measured as the difference between the acquisition cost and the current fair value, less any impairment losses on that financial asset previously recognized in the profit or loss- is removed from equity and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. A specific provision for impairment of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. The amount of specific provision is the difference between the asset s carrying amount and present value of the estimated cash flows, including the amounts recoverable from guarantees and collateral, discounted at the effective interest rate. The amount of the provision is recognized in the income statement. 2.4 Cash and cash equivalents Cash on hand, demand and time deposits with banks and financial institutions whose original maturities do not exceed three months, from the date of placement are classified as cash and cash equivalents in the statement of cash flows. 2.5 End of service indemnity The Company is liable under Kuwaiti labour law, to make payments to employees for post employment benefits under a defined benefit plan. Such payment is made on a lump sum basis at the end of an employees service. This liability is unfunded and has been computed as the amount payable as a result of involuntary termination of employees on the balance sheet date. The Company estimates that this method will give a reliable approximation of the present value of this obligation. 2.6 Creditors Liabilities are recognised for amounts, to be paid in the future for goods or services received, whether billed by the suppliers or not. The accrued leave recorded when accrued. 2.7 Revenue recognition Murabaha and investment deposit income are recognised on a time proportion basis using the effective rate of return on outstanding balances for such transactions. The shareholders share from insurance surplus recorded according to rules set by The Board of Directors, where not excess of 50% from total insurance surplus. Dividend income is recognized when the right to receive payment is established. 2.8 Foreign currencies The functional currency of the Company is the Kuwaiti Dinar. Foreign currency transactions are recorded at the rates of exchange prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Kuwaiti Dinars at the rates of exchange prevailing on that date. Resultant gains and losses are taken to the statement of income. Translation differences on non monetary items carried at fair value are considered part of the change in the fair value of those items. 2.9 Zakat Since the Company s Articles of Association does not state paying Zakat on behalf of the shareholders, the responsibility of paying Zakat is laying on the shareholders (owners). The accompanying notes from (1) to (22) form an integral part of these financial statements 22
ANNUAL REPORT 2006 Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 3. Cash and cash equivalents Kuwaiti Dinars 2006 2005 (Restated) Cash at banks 239,377 182,979 Cash at investment portfolios 143,561 (40,188) 382,938 142,791 4. Murabaha and investment deposits Murabaha and investment deposits are deposited with some Islamic Financial Institutions in State of Kuwait, the average effective rate of return on the time deposits and Murabaha is 8.5% as at 31 December 2006 (6.80% as at 31 December 2005). Murabaha and investment deposits include an amount of KD 635,000 (KD 635,000 as at 31 December 2005) pledged against letters of guarantee for governmental institutions in State of Kuwait (Note 18). 5. Investments at fair value through profit and loss Kuwaiti Dinars 2006 2005 (Restated) Investments in local shares unquoted 1,475,000 1,380,000 Investments in foreign shares quoted 1,159,432 - Investments in foreign shares unquoted 868,665 - Investments in local funds unquoted 3,164,675 3,448,580 Investments in foreign funds unquoted 1,239,317 438,621 7,907,089 5,267,201 Investments in unquoted shares amounted KD 6,747,657 as at 31 December 2006 (31 December 2005: KD 5,267,201) was valued based on the report of investment portfolios by the manager related party as at that date. 6. Investments available for sale Kuwaiti Dinars 2006 2005 (Restated) Investments in local shares quoted 1,475,600 1,808,800 Investments in local shares unquoted 1,814,024 3,219,915 Investments in foreign funds unquoted 1,872,744 1,769,982 5,162,368 6,798,697 Investments in unquoted shares include investments amounted KD 175,274 are carried at cost as it was not possible to determine its fair value in reliable method. Management is not aware of any indications of impairment in the value of these investments. 7. Free profit loan to the policyholders fund According to the Company s Articles of Association, the net deficit in each insurance activity is covered by the Company s shareholders in the form of free profit loan. Free profit loan offered by the shareholders is settled from the surplus that is expected to resulted in the future years. The accompanying notes from (1) to (22) form an integral part of these financial statements 23
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) Following is the movement of free profit loan: Kuwaiti Dinars 2006 2005 (Restated) Balance at the beginning of the year/ period 780,770 - payment of the free profit loan - 780,770 Payment of free profit loan (780,770) - Balance at the end of the year/ period - 780,770 An amount of KD 780,770 was excluded from the statement of cash flows as it is a non cash transaction representing payment of the free profit loan from the shareholder. 8. Due from policyholders fund Kuwaiti Dinars 2006 2005 (Restated) Balance at the beginning of the year 322,040 - Payment of the free profit loan (note 7) 780,770 - Shareholders share from insurance surplus (note 16) 21,904 - Other movements in amounts transferred to the policyholders (1,030,270) 322,040 94,444 322,040 On 4 June 2007, the Board of Directors approved dividend 50% of insurance surplus from policyholders insurance share for the year ended 2006. 9. Other debit balances Kuwaiti Dinars 2006 2005 (Restated) Accrued investments income 76,742 100,540 Refundable insurance 13,655 13,655 Prepaid expenses 18,380 117,089 Staff receivables 131,276 5,867 240,053 237,151 10. Share capital On 25 April 2006, the General Assembly of shareholders approved the proposal of Board of Directors to increase the share capital 1,065,000 shares with par value 100 fils per share. The issued and paid share capital will be KD 15,106,500 distributed over 151,065,000 with par value 100 fils per share as at 31 December 2006. 11. Reserves 11.1 Statutory reserve In accordance with the Commercial Companies Law and the Company s Articles of Association, 10% of net profit is transferred before contribution to Kuwait Foundation for the Advancement of science and Board of Directors Remuneration to statutory reserve. The Company may resolve to discontinue such annual transfers when the reserve equals 50% of the share capital. This reserve is not available for distribution except in cases stipulated by Law and the Company s Articles of Association. The accompanying notes from (1) to (22) form an integral part of these financial statements 24
ANNUAL REPORT 2006 Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 11.2 Voluntary reserve In accordance with the Company s Articles of Association, a specific percentage - proposed by the Board of Directors and approved by the ordinary general assembly meeting - from net profit for the year is transferred to voluntary reserve and such transfers may be discontinued by a resolution at the ordinary general assembly meeting based on the board of direct proposal. The Board of Directors has proposed to transfer 10% of net profit for the year ended 31 December 2006 to voluntary reserve. 12. Investments income Kuwaiti Dinars 2006 2005 (Restated) Gain on sale of investments 3,650 109,248 Net unrealised (loss)/ gain (45,135) 1,063,271 Cash dividends 135,944 3,030 94,459 1,175,549 Unrealised loss resulted from the evaluated investments at fair value through profit and loss at inception (unlisted) amounted to KD 193,911 for the year ended 31 December 2006 (unrealised gain amounted to KD 1,068,032 for the period ended 31 December 2005). 13. Earnings per share Earnings per share is calculated by dividing net profit of the year/ period by the weighted average number of common outstanding shares during the year as follows: Kuwaiti Dinars 2006 2005 (Restated) Net profit for the year/ period 197,194 1,352,173 Weighted average number of issued shares (share) 150,011,671 150,000,000 Earnings per share (Fils) 1.31 9.01 14. Previous years adjustments During the year, the company discovered a mistake in classified one of its investments under Investment at fair value through profit and loss instead of Investments available for sale where the management intend to keep this investments. According to International Accounting Standard 8 (Accounting policies, charges in Accounting Estimates and Errors), the adjustments retroactive and restated the comparative financial statements of previous years. The effect of the restatement on the financial statements of the year ended 31 December summarised as follows: The reclassification of the investment amounted to KD 1,808,800 as at 31 December 2005 from Investments at fair value through profit and loss to Investments available for sale as a result of reclassified the unrealised profit amounted to KD 309,400 from statement of income to change in fair value reserve. 15. Policyholders operation The significant accounting policies used in accounting for the insurance business are set out below. Policies used in accounting for other accounts and transactions are the same as those adopted by the Company. The accounting policies were consistently applied during the financial year presented in these financial statement. The accompanying notes from (1) to (22) form an integral part of these financial statements 25
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) Accounting policies used in insurance operation Revenue recognition Premiums are recognised as revenue over the period of the insurance coverage charge. Unearned premiums are reported as unearned premiums in the liabilities in the balance sheet. Commissions earned are recognised at the time of recognition of its related premium. Premiums under collection Premiums under collection are carried at its nominal value less impairment losses or provision for doubtful debts. Reinsurance Inward and outward of insurance business are conducted with other insurance and reinsures companies. Reinsurance business includes quota share, excess of loss, facultative and other forms of reinsurance for all lines of business. Reinsurance ceded contracts do not relieve the policyholders from their obligations. Since the failure of the reinsurers to meet their obligations may lead to losses, accordingly a provision for expected uncollectable amounts is formed. Reinsures share in the claims reserve is stated in a method that consistency is consistent with policyholders obligation for each claim. Reserve for claims under settlement A provision is calculated against claims presented and not settled up to balance sheet date. Reserve for takaful insurance A provision for takaful insurance liabilities are recognised based on independent acturarial valuation. Reserve for claims incurred but not reported A provision for incurred claims but not reported up to balance sheet date is calculated based on prior experience of loss ratio. The accompanying notes from (1) to (22) form an integral part of these financial statements 26
ANNUAL REPORT 2006 Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 16. Policyholders result of operation by business segments Kuwaiti Dinars Marine & General Vehicles Total General Takaful Total Aviation Accidents risk insurance Insurance Year ended 31 December 2006 Premiums: Gross premium written 49,445 1,715,507 2,688,115 4,453,067 606,915 5,059,982 Less: Premium ceded to reinsures (37,925) (747,773) (176,748) (962,446) (351,879) (1,314,325) Net premiums written 11,520 967,734 2,511,367 3,490,621 255,036 3,745,657 Unearned premium (1,719) 233,635 (579,298) (347,382) 13,002 (334,380) Net premium earned 9,801 1,201,369 1,932,069 3,143,239 268,038 3,411,277 Investment revenues 131 4,547 7,125 11,803 1,609 13,412 Issue fees and other income 408 3,678 347,668 351,754-351,754 Net commissions (596) 30,446 (634,940) (605,090) (61,005) (666,095) Total revenues 9,744 1,240,040 1,651,922 2,901,706 208,642 3,110,348 Claims incurred (710) (126,533) (841,102) (968,345) (141,667) (1,110,012) Less: reinsurance share from claims incurred 175 2,097 214,453 216,725 115,852 332,577 Net claims (535) (124,436) (626,649) (751,620) (25,815) (777,435) Provision for takaful insurance - - - - 39,100 39,100 Provision for claims under settlement and compensation incurred but not reported (1,535) (47,500) (267,889) (316,924) (14,269) (331,193) Total claims (2,070) (171,936) (894,538) (1,068,544) (984) (1,069,528) Surplus by business segments 7,674 1,068,104 757,384 1,833,162 207,658 2,040,820 Allocation of general and administrative expenses (11,885) (412,347) (646,129) (1,070,361) (145,881) (1,216,242) Net (deficit)/ surplus from insurance operation (4,211) 655,757 111,255 762,801 61,777 824,578 Payment of the free profit loan (780,770) Net insurance surplus 43,808 Shareholders share of insurance surplus (21,904) Insurance surplus transferred to policyholders fund 21,904 The accompanying notes from (1) to (22) form an integral part of these financial statements 27
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 16. Policyholders result of operation by business segments (Continued) Period ended 31 December 2005 Total general Takaful Total Insurance Insurance Premiums: Gross premium written 916,219 95,176 1,011,395 Less: Premium ceded to reinsures (108,385) (39,963) (148,348) Net premiums written 807,834 55,213 863,047 Unearned premium (717,151) (48,693) (765,844) Net premium earned 90,683 6,520 97,203 Issue fees and other income 10,321-10,321 Net commissions (66,445) (7,125) (73,570) Total revenues 34,559 (605) 33,954 Claims incurred (37,223) (5,220) (42,443) Less: reinsurance share from claims incurred - - - Net claims (37,223) (5,220) (42,443) Provision for takaful insurance - (55,950) (55,950) Provision for claims under settlement and compensation incurred but not reported (56,852) - (56,852) Total claims (94,075) (61,170) (155,245) Surplus by business segments (59,516) (61,775) (121,291) Allocation of general and administrative expenses (596,559) (62,920) (659,479) Net (deficit)/ surplus from insurance operation (656,075) (124,695) (780,770) Free profit loan from shareholders 656,075 124,695 780,770 17. Policyholders assets and liabilities Kuwaiti Dinars 2006 2005 Assets Cash and bank balances 424,035 97,477 Investments deposits 157,500 - Premiums under collection 2,031,081 439,813 Other debit balances 33,464 - Claims under settlement recoverable from reinsurers 194,622-2,840,702 537,290 Liabilities Reinsurers balances 183,891 74,409 Unearned premiums 1,100,225 765,844 Reserve of claims under settlement 549,227 19,372 Reserve for claims incurred but not reported 52,815 56,852 Provision for takaful insurance 16,850 55,950 Reserve retained on reinsurance business 104,652 1,941 Premium received in advance 466,655 - Due to shareholders 94,444 322,040 Other liabilities 250,039 21,652 2,818,798 1,318,060 Policyholders fund Net surplus/ (deficit) from insurance operations 21,904 (780,770) Free profit loan from shareholders - 780,770 2,840,702 537,290 The company carries out its activities in the state of Kuwait, accordingly no geographical distribution has been presented. 28
18. Contingent liabilities In the ordinary course of business of the Company, letters of guarantee have been issued for others by an amount of KD 635,000 as at 31 December 2006 (31 December 2005: KD 635,000) for a governmental institutions for operating insurance business. This guarantee are secured by Murabaha ad investment deposits pledged at the banks (Note 4). On July 2006, Kuwait s Ministry of Health suspended the governmental health insurance operation which was conducted by the corporate insurance companies. The Company believes that such claims will not have a material effect on the Company s financial position. 19. Insurance Risk Management The Company issues contracts that transfer insurance risk. This section summarises these risks and the way the Company manages them. Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. The principal risk that the Company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year. The Company manages these risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. Sources of uncertainty in the estimation of future claim payments ANNUAL REPORT 2006 Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) Non takaful Claims are payable on a claims-occurrence basis. The Company is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term. As a result, liability claims are settled over a long period of time and an element of the claims provision relates to incurred but not reported claims (IBNR). There are several variables that affect the amount and timing of cash flows from these contracts. These mainly relate to the inherent risks of the business activities carried out by individual contract holders and the risk management procedures they adopted. The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and other recoveries. The Company takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. The liability for these contracts comprise a provision for IBNR, a provision for reported claims not yet paid and a provision for unexpired risks at the balance sheet date. In estimating the liability for the cost of reported claims not yet paid the Company considers any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims are assessed on a case-by-case basis or projected separately. Takaful Uncertainty in the estimation of future benefit payments and premium receipts for takaful insurance contracts arises from the unpredictability of overall levels of mortality, health and the variability in contract holder behavior. 29
Gulf Takaful Insurance Company K.S.C.C. (Closed) Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) The company uses an actuarial valuation for takaful insurance contracts. For health and disability insurance covers there is no need to estimate mortality rates or morbidity rates for future years because these contracts have short duration and the claims are payable on a claims-occurrence basis. These insurance contracts are exposed to similar risks of uncertainty in the estimation of future claim payments as non takaful insurance contracts and are managed in a similar manner. 20. Financial risk management The Company is exposed to a variety of financial risks, including the effects of changes in debt and equity market prices. The Company s risk management is conducted in accordance with policies approved by the Board of Directors. 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. The financial assets of the Company that are exposed to credit risk are mainly represented in cash and cash equivalents, investment deposits and receivables. The cash and cash equivalents, investment deposits are placed with worthy credit financial institutions. Receivable balances are stated by net after deduction of provision for doubtful debts. Credit risk with respect to receivables is limited due to the large number of customers and their dispersion across different industries. The Group evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. Liquidity risk Liquidity risk is represented in the Company s inability to meet its financial obligations. The Company seeks to mitigate this risk by dealing with creditworthy counter parties, placing adequate credit and lending policies and diversifying its investments. In addition, the Company also seeks to match the maturities of its assets and liabilities. Interest rate risk Interest rate risk is the risk that the Company s financial position will be adversely affected by changes in interest rates. The Company seeks to mitigate this risk through investing its assets for short term periods. Foreign currency risk The Company incurs foreign currency risk on transactions denominated in a currency other than the Kuwaiti Dinar. The Company ensures that the net exposure is kept to an acceptable level, by dealing in currencies that do not fluctuate significantly against the Kuwaiti Dinar. Cash flow risk Cash flow risk is the risk that future cash flows associated with a monetary financial instrument will fluctuate in amount. At present, the Company has no significant cash flow risk. Fair value of financial instruments Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm s length transaction, other than in a forced or liquidation sale. Fair values are obtained from quoted market prices, discounted cash flow models and other models as appropriate. In the Company opinion, the fair value of financial assets and liabilities on the balance sheet date approximates their book value. 30
Notes to the Financial Statements for the year ended 31 December 2006 (All amounts are in Kuwaiti Dinars unless otherwise stated) 21. Related parties transaction In the ordinary course of business of the Company, there are transactions with related parties represented in shareholders, senior management and executive managers and all of these transactions have been done according to basis of dealing with others and by management approval. Transactions and balance are as follows: Kuwaiti Dinars 2006 2005 Shareholders Income statement Murabaha and investment deposits income 234,532 262,210 Investments revenue 93,159 1,481,918 Balance sheet Investments at fair value through profit and loss 8,486,686 6,049,913 Other liabilities 368,181 78,205 Key management compensation 6,685 31,607 Policyholders Income statement Total premiums written 37,522 52,879 Balance sheet Premiums under collection 115,534 52,879 Key management compensation 127,015 87,521 The related party transactions are subject to the approval of General Assembly of Shareholders. 22. Critical accounting estimates and judgments The Company makes estimates and assumptions that may affect amounts reported in these financial statements. Estimates are revised if changes occur in the circumstances on which the estimate was based. The areas where estimates and assumptions are significant to the financial statements, or areas involving a higher degree of judgment, are: Classification of financial instruments On acquisition of a financial instrument, the Company s management decides its classification. In making that judgment the Company considers the primary purpose for which it is acquired and how it intends to manage and report its performance. Such judgment determines whether it is subsequently measured at fair value or at amortised cost. Financial instruments carried at amortized cost The effective yield method of calculating the amortized cost of a financial instrument involves the estimation of future cash flows through the expected takaful of the instrument. Impairment of financial assets The Company reviews financial assets at each balance sheet date to assess whether a provision for impairment loss should be recognized in the Statement of Income. The process for estimating the amount of an impairment loss involves considerable judgment by the management with respect to the estimation of future cash flows. Such estimates and assumptions are also based on several other factors involving varying degrees of judgment and uncertainty. 31 ANNUAL REPORT 2006
ANNUAL REPORT 2006