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2023 ReportContents About IGIH Board of Directors Letter from the Board of Directors Financial Statements IGI Offices 2 4 6 8 50 About IGIH International General Insurance Holdings Limited (IGIH) is registered in the Dubai International Financial Centre (DIFC) with operations in Bermuda, Jordan, Malaysia and a wholly owned subsidiary in the U.K. IGI Bermuda is a class 3B (re)insurer regulated by the Bermuda Monetary Authority (BMA). This subsidiary is the principal underwriting entity for the Group. The Group also has a branch in Labuan, Malaysia, registered as a first-tier offshore reinsurer. Both Bermuda and UK subsidiaries are rated A- (Excellent) by A.M. Best Company Inc. IGI Group of companies underwrites a worldwide portfolio of energy, property, marine, engineering, casualty, financial institutions, general aviation, ports & terminals, political violence and non-proportional reinsurance treaty business with the main geographical focus being the Afro-Asian markets. IGIH has assets in excess of US$ 600 million as at 31st December, 2012. 4 International General Insurance Holdings Limited | BoARd of dIRecToRS International General Insurance Holdings Limited | BoARd of dIRecToRS 5 Board of directors Mr. Mohammed Abu Ghazaleh Chairman (Chairman and CEO, Fresh Del Monte Produce Inc. – Miami) Mr. Wasef Jabsheh CEO & Vice Chairman Mr. Khalifa Al Mulhem Director (Chairman, National Polypropylene Company Limited – Saudi Arabia) Mr. Hani Tarazi Director (Saba IP & Co. – Dubai, UAE) Mr. Khaled Sifri Director (CEO, Arab Emirates Investment Bank – Dubai, UAE) Mr. Hani Jabsheh Director (CEO, Al Bawaba.com) Al Sayyida Rawan Al Said MD and Group CE of ONIC Holding 6 International General Insurance Holdings Limited | LeTTeR fRoM THe BoARd of dIRecToRS International General Insurance Holdings Limited LeTTeR fRoM THe BoARd of dIRecToRS 7 Letter from the Board of Directors It gives us pleasure to include herewith the full Report on our 2012 performance. The past year was one where IGI’s underwriting strategy and international reach brought its own rewards. While 2012 was met by the residual effects from the massive insurance market losses incurred in 2011, IGI was in a prime position to take advantage of the market situation and subsequent increase in prices. Worldwide insured catastrophe losses in 2012 amounted to an estimated $65 billion in 2012 compared to $119 billion in 2011. Of the insurance market’s 2012 losses, 90% were wrought from US catastrophes – mainly due to superstorm Sandy and an extreme drought that devastated crop yields. Although losses were significantly less compared to the extraordinary year of 2011, 2012’s catastrophe losses still stood out as above the 10-year industry average of $50 billion. While the Afro-Asian market remained the backbone of our revenues, we also managed to expand out more confidently into Australasia, leveraging our comparatively greater capacity to move into a hardening market when others were forced to reduce their capacity. That region, alongside Europe and MENA, remained the main source of our healthy growth in underwriting profits, as we continue to capture new business in our core geographic areas. Given that the ongoing Arab Spring has continued to hold the geopolitical landscape hostage, we have navigated adeptly in the face of political challenges presented, to seek new opportunities. Meticulous market research and portfolio review was behind our decision to introduce Political Violence as a new line of business. This is a testament to our tried and tested philosophy of building on our specialist knowledge to add niche underwriting business lines. Again, we achieved a record year beating our bottom line forecasts by keeping our eye on our core geographic areas, while adding underwriting capabilities and growing our book of business in Asia Pacific and Europe. Although we continue to face low investment returns, our underwriting profits have more than compensated our investment income shortfalls. 2012 performed strongly as the following financials attest. This year the Company recorded a compounded annual growth rate of 43.2% on gross premiums from 2002 – 2012. Our conservative actuarial practices and strict risk parameters have continued to keep IGI protected. As a result of a frequent review of our insurance portfolio and risk appetite, we have adjusted our exposure in certain parts of our marine portfolio and we will continue to monitor this line of business in the future, as generally, market conditions remain challenging. We continue to assess the geopolitical risks associated with our operations in the region, yet, we see the silver lining in increased MENA government spending in construction and energy. This investment boon has and will continue to filter into our insurance portfolio. Highlights for the year 2012 include the following: • Gross written premium in 2012 was US$ 225.6 million, an increase of 11% compared to US$ 202.8 million for 2011. • Underwriting profit grew to US $36.8 million for 2012, an increase of 9% from US$ 33.6 million in 2011. • Investment income for the year stood at $ 7.5 million, an increase of 3% compared to US$ 7.3 million for 2011. • The combined ratio for 2012 was 88% compared to 87% for 2011. • The Net Profit amounted to US$ 25.3 million for 2012 against US$ 23.2 million for 2011, an increase of 9%. • Total assets were US$ 608.9 million at the end of 2012, an increase of 8% compared to US$ 563.9 million as of 31st December, 2011. • Shareholders’ equity rose to US$ 232.1 million at the end of 2012, up 13% compared to US$ 205.4 million as of 31st December, 2011. In conclusion, the year left us with record profits, at the same time increasing our reserves and solidifying our balance sheet. This in turn allowed the Board to give an interim dividend in July 2012 and further increase the dividend from US¢ 4 per share in 2011 to US¢ 7 per share for fiscal year 2012. IGI will push into 2013, confident in the knowledge that it took the right steps over the last 12 months, consolidating core geographical and business lines, but importantly diversifying these by a continued expansion into Europe and the Far East. Our strong position leaves us well-placed to respond to any challenges posed by the insurance industry in the coming year, while enabling us to enter new markets and niche business lines. We aim to build on these gains and performances going forward, in order to cement our pole position as a leading regional niche underwriter. As always, we would like to extend a thank you to all our clients and producers for their unremitting support throughout 2012. We would also like to thank all our employees for their significant effort and contribution this year. We look forward to working together in 2013 to fulfill the visions and ambitions of the Company and to further promote our position as the lead underwriting operation in the region. 8 International General Insurance Holdings Limited AUdIToRS’ RePoRT 9 P.O. Box 9267 28th Floor - Al Attar Business Tower Sheikh Zayed Road Duabi, United Arab Emirates Tel: +971 4 332 4000 Fax:+971 4 332 4004 dubai.uae@ae.ey.com www.ey.com/me INdePeNdeNT AUdIToR’S RePoRT To THe SHAReHoLdeRS of INTeRNATIoNAL GeNeRAL INSURANce HoLdINGS Ltd Report on the consolidated financial statements We have audited the accompanying consolidated financial statements of International General Insurance Holdings Ltd (“the Company”) and its subsidiaries (together “the Group”), which comprise the consolidated statement of financial position as at 31 December 2012 and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and the applicable provisions of the Companies Law pursuant to DIFC Law No. 2 of 2009, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the shareholders of the Company as a body, for our audit work, for this report, or for the opinions we have formed. 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 judgement, including the assessment of the risks of material misstatement of the consolidated 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 consolidated financial statements in order to design audit procedures that are appropriate for 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 the management, as well as evaluating the overall presentation of the consolidated 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 consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2012 and its financial performance and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. Report on other legal and regulatory requirements We also confirm that, in our opinion, the consolidated financial statements include, in all material respects, the applicable requirements of the Companies Law pursuant to DIFC Law No. 2 of 2009. We have obtained all the information and explanations which we required for the purpose of our audit. To the best of our knowledge and belief, no violations of the companies law pursuant to Law No. 2 of 2009 have occurred during the year which would have had a material effect on the business of the Company or on its financial position. 20 March 2013 Dubai, United Arab Emirates 10 International General Insurance Holdings Limited Financial Results 11 12 International General Insurance Holdings Limited coNSoLIdATed STATeMeNT of fINANcIAL PoSITIoN AT 31 DeceMBer 2012 13 ASSETS Premises and equipment Intangible assets Investment in associated companies Investment properties Investments Deferred policy acquisition costs Insurance receivables Trade receivables Other assets Deferred tax assets Reinsurance assets Cash and bank balances ToTAL ASSeTS eQUITY ANd LIABILITIeS equity Issued share capital Foreign currency translation reserve Cumulative changes in fair values Retained earnings Total equity Liabilities Insurance contracts liabilities Other liabilities Insurance payables Unearned commissions Total liabilities ToTAL eQUITY ANd LIABILITIeS Notes 2012 USD 2011 USD 3 4 5 6 7 8 9 10 11 23 13 14 3,525,920 250,498 12,228,572 29,339,762 3,191,687 210,238 11,702,917 29,163,154 151,216,442 134,452,231 30,754,592 97,742,261 137,982 2,167,665 841,900 86,177,127 194,500,512 608,883,233 29,451,946 100,402,233 236,294 2,552,132 118,532 94,332,057 158,083,737 563,897,158 15 143,375,678 143,375,678 (230,995) 15,325,027 73,671,131 (286,652) 5,326,279 57,018,481 232,140,841 205,433,786 12 17 18 19 344,808,524 308,536,375 3,649,283 19,567,472 8,717,113 376,742,392 608,883,233 2,885,594 37,827,012 9,214,391 358,463,372 563,897,158 The consolidated financial statements were authorised for issue in accordance with a resolution of the Board of Directors on 19 March 2013. 14 International General Insurance Holdings Limited coNSoLIdATed INcoMe STATeMeNT For The yeAr eNDeD 31 DeceMBer 2012 International General Insurance Holdings Limited coNSoLIdATed STATeMeNT of coMPReHeNSIVe INcoMe For The yeAr eNDeD 31 DeceMBer 2012 15 2012 USD 2011 USD Profit for the year 25,255,190 23,221,943 other comprehensive income Fair value changes Currency translation differences other comprehensive income for the year Total comprehensive income for the year 9,998,748 55,657 10,054,405 35,309,595 (1,250,471) (17,562) (1,268,033) 21,953,910 Gross written premiums Change in unearned premiums Gross earned premiums Reinsurers’ share of insurance premiums Reinsurers’ share of change in unearned premiums Reinsurers’ share of gross earned premiums Net premiums earned Claims Reinsurers’ share of claims Commissions earned Policy acquisition costs Net underwriting result Net investment income Share of profit from associated companies General and administrative expenses Other income Loss on exchange Profit before tax Tax credit on subsidiary losses PRofIT foR THe YeAR Notes 2012 USD 2011 USD 12 (a) 225,569,256 12 (a) 12 (a) (19,265,207) 206,304,049 (49,760,815) (8,100,260) 12 (a) (57,861,075) 148,442,974 202,786,867 (17,544,900) 185,241,967 (69,745,208) 3,779,284 (65,965,924) 119,276,043 12 (b) 12 (b) 19 8 20 5 (111,182,933) (110,425,705) 28,746,306 14,361,470 44,590,694 15,782,822 (43,579,118) (35,586,760) 36,788,699 33,637,094 6,937,296 525,655 6,910,012 552,864 (19,739,392) (18,605,669) 50,700 (9,778) 796,743 (187,633) 24,553,180 23,103,411 23 702,010 118,532 25,255,190 23,221,943 16 International General Insurance Holdings Limited coNSoLIdATed STATeMeNT of cASH fLoWS For The yeAr eNDeD 31 DeceMBer 2012 International General Insurance Holdings Limited coNSoLIdATed STATeMeNTS of cHANGe IN eQUITY For The yeAr eNDeD 31 DeceMBer 2012 17 Issued share capital Foreign currency translation reserve Cumulative change in fair value of investments Retained earnings Total USD USD USD USD USD At 1 January 2012 Profit for the year Other comprehensive income Total comprehensive income Dividends paid during the year (note 16) 143,375,678 (286,652) 5,326,279 57,018,481 205,433,786 - - - - - 55,657 55,657 - - 25,255,190 25,255,190 9,998,748 - 10,054,405 9,998,748 25,255,190 35,309,595 - (8,602,540) (8,602,540) At 31 december 2012 143,375,678 (230,995) 15,325,027 73,671,131 232,140,841 At 1 January 2011 Profit for the year Other comprehensive income Total comprehensive income Dividends paid during the year (note 16) 143,375,678 (269,090) 6,576,750 38,097,808 187,781,146 - - - - - (17,562) (17,562) - - 23,221,943 23,221,943 (1,250,471) - (1,268,033) (1,250,471) 23,221,943 21,953,910 - (4,301,270) (4,301,270) At 31 december 2011 143,375,678 (286,652) 5,326,279 57,018,481 205,433,786 oPeRATING AcTIVITIeS Profit before tax Adjustments for: Depreciation and amortisation Gain on sale of available-for-sale investments Provision for doubtful debts Impairment of available-for-sale investments Gain on sale of vehicle Loss on revaluation of held for trading investments Dividends and interest income Share of profit from associated companies Reinsurance assets Insurance contracts liabilities Deferred policy acquisition costs Insurance receivables Trade receivables Other assets Unearned commission Insurance payables Other liabilities Notes 2012 USD 2011 USD 24,553,180 23,103,411 3,4 20 20 20 20 5 785,420 (366,140) 900,000 1,231,640 (6,127) 63,782 (8,073,959) (525,655) 18,562,141 8,154,930 36,272,149 (1,302,646) 1,759,972 98,312 418,766 (497,278) (18,259,540) 763,689 856,714 (170,757) 900,000 537,220 (8,206) 153,532 (7,531,438) (552,864) 17,287,612 (25,180,233) 49,073,928 (3,721,476) (15,541,840) 801,366 3,327,379 1,437,670 6,969,099 187,582 Net cash from operating activities 45,970,495 34,641,087 INVeSTING AcTIVITIeS Purchase of premises and equipment Proceeds from sale of vehicle Purchase of intangible assets Purchase of available-for-sale investments Proceeds from maturity of held to maturity investments Proceeds from sale of available-for-sale investments Purchase of investment properties Dividends received from associated companies Matured time deposits – long term Dividends and interest income Net cash from investing activities fINANcING AcTIVITIeS Dividends paid Net cash used in financing activities NeT cHANGe IN cASH ANd cASH eQUIVALeNTS Cash and cash equivalents at the beginning of the year cASH ANd cASH eQUIVALeNTS AT THe eNd of THe YeAR 3 4 5 16 14 (1,009,428) (216,909) 8,454 (152,812) 8,206 (7,667) (24,705,631) (17,578,443) 169,492 16,841,394 (176,608) - 5,444,160 8,073,959 4,492,980 (8,602,540) (8,602,540) 41,860,935 152,639,577 194,500,512 - 36,354,199 (167,028) 130,835 1,760,394 7,531,438 27,815,025 (4,301,270) (4,301,270) 58,154,842 94,484,735 152,639,577 18 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 19 1. AcTIVITIeS 2. BASIS of PRePARATIoN (continued) International General Insurance Holdings Ltd (“the Company”) is incorporated as a company limited by shares under the Companies Law, DIFC Law No. 2 of 2009 on 7 May 2006. The Company’s registered office is at unit 1, Gate Village 01, P. O. Box 506646, International Financial Centre, Dubai. changes in accounting policies The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those of the previous financial year, except for the following amended IFRS effective as of 1 January 2012: The Company and its subsidiaries (together “the Group”) operate in the United Arab Emirates, Bermuda, United Kingdom, Jordan and Malaysia. 2. BASIS of PRePARATIoN The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been presented in United States Dollars “USD” which is the Group’s functional currency. The consolidated financial statements are prepared under the historical cost convention modified to include the measurement at fair value of financial assets available-for-sale, financial assets held for trading and investment properties. Basis of consolidation The financial statements of the subsidiaries are prepared for the same reporting year as the Group, using consistent accounting policies. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All intra-group balances, transactions, income and expenses and profits and losses, including dividends resulting from intra-group transactions, are eliminated in full. The Group has the following subsidiaries: Country of incorporation Activity International General Insurance Underwriting Jordan Underwriting agency Ownership 2012 100% 2011 100% North Star Underwriting Limited United Kingdom Underwriting agency 100% 100% International General Insurance Company Ltd. The following entities are wholly owned by the subsidiary International General Insurance company Ltd. Bermuda International General Insurance Company Ltd. Labuan Branch International General Insurance Company (UK) Limited Bermuda Reinsurance and insurance 100% 100% Malaysia Reinsurance and insurance 100% 100% United Kingdom Reinsurance and insurance 100% 100% International General Insurance Company Dubai Ltd. United Arab Emirates Insurance intermediation and insurance management 100% 100% Specialty Malls Investment Co.* Jordan Real estate properties development and lease 100% 100% * During 2012, the ownership of 100% of equity shares of Specialty Malls Investments co. was transferred from the subsidiary International General Insurance Underwriting company - Jordan to the subsidiary International General Insurance company Ltd. Bermuda. IAS 12 Income Taxes (Amendment) – Deferred Taxes: recovery of Underlying Assets The amendment clarified the determination of deferred tax on investment property measured at fair value and introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. It includes the requirement that deferred tax on non-depreciable assets that are measured using the revaluation model in IAS 16 should always be measured on a sale basis. The amendment is effective for annual periods beginning on or after 1 January 2012 and there has been no effect on the Group’s financial position, performance or its disclosures. IFrS 1 First-Time Adoption of International Financial reporting Standards (Amendment) – Severe hyperinflation and removal of Fixed Dates for First-Time Adopters The IASB provided guidance on how an entity should resume presenting IFRS financial statements when its functional currency ceases to be subject to hyperinflation. The amendment is effective for annual periods beginning on or after 1 July 2011. The amendment had no impact to the Group. IFrS 7 Financial Instruments: Disclosures — enhanced Derecognition Disclosure requirements The amendment requires additional disclosure about financial assets that have been transferred but not derecognised to enable the user of the Group’s financial statements to understand the relationship with those assets that have not been derecognised and their associated liabilities. In addition, the amendment requires disclosures about the entity’s continuing involvement in derecognised assets to enable the users to evaluate the nature of, and risks associated with, such involvement. The amendment is effective for annual periods beginning on or after 1 July 2011. The Group has no assets with these characteristics so there has been no effect on the presentation of the consolidated financial statements. Standards and interpretations issued at 31 December 2012 but not yet effective Standards and interpretations issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Group intends to adopt these standards when they become effective. IAS 1 Financial Statement Presentation – Presentation of Items of other comprehensive Income The amendments to IAS 1 change the grouping of items presented in other comprehensive income (OCI). Items that could be reclassified (or ‘recycled’) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment affects presentation only and has no impact on the Group’s financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 July 2012. IAS 19 employee Benefits (revised) The IASB has issued numerous amendments to IAS 19. These range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and re-wording. The Group does not expect the amendments to have any impact on its financial position or performance. The amendment becomes effective for annual periods beginning on or after 1 January 2013. IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after 1 January 2013. IAS 32 offsetting Financial Assets and Financial Liabilities — Amendments to IAS 32 These amendments clarify the meaning of “currently has a legally enforceable right to set-off”. The amendments also clarify the application of the IAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. These amendments are not expected to impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2014. IFrS 1 Government Loans – Amendments to IFrS 1 These amendments require first-time adopters to apply the requirements of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, prospectively to government loans existing at the date of transition to IFRS. Entities may choose to apply the requirements of IFRS 9 (or IAS 39, as applicable) and IAS 20 to government loans retrospectively if the information needed to do so had been obtained at the time of initially accounting for that loan. The exception would give first-time adopters relief from retrospective measurement of government loans with a below-market rate of interest. The amendment is effective for annual periods on or after 1 January 2013. The amendment has no impact on the Group. 20 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 21 2. BASIS of PRePARATIoN (continued) changes in accounting policies (continued) 2. BASIS of PRePARATIoN (continued) changes in accounting policies (continued) IFrS 7 Disclosures — offsetting Financial Assets and Financial Liabilities — Amendments to IFrS 7 These amendments require an entity to disclose information about rights to set-off and related arrangements (e.g., collateral agreements). The disclosures would provide users with information that is useful in evaluating the effect of netting arrangements on an entity’s financial position. The new disclosures are required for all recognised financial instruments that are set off in accordance with IAS 32. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2013. Financial Instruments: Presentation. The disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32. These amendments will not impact the Group’s financial position or performance and become effective for annual periods beginning on or after 1 January 2013. IFrS 9 Financial Instruments: classification and Measurement IFRS 9, as issued, reflects the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or after 1 January 2013, but amendments to IFRS 9 mandatory effective date of IFRS 9 and transition disclosures, issued in December 2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets, but will not have an impact on classification and measurements of financial liabilities. The Group will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued. IFrS 10 consolidated Financial Statements IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation — Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by IFRS 10 will require management to exercise significant judgement to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in IAS 27. This standard becomes effective for annual periods beginning on or after 1 January 2013. IFrS 11 Joint Arrangements IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities — Non-monetary Contributions by Ventures. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. This standard becomes effective for annual period beginning on or after 1 January 2013 and is to be applied retrospectively for joint arrangements held at the date of initial application. IFrS 12 Disclosure of Interests in other entities IFRS 12 includes all of the disclosures that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required, but has no impact on the Group’s financial position or performance. This standard becomes effective for annual periods beginning on or after 1 January 2013. IFrS 13 Fair Value Measurement IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The Group is currently assessing the impact that this standard will have on the financial position and performance, but based on the preliminary analysis, no material impact is expected. This standard becomes effective for annual periods beginning on or after 1 January 2013. IAS 1 Presentation of Financial Statements This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period. IAS 16 Property, Plant and equipment This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipment are not inventory. IAS 32 Financial Instruments, Presentation This improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes. IAS 34 Interim Financial reporting The amendment aligns the disclosure requirements for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures. These improvements are effective for annual periods beginning on or after 1 January 2013. Summary of significant accounting policies revenue recognition Gross premiums Gross general insurance written premiums comprise the total premiums receivable for the whole period of cover provided by contracts entered into during the accounting period. They are recognised on the date on which the policy commences. Premiums include any adjustments arising in the accounting period for premiums receivable in respect of business written in prior accounting periods. Rebates that form part of the premium rate, such as no-claim rebates, are deducted from the gross premium; others are recognised as an expense. Premiums collected by intermediaries, but not yet received, are assessed based on estimates from underwriting or past experience and are included in premiums written. Unearned premiums are those proportions of premiums written in a year that relate to periods of risk after the reporting date. Unearned premiums are calculated on a pro rata basis. The proportion attributable to subsequent periods is deferred as a provision for unearned premiums. reinsurance premiums Gross general reinsurance premiums written comprise the total premiums payable for the whole cover provided by contracts entered into the period and are recognised on the date on which the policy incepts. Premiums include any adjustments arising in the accounting period in respect of reinsurance contracts incepting in prior accounting periods. Unearned reinsurance premiums are those proportions of premiums written in a year that relate to periods of risk after the reporting date. Unearned reinsurance premiums are deferred over the term of the underlying direct insurance policies for risks-attaching contracts and over the term of the reinsurance contract for losses occurring contracts. commission income Insurance and investment contract policyholders are charged for policy administration services, investment management services, surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are performed. If the fees are for services provided in future periods, then they are deferred and recognised over those future periods. IFrIc 20 Stripping costs in the Production Phase of a Surface Mine This interpretation applies to waste removal (stripping) costs incurred in surface mining activity, during the production phase of the mine. The interpretation addresses the accounting for the benefit from the stripping activity. The interpretation is effective for annual periods beginning on or after 1 January 2013. The new interpretation will not have an impact on the Group. claims Claims, comprising amounts payable to contract holders and third parties and related loss adjustment expenses, net of salvage and other recoveries, are charged to income as incurred. Claims comprise the estimated amounts payable, in respect of claims reported to the Group and those not reported at the consolidated statement of financial position date. Annual Improvements 2012 to IfRSs These improvements will not have any impact on the Group, but include: IFrS 1 First-time Adoption of International Financial reporting Standards: This improvement clarifies that an entity that stopped applying IFRS in the past and chooses, or is required, to apply IFRS, has the option to re-apply IFRS 1. If IFRS 1 is not re-applied, an entity must retrospectively restate its financial statements as if it had never stopped applying IFRS. The Group generally estimates its claims based on appointed loss adjusters or leading underwriters’ recommendations. In addition a provision based on management’s judgement and the Group’s prior experience is maintained for the cost of settling claims incurred but not reported at the consolidated statement of financial position date. Policy acquisition costs Policy acquisition costs represent commissions paid to intermediaries and other direct costs incurred in relation to the acquisition and renewal of insurance contracts which are deferred and expense over the terms of the insurance contracts to which they relate as premiums are earned. 22 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 23 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) Liability adequacy test At each statement of financial position date the Group assesses whether its recognised insurance liabilities are adequate using current estimates of future cash flows under its insurance contracts. If that assessment shows that the carrying amount of its unearned premiums (less related deferred policy acquisition costs) is inadequate in the light of estimated future cash flows, the entire deficiency is immediately recognised in income and an unexpired risk provision created. The Group does not discount its liability for unpaid claims as substantially all claims are expected be paid within one year of the statement of financial position date. reinsurance The Group cedes insurance risk in the normal course of business for all of its businesses. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision or settled claims associated with the reinsurer’s policies and are in accordance with the related reinsurance contract. Reinsurance assets are reviewed for impairment at each reporting date, or more frequently, when an indication of impairment arises during the reporting year. Impairment occurs when there is objective evidence as a result of an event that occurred after initial recognition of the reinsurance asset that the Group may not receive all outstanding amounts due under the terms of the contract and the event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer. The impairment loss is recorded in the consolidated statement of income. Gains or losses on buying reinsurance are recognised in the consolidated statement of income immediately at the date of purchase and are not amortised. Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders. The Group also assumes reinsurance risk in the normal course of business for life insurance and non-life insurance contracts where applicable. Premiums and claims on assumed reinsurance are recognised as revenue or expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Reinsurance liabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the related reinsurance contract. Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance. Reinsurance assets or liabilities are derecognised when the contractual rights are extinguished or expire or when the contract is transferred to another party. Reinsurance contracts that do not transfer significant insurance risk are accounted for directly through the statement of financial position. These are deposit assets or financial liabilities that are recognised based on the consideration paid or received less any explicit identified premiums or fees to be retained by the reinsured. Investment income on these contracts is accounted for using the effective interest rate method when accrued. Interest income Interest income included in investment income is recognised as the interest accrues using the effective interest method, under which the rate used exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Dividend income Dividend revenue included in investment income is recognised when right to receive the payment is established. Premises and equipment Premises and equipment are stated at cost less accumulated depreciation and any impairment in value. Depreciation is calculated on a straight-line basis over the estimated useful lives using the following are the estimated useful lives (Note 3). years Office buildings Office furniture Computers Equipment Leasehold improvement Vehicles 20 5 3 4 5 5 An item of property, plant and equipment and any significant part initially recognised is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the consolidated income statement when the asset is derecognised. The assets’ residual values, useful lives and method of depreciation are reviewed and adjusted if appropriate at each financial year- end. Impairment reviews take place when events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment losses are recognised in the consolidated statement of income as an expense. Intangible assets Intangible assets acquired through business combinations are recorded at their fair value on that date. Other intangible assets are measured on initial recognition at cost. Intangible assets with finite lives are amortised over the useful economic lives, while intangible assets with indefinite useful lives are assessed for impairment at each reporting date or when there is an indication that the intangible asset may be impaired. Internally generated intangible assets are not capitalised and are expensed in the consolidated statement of income. Indications of impairment of intangible assets are reviewed and their useful economic lives are reassessed at each reporting date. Adjustments are reflected in the current and subsequent periods. Intangible assets include computer software and software licenses. These intangible assets are amortised on a straight line basis over their estimated economic useful lives of 5 years. Impairment and uncollectibility of financial assets An assessment is made at each consolidated statement of financial position date to determine whether there is objective evidence that a specific financial asset may be impaired. If such evidence exists, any impairment loss is recognised in the consolidated statement of income. Impairment is determined as follows: A) For assets carried at fair value, impairment is the difference between cost and fair value; B) For assets carried at cost, impairment is the difference between cost and the present value of future cash flows discounted at the current market rate of return for a similar financial asset; and C) For assets carried at amortised cost, impairment is based on estimated cash flows discounted at the original effective interest rates. The group treats financial assets available-for-sale as impaired when there has been a significant or prolonged decline in the fair value below cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. In addition, the Group evaluates other factors, including normal volatility in share prices for quoted equities and the future cash flows and discount factors for unquoted equities. Impairment is recognised in the income statement. If, in a subsequent period, the amount of the impairment loss decreases, the carrying value of the asset is increased to its recoverable amount. The amount of the reversal is recognised in the income statement except for equity instruments classified as available for sale investments for which the reversal is recognized in the of other comprehensive income. Derecognition of financial instruments The derecognition of a financial instrument takes place when the Group no longer controls the contractual rights that comprise the financial instrument, which is normally the case when the instrument is sold, or all the cash flows attributable to the instrument are passed through to an independent third party. Investment in associated companies The Group’s investment in its associate is accounted for using the equity method of accounting. An associate is an entity in which the Group has significant influence and which is neither a subsidiary nor a joint venture. Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated statement of income reflects the share of the results of operations of the associate. Where there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated statement of changes in equity. Profits or losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate. 24 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 25 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) The share of profit of the associate is shown on the face of the consolidated statement of income. This is profit attributable to equity holders of the associate and, therefore, is profit after tax and non-controlling interests in the subsidiaries of the associates. The financial statements of the associate are prepared for the same reporting period as the Group. Where necessary, adjustments are made to bring its accounting policies in line with the Group’s. After application of the equity method, the Group determines whether it is necessary to recognise an additional impairment loss on the Group’s investment in associates. The Group determines at each reporting date, whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the ‘share of profit of an associate’ in the consolidated income statement. Upon loss of significant influence over the associate, the Group measures and recognises any remaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognised in profit or loss. Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met; and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Gains or losses arising from changes in the fair values of investment properties are included in the consolidated statement of income in the period in which they arise. Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Available-for-sale financial investments Available-for-sale financial investments include equity and debt securities. Equity investments classified as available-for sale are those, which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income, or determined to be impaired, at which time the cumulative loss is recognised in the consolidated statement of income and removed from the available- for-sale reserve. cash and cash equivalents For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash in hand, bank balances, and short-term deposits with an original maturity of three months or less. Provisions Provisions are recognised when the Group has an obligation (legal or constructive) as a result of a past event, and the costs to settle the obligation are both probable and able to be reliably measured. Share based payment A phantom share option plan linked to the value of an ordinary share of the Group as approved by the Board of directors has been declared during 2011. The scheme is applicable to senior executives with more than 12 months service. The amount of bonus is determined by reference to the increase in the book value of shares covered by the option. No shares are actually issued or transferred to the option holder on the exercise of the option. The difference between the net disposal proceeds and the carrying amount of the asset is recognised in the consolidated statement of income in the period of derecognition. The options vest equally over a span of 5 years from the grant date. The incentive amounts to the excess of book value on vesting date over grant date with an additional 20% on the excess. Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the fair value at the date of change in use. If owner occupied property becomes an investment property, the Group accounts for such property in accordance with the policy stated under property, plant and equipment up to the date of change in use. Financial assets Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, held-to-maturity investments or available-for-sale financial assets. The Group determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. The subsequent measurement of financial assets depends on their classification as follows: Insurance receivables Insurance companies and intermediaries receivables are recognised when due and measured on initial recognition at the fair value of the consideration received or receivable. Subsequent to initial recognition, insurance receivables are measured at amortised cost, using the effective interest rate method. The carrying value of insurance receivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the consolidated income statement. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in the consolidated statement of income. The Group has not designated any financial assets upon initial recognition as at fair value through consolidated income statement. held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold it to maturity. After initial measurement held-to-maturity investments are measured at amortised cost using the effective interest rate method, less impairment. Impairment losses are recognised in the consolidated statement of income. offsetting Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of income unless required or permitted by any accounting standard or interpretation. Foreign currencies The Group’s consolidated financial statements are presented in United States Dollars, which is also the functional currency of the Group. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recorded by the Group entities at their respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. All differences are taken to the consolidated statement of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Group companies The assets and liabilities of foreign operations are translated into United States Dollars at the rate of exchange prevailing at the reporting date and their statements of income are translated at exchange rates prevailing at the date of the transactions. The exchange differences arising on the translation are recognised in consolidated statement of comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in the consolidated statement of income. Taxation current income tax Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries were the group operates and generates taxable income. 26 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 27 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) 2. BASIS of PRePARATIoN (continued) Summary of significant accounting policies (continued) Deferred tax Deferred tax is provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credit and unused tax losses can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Leasing The Group has no finance lease. The determination of whether an arrangement is a lease, or contains a lease, is based on the substance of the arrangement at the inception date and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Group as a lessee Finance leases that transfer to the Group substantially all of the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance cost in the consolidated income statement. Leased assets are depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term. Contingent rentals are recognised as an expense in the period in which they are incurred. Group as a lessor Leases in which the Group does not transfer substantially all of the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as rental income. Rental income from operating leases is recognised on a straight-line basis over the term of lease. Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements: Operating lease commitments-group as lessor The Group has entered into commercial property leases on its premises and equipment. The Group, as a lessor, has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of its property and so accounts for them as operating leases. Impairment losses on available for sale investments The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. Where fair values are not available, the recoverable amount of such investment is estimated to test for impairment. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and discount factors for unquoted equities. Impairment losses on held-to-maturity investments The Group reviews its individually significant held-to-maturity investments at each statement of financial position date to assess whether an impairment loss should be recorded in the consolidated statement of income. In particular, management judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Impairment losses on receivables Receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. This assessment of impairment requires judgment. In making this judgment, the Company evaluates credit risk characteristics that consider past-due status being indicative of the inability to pay all amounts due as per contractual terms. Going concern The Group’s management has made an assessment of the Group’s ability to continue as a going concern and is satisfied that the Group has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Group’s ability to continue as a going concern. Therefore, the financial statements continue to be prepared on the going concern basis. Classification of investments Management decides on acquisition of an investment whether it should be classified as held for trading or available for sale or held to maturity. The group classifies investments as trading if they are acquired primarily for the purpose of making a short term profit by the dealers. Financial assets are classified as held to maturity if the Group has the positive intention and ability to hold up till maturity. All other investments are classified as financial assets available -for- sale. Fair values The fair value of financial instruments that are actively traded in organised financial markets is determined by reference to quoted market bid prices for assets and offer prices for liabilities, at the close of business on the consolidated statement of financial position date. If quoted market prices are not available, reference is also be made to broker or dealer price quotations. estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the consolidated statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: For financial instruments where there is not an active market, the fair value is determined by using valuation techniques. Such techniques include using recent arm’s length transactions, reference to the current market value of another instrument which is substantially the same and/or discounted cash flow analysis. For discounted cash flow techniques, estimated future cash flows are based on management’s best estimates and the discount rate used is a market related rate for a similar instrument. If the fair value cannot be measured reliably, these financial instruments are measured at cost, being the fair value of the consideration paid for the acquisition of the investment or the amount received on issuing the financial liability. All transaction costs directly attributable to the acquisition are also included in the cost of the investment. Valuation of outstanding claims, whether reported or not Considerable judgement by management is required in the estimation of amounts due to contract holders arising from claims made under insurance contracts. Such estimates are necessarily based on assumptions about several factors involving varying, and possibly significant, degrees of judgement and uncertainty and actual results may differ from management’s estimates resulting in future changes in estimated liabilities. In particular, estimates have to be made both for the expected ultimate cost of claims reported at the consolidated statement of financial position date and for the expected ultimate cost of claims incurred but not yet reported (IBNR) at the consolidated statement of financial position date. The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends. Claims requiring court or arbitration decisions are estimated individually. Independent loss adjustors normally estimate property claims. Management reviews its provisions for claims incurred, and claims incurred but not reported, on a quarterly basis. Investment properties Investment properties are stated at fair value which is determined based on valuations performed by professional independent valuers. 28 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 29 3. PReMISeS ANd eQUIPMeNT 4. INTANGIBLe ASSeTS Computer software / licenses Office building Office furniture Computers Equipment Leasehold improvements Vehicles Work in progress Total USD USD USD USD USD USD USD USD cost At 1 January 2012 1,851,593 1,238,115 514,582 165,355 915,827 416,653 - 5,102,125 Additions 15,796 160,463 379,875 79,432 161,456 120,349 92,057 1,009,428 Written off and disposals - (79,808) (96,724) (977) (50,880) (21,243) - (249,632) At 31 December 2012 1,867,389 1,318,770 797,733 243,810 1,026,403 515,759 92,057 5,861,921 depreciation At 1 January 2012 170,093 504,280 434,043 123,334 438,006 240,682 Deprecation for the year 70,768 224,342 84,957 27,575 202,249 62,977 Written off and disposals - (79,808) (96,724) (792) (50,880) (19,101) At 31 December 2012 240,861 648,814 422,276 150,117 589,375 284,558 - 1,910,438 - - 672,868 (247,305) - 2,336,001 Net carrying amount At 31 December 2012 1,626,528 669,956 375,457 93,693 437,028 231,201 92,057 3,525,920 cost At 1 January 2011 1,836,188 1,284,365 446,547 185,557 987,867 374,508 Additions 15,405 55,072 68,035 7,746 11,604 59,047 Written off and disposals - (101,322) - (27,948) (83,644) (16,902) At 31 December 2011 1,851,593 1,238,115 514,582 165,355 915,827 416,653 depreciation At 1 January 2011 99,413 347,352 345,610 108,697 281,083 197,804 Deprecation for the year 70,680 258,250 88,433 42,585 240,567 59,780 Written off and disposals - (101,322) - (27,948) (83,644) (16,902) At 31 December 2011 170,093 504,280 434,043 123,334 438,006 240,682 - 5,115,032 - - 216,909 (229,816) - 5,102,125 - 1,379,959 - - 760,295 (229,816) - 1,910,438 cost Beginning balance Additions Ending balance Amortisation Beginning balance Amortisation for the year Ending balance Net book value 2012 USD 773,465 152,812 926,277 563,227 112,552 675,779 250,498 5. INVeSTMeNT IN ASSocIATed coMPANIeS In 2002, the Group acquired a 33% equity ownership interest in companies registered in Lebanon as shown below: Country of incorporation Ownership 2012 Star Rock SAL Lebanon Sina SAL Lebanon Silver Rock SAL Lebanon Golden Rock SAL Lebanon Lebanon Lebanon Lebanon Lebanon Movement on investment in associates is as follows: 33% 33% 33% 33% 2012 USD 2011 USD 765,798 7,667 773,465 466,808 96,419 563,227 210,238 2011 33% 33% 33% 33% 2011 USD Net carrying amount Opening balance At 31 December 2011 1,681,500 733,835 80,539 42,021 477,821 175,971 - 3,191,687 Share of profit of results of associated companies Dividends received The depreciation charge for the year of USD 672,868 (2011: USD 760,295) has been included in general and administrative expenses. Fully depreciated premises and equipment still in use amounted to USD 565,134 as at 31 December 2012 (2011: 530,351). 11,702,917 11,280,888 525,655 - 552,864 (130,835) 12,228,572 11,702,917 30 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 31 5. INVeSTMeNT IN ASSocIATed coMPANIeS (continued) 7. INVeSTMeNTS The following table includes summarised information of the Group’s investments in associates: Share of associates’ statement of financial position Current assets Non-current assets Current liabilities Net assets Share of associates’ revenues and results Revenues Profit 2012 USD 467,624 16,910,445 (5,149,497) 12,228,572 2011 USD 553,840 16,901,477 (5,752,400) 11,702,917 796,590 800,090 525,655 552,864 Investment properties of the associates are stated at fair value, which has been determined based on valuations performed by professional independent valuers who are specialists in valuing these types of investment properties. The fair value represents the amount, which the assets could be exchanged between a knowledgeable, willing seller in an arm’s length transaction at the date of valuation. All the investment properties generated rental income during the current period and the prior years. 6. INVeSTMeNT PRoPeRTIeS The following table includes summarised information of the Group’s investment properties: Opening balance Additions closing balance Opening balance Additions Closing balance commercial building USD 2012 Land* USD Total USD 20,701,304 176,608 20,877,912 8,461,850 29,163,154 - 176,608 8,461,850 29,339,762 2011 commercial building USD Land* USD Total USD 20,534,276 167,028 20,701,304 8,461,850 28,996,126 - 167,028 8,461,850 29,163,154 * Land amounting to USD 8,461,850 as at 31 December 2012 (2011: USD 8,461,850) is registered in the name of the Directors of the Group. The Group has obtained an irrevocable proxy over this investment property. The carrying amount approximates the fair value of the investment property based on valuations performed by independent valuer. Held to maturity Unquoted bonds* Held for trading Quoted funds Available-for-sale Quoted bonds and debt securities with fixed interest rate Quoted equities Quoted funds and alternative investments Unquoted equities * Maturity of these bonds as at 31 December 2012 are as follows: 6 December 2015 27 October 2017 2012 USD 2011 USD 4,520,649 4,690,141 1,461,920 1,525,702 69,409,224 64,017,190 4,476,243 7,331,216 145,233,873 151,216,442 69,711,890 44,555,931 6,681,449 7,287,118 128,236,388 134,452,231 Maturity Carrying amount Effective interest rate 1,520,649 3,000,000 4,520,649 10% 5% Provision for impairment for equity investments charged to the consolidated statement of income amounted to USD 1,231,640 (2011: USD 537,220). 8. defeRRed PoLIcY AcQUISITIoN coSTS Opening balance Acquisition costs Charged to consolidated income statement 2012 USD 2011 USD 29,451,946 44,881,764 (43,579,118) 30,754,592 25,730,470 39,308,236 (35,586,760) 29,451,946 32 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 9. INSURANce ReceIVABLeS Receivables from insurance companies and intermediaries Less: Provision for doubtful debts The movement in the provision of doubtful debts is as follows: Opening balance Provision for the year 2012 USD 2011 USD 99,542,261 (1,800,000) 97,742,261 101,302,233 (900,000) 100,402,233 2012 USD (900,000) (900,000) (1,800,000) 2011 USD - (900,000) (900,000) All of the above amounts are due within twelve months of the statement of financial position date (Note 24). It is not the practice of the Group to hold collaterals as security. Therefore the receivable are unsecured. 10. TRAde ReceIVABLeS This amount represents the balances due from the Specialty Mall customers against rental income. There are no impaired trade receivables and management believes that the trade receivables will be recovered in full. The aging of the trade receivables is less than 180 days. 11. oTHeR ASSeTS Accrued interest income Prepaid expenses Dividend receivable Refundable deposits Employees receivables Others 12. INSURANce coNTRAcTS LIABILITIeS 2012 USD 1,290,773 567,412 43,459 125,144 10,444 130,433 2011 USD 1,687,268 322,620 - 88,732 284,842 168,670 2,167,665 2,552,132 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 33 12. INSURANce coNTRAcTS LIABILITIeS (continued) a) Unearned premiums 2012 reinsurers’ share USD Gross USD Net USD Gross USD 2011 reinsurers’ share USD Net USD Opening balance 120,947,599 (31,886,053) 89,061,546 103,402,699 (28,106,769) 75,295,930 Premiums written 225,569,256 (49,760,815) 175,808,441 202,786,867 (69,745,208) 133,041,659 Premiums earned (206,304,049) 57,861,075 (148,442,974) (185,241,967) 65,965,924 (119,276,043) 140,212,806 (23,785,793) 116,427,013 120,947,599 (31,886,053) 89,061,546 b) outstanding claims Movement in outstanding claims 2012 reinsurers’ share USD Gross USD Net USD Gross USD 2011 reinsurers’ share USD Net USD At the beginning of the year Reported claims 138,288,776 (55,956,166) 82,332,610 114,059,748 (34,756,238) 79,303,510 Claims incurred but not reported 49,300,000 - 49,300,000 42,000,000 - 42,000,000 187,588,776 (55,956,166) 131,632,610 156,059,748 (34,756,238) 121,303,510 Claims paid (94,175,991) 30,702,185 (63,473,806) (78,896,677) 23,390,766 (55,505,911) 125,366,105 (25,247,317) 100,118,788 124,151,705 (47,970,694) 76,181,011 (14,183,172) (3,498,989) (17,682,161) (13,726,000) 3,380,000 (10,346,000) 204,595,718 (54,000,287) 150,595,431 187,588,776 (55,956,166) 131,632,610 Provided during the year related to current accident year Provided during the year related to previous accident years At the end of the year At the end of the year 2012 reinsurers’ share USD Gross USD Net USD Gross USD 2011 reinsurers’ share USD Net USD Reported claims 147,595,718 (54,000,287) 93,595,431 138,288,776 (55,956,166) 82,332,610 Claims incurred but not reported 57,000,000 - 57,000,000 49,300,000 - 49,300,000 204,595,718 (54,000,287) 150,595,431 187,588,776 (55,956,166) 131,632,610 Unearned premiums 140,212,806 (23,785,793) 116,427,013 120,947,599 (31,886,053) 89,061,546 Outstanding claims 204,595,718 (54,000,287) 150,595,431 187,588,776 (55,956,166) 131,632,610 344,808,524 (77,786,080) 267,022,444 308,536,375 (87,842,219) 220,694,156 34 t o n t u b d e r r u c n i i m a c l d n a s m a c i l d e t r o p e r h t o b i g n d u c n l i , s m a c i l ) d e u n i t n o c ( I I I I S e T L B A L S T c A R T N o c e c N A R U S N I . 2 1 2 1 0 2 r e B M e c e D 1 3 T A ) d e u n i t n o c ( l i s m a c g n d n a t s t u o i ) b d e r r u c n i l e v i t a u m u c f o e t a m i t s e e h t w o h s l s e b a t i g n w o l l o f e h T l t n e m p o e v e d s m a c i l I I S T N e M e T A T S L A c N A N f d e T A d L o S N o c e H T o T S e T o N I d e t i i i l m L s g n d o H e c n a r u s n I l a r e n e G l a n o i t a n r e t n I l a t o T D S U 2 1 0 2 D S U 1 1 0 2 D S U 0 1 0 2 D S U 9 0 0 2 D S U 8 0 0 2 D S U 7 0 0 2 D S U 6 0 0 2 D S U 5 0 0 2 D S U 4 0 0 2 D S U 3 0 0 2 D S U 2 0 0 2 D S U . e t a d o t s t n e m y a p e v i t a u m u c l h t i w r e h t e g o t , e t a d n o i t i s o p l i a c n a n fi f o t n e m e t a t s h c a e t a r a e y t n e d c c a i i e v s s e c c u s h c a e r o f d e t r o p e r 5 0 1 6 6 3 , , 5 2 1 3 6 1 4 4 6 , , 3 1 1 1 8 0 2 3 9 , , 6 0 1 9 3 3 9 3 4 , , 9 7 2 2 4 , 1 6 0 , 0 1 1 5 2 4 , 4 8 3 , 7 3 3 6 2 , 4 5 2 , 5 2 6 1 4 , 2 6 3 , 5 2 2 7 7 , 8 8 4 , 1 2 3 1 , 4 5 4 7 2 7 , 7 t n e d c c a i f o d n e t A r a e y , 9 7 3 3 0 1 , 6 1 8 , 1 4 4 6 0 1 , 5 6 4 , 1 3 6 2 7 , 8 2 4 , 7 8 9 , 3 2 1 8 4 6 , 9 9 1 , 3 5 5 9 5 , 1 0 0 , 5 3 9 9 4 , 0 2 5 , 4 4 7 8 4 , 5 0 0 , 8 5 4 8 , 8 0 7 , 1 6 1 7 , 0 4 r e t a l r a e y e n O - - - - - - - - - - - - - - - - - - - 8 1 7 6 8 9 5 4 4 , , 8 6 6 5 0 1 , 6 6 3 5 2 1 , 8 1 7 , 9 7 3 3 0 1 , 0 1 1 5 3 7 , , 4 0 1 9 2 5 9 3 8 , , 6 6 6 0 9 , 0 7 1 , 9 1 1 1 1 4 , 8 8 1 , 3 5 3 2 6 , 8 2 7 , 0 4 0 5 0 , 4 9 3 , 7 4 3 7 6 , 4 1 7 , 7 0 8 2 , 8 7 6 , 3 3 5 9 , 2 2 2 r e t a l s r a e y o w T - - - - - - - - 0 1 1 , 5 3 7 4 0 1 , 4 0 7 7 6 8 , , 7 6 8 7 4 , 9 2 3 , 1 2 1 5 6 4 , 6 8 7 , 3 5 2 3 7 , 5 8 4 , 9 3 0 4 6 , 0 0 2 , 7 4 7 6 8 , 1 9 4 , 7 6 7 1 , 9 0 5 , 3 4 1 8 , 5 8 2 r e t a l s r a e y e e r h T - - - - - - - 0 2 2 , 6 8 6 , 9 1 1 9 8 9 , 9 0 2 , 3 5 1 1 3 , 1 2 3 , 7 3 4 0 4 , 9 1 7 , 6 4 0 3 3 , 9 9 7 , 7 9 6 0 , 8 6 4 , 3 2 5 5 , 5 7 2 r e t a l s r a e y r u o F - - - - - - 0 6 5 , 4 4 2 , 3 5 6 9 5 , 1 5 4 , 7 3 6 5 4 , 3 9 2 , 6 4 6 8 3 , 8 3 7 , 7 6 7 3 , 8 2 4 , 3 2 8 7 , 4 0 3 r e t a l s r a e y e v F i - - - - - 6 7 0 , 6 2 6 , 6 3 9 2 9 , 9 9 9 , 6 4 1 9 5 , 0 4 6 , 7 9 1 5 , 2 1 3 , 3 7 6 0 , 6 8 2 r e t a l s r a e y i x S - - - - 6 0 2 , 9 2 1 , 6 4 1 8 9 , 8 7 7 , 7 1 9 8 , 2 1 3 , 3 8 6 5 , 1 7 2 r e t a l s r a e y n e v e S - - - 1 7 8 , 2 4 8 , 7 4 0 0 , 6 9 2 , 3 8 6 5 , 1 7 2 r e t a l s r a e y t h g E i - - 8 4 8 , 6 9 2 , 3 8 6 5 , 1 7 2 r e t a l s r a e y e n N i - 8 6 5 , 1 7 2 r e t a l s r a e y n e T 4 0 7 , 7 6 8 7 6 , 0 2 2 , 6 8 6 , 9 1 1 0 6 5 , 4 4 2 , 3 5 6 7 0 , 6 2 6 , 6 3 6 0 2 , 9 2 1 , 6 4 1 7 8 , 2 4 8 , 7 8 4 8 , 6 9 2 , 3 8 6 5 , 1 7 2 e t a m i t s e t n e r r u C l e v i t a u m u c f o d e r r u c n i s m a c l i ) 8 6 2 0 5 8 , , 3 6 4 ( ) 4 4 8 , 4 1 7 , 4 2 ( ) 2 8 0 , 2 7 3 , 0 5 ( ) 0 3 6 , 9 4 7 , 6 8 ( ) 2 2 4 , 2 8 6 , 8 5 ( ) 7 3 9 , 3 1 9 , 4 0 1 ( ) 2 8 0 , 3 6 1 , 8 4 ( ) 6 4 3 , 9 3 1 , 4 3 ( ) 9 2 7 , 4 8 8 , 4 4 ( ) 0 3 5 , 6 6 6 , 7 ( ) 8 9 0 , 6 9 2 , 3 ( ) 8 6 5 , 7 6 2 ( e t a d o t s t n e m y a p l e v i t a u m u C 8 1 7 5 9 5 , , 4 0 2 f o t n e m e t a t s d e t a d i l o s n o c e h t n i d e d u c n l i y t i l i b a i l l a t o T n o i t i s o p l i a c n a n fi International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 35 13. ReINSURANce ASSeTS Reinsurance share of unearned premiums (note 12) Reinsurance share of outstanding claims (note 12) Deferred XOL premium 14. cASH ANd BANK BALANceS Cash and bank balances Time deposits – short term Cash and cash equivalents Time deposits – long term 2012 USD 23,785,793 54,000,287 8,391,047 86,177,127 2011 USD 31,886,053 55,956,166 6,489,838 94,332,057 2012 USD 2011 USD 63,992,637 130,507,875 194,500,512 - 49,753,074 102,886,503 152,639,577 5,444,160 194,500,512 158,083,737 The time deposits, which are substantially denominated in US Dollars, are made for varying periods between one month to one year (2011: between one month to two years) depending on the immediate cash requirements of the Group. All deposits earned an average variable interest rate of 2.21% (2011: 1.76%). 15. ISSUed SHARe cAPITAL Shares of USD 1 each 16. dIVIdeNdS PAId Authorised, issued and fully paid 2012 USD 2011 USD 143,375,678 143,375,678 At a meeting held on 7 March 2012, the shareholders resolved to pay dividend of USD 0.04 (2011: USD 0.03) per share amounting to USD 5,735,027 (2011: USD 4,301,270) related to the year ended 31 December 2011. Further, the shareholders also resolved on 5 August 2012 to pay interim dividends of USD 0.02 per share amounting to USD 2,867,513 related to the current year. 17. oTHeR LIABILITIeS Accounts payable Accrued expenses 2012 USD 537,226 3,112,057 3,649,283 2011 USD 579,912 2,305,682 2,885,594 36 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 37 18. INSURANce PAYABLeS 22. ReLATed PARTY TRANSAcTIoNS Payables due to insurance companies and intermediaries Reinsures – amounts due in respect of ceded premium 2012 USD 2,183,916 17,383,556 19,567,472 2011 USD 7,366,319 30,460,693 37,827,012 19. UNeARNed coMMISSIoNS The movement in unearned commissions in the consolidated statement of financial position is as follows: Opening balance Commissions received Commissions earned 20. INVeSTMeNT INcoMe Interest Dividends Gain on sale of available-for-sale investments Fair value changes of held for trading investments Impairment of available-for-sale investments (note 7) Investments custodian fees and other investments expenses Rental income, net 2012 USD 2011 USD 9,214,391 13,864,192 7,776,721 17,220,492 (14,361,470) (15,782,822) 8,717,113 9,214,391 2012 USD 6,482,521 1,591,438 366,140 (63,782) (1,231,640) (1,087,858) 880,477 6,937,296 2011 USD 6,067,068 1,464,370 170,757 (153,532) (537,220) (1,005,909) 904,478 6,910,012 21. coMMITMeNTS ANd coNTINGeNcIeS As of the date of the financial statements, the Group is contingently liable for the following: • Letters of Guarantee amounting to USD 9,181 (31 December 2011: USD 17,373) to the order of the Jordanian Ministry of Trade and Industry with margin of USD 918 (31 December 2011: USD 1,737). • Letters of Credit amounting to USD 28,256,883 to the order of reinsurance companies for collateralising insurance contract liabilities in accordance with the reinsurance arrangements (31 December 2011: USD 32,977,488). • Letter of Guarantee amounting to USD 373,192 to the order of Friends Provident Life Assurance Ltd. for collateralising rent payment obligation in one of the Group entity’s office premises (31 December 2011: USD 373,192). Related parties represent major shareholders, associates, directors and key management personnel of the Group and entities controlled, jointly controlled or significantly influenced by such parties, pricing policies and terms of these transactions are approved by the Group’s management. Transactions with related parties included in the consolidated financial statements are as follows: 2012 USD 2011 USD Consolidated statement of income Commission paid Eastern Insurance Brokers Ltd – Owned by immediate family member of the major shareholder 278,412 140,353 Compensation of key management personnel of the Group, consisting of salaries and benefits was USD 4,884,474 (31 December 2011: USD 5,047,396). Out of the total amount of key management personnel compensation, an amount of USD 83,311 (2011: USD 13,824) represents long term benefits. 23. TAX cRedIT oN SUBSIdIARY LoSSeS Tax credit on subsidiary losses resulted from the losses recorded in International General Insurance Company (UK) Ltd. which is subject to the United Kingdom income tax laws. Following is the movement on the deferred tax assets: Opening balance Tax credit on losses of the subsidiary IGI UK Others ending balance 24. RISK MANAGeMeNT 2012 USD 118,532 702,010 21,358 841,900 2011 USD - 118,532 - 118,532 The risks faced by the Group and the way these risks are mitigated by management are summarised below. Insurance risk Insurance risk includes the risks of inappropriate underwriting, ineffective management of underwriting, inadequate controls over exposure management in relation to catastrophic events and insufficient reserves for losses including claims incurred but not reported. To manage this risk, the Group’s underwriting function is conducted in accordance with a number of technical analytical protocols which includes defined underwriting authorities, guidelines by class of business, rate monitoring and underwriting peer reviews. The risk is further protected by reinsurance programmes which respond to various arrays of loss probabilities. The Group has in place effective exposure management system. Aggregate exposure is modelled and tested against different stress scenarios to ensure adherence to Group’s overall risk appetite and alignment with reinsurance programmes and underwriting strategies. 38 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 39 24. RISK MANAGeMeNT (continued) Loss reserve estimates are inherently uncertain. Reserves for unpaid losses are the largest single component of the liabilities of the Group. Actual losses that differ from the provisions, or revisions in the estimates, can have a material impact on future earnings and the statement of financial position. The Group has in house experienced actuarial set up reviewing and monitoring the reserving policy and its implementation at quarterly intervals. They work closely with the underwriting and claims team to ensure understanding of the Group’s exposure and loss experience. In addition, the Group receives external independent analysis of its reserve requirements on quarterly basis. In order to minimise financial exposure arising from large claims, the Group, in the normal course of business, enters into contracts with other parties for reinsurance purposes. Such reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from large risks, and provide additional capacity for growth. A significant portion of the reinsurance is affected under treaty, facultative and excess-of-loss reinsurance contracts. Geographical concentration of risks The Group’s insurance risk based on geographical concentration of risk is illustrated in the table below: 2012 Europe Middle / Far East & Africa North America Rest of the World 2011 Europe Middle / Far East & Africa North America Rest of the World Gross written premiums Concentration Percentage USD 37,502,898 95,355,232 3,204,828 89,506,298 225,569,256 % 17% 42% 1% 40% Gross written premiums Concentration Percentage USD 38,529,505 91,254,090 8,111,475 64,891,797 202,786,867 % 19% 45% 4% 32% 24. RISK MANAGeMeNT (continued) Line of business concentration of risk The Group’s insurance risk based on line of business concentration is illustrated in the table below: 2012 Energy Property Engineering Marine Reinsurance Financial Casualty Aviation Ports & Terminals 2011 Energy Property Engineering Marine Reinsurance Financial Casualty Aviation Ports & Terminals Gross written premiums USD 85,296,674 40,592,533 20,925,530 20,978,588 20,416,389 16,497,299 3,110,218 11,228,325 6,523,700 225,569,256 Concentration Percentage % 38% 18% 9% 9% 9% 7% 1% 5% 3% Gross written premiums Concentration Percentage USD 82,569,712 26,073,716 16,975,720 28,955,914 21,038,007 16,643,005 1,545,213 8,843,203 142,377 202,786,867 % 41% 13% 8% 14% 10% 8% 1% 4% - Sensitivities The analysis below shows the estimated impact on gross and net insurance contracts claims liabilities and on profit before tax, of an ultimate development on net claims liabilities of 5% different from that reported in the statement of financial position (2011: 5%). The impact on gross claims liabilities assumes that recovered rates remain constant % + 5 + 5 2012 2011 Impact on gross insurance contract claims liabilities Impact on net insurance contract claims liabilities USD USD Impact on profit USD 10,229,786 7,529,772 (7,529,772) 9,379,439 6,581,631 (6,581,631) 40 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 41 24. RISK MANAGeMeNT (continued) 24. RISK MANAGeMeNT (continued) financial risk The Group’s principal financial instruments are financial assets available-for-sale, financial assets held for trading, financial assets held to maturity, receivables arising from insurance, investment in associates, investment properties and reinsurance contracts, and cash and cash equivalents. The Group does not enter into derivative transactions. The main risks arising from the Group’s financial instruments are interest rate risk, foreign currency risk, credit risk, market price risk and liquidity risk. The board reviews and agrees policies for managing each of these risks and they are summarised below. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future profitability or the fair values of financial instruments. The Group is exposed to interest rate risk on certain of its investments and cash and cash equivalents. The Group limits interest rate risk by monitoring changes in interest rates in the currencies in which its cash and interest bearing investments and borrowings are denominated. Details of maturities of the major classes of financial assets are as follows: Less than 1 year 1 to 5 years More than 5 years Non-interest bearing items Total Effective Interest Rate on interest bearing assets 2012 USD USD USD USD USD (%) Investments held for trading - - - 1,461,920 1,461,920 Available-for-sale investments 13,231,115 31,427,215 24,750,898 75,824,645 145,233,873 Held to maturity investments 1,520,649 Cash and bank balances 194,500,512 - - 3,000,000 - - - 4,520,649 194,500,512 209,252,276 31,427,215 27,750,898 77,286,565 345,716,954 2011 Investments held for trading Available-for-sale investments - - - 1,525,702 1,525,702 9,708,299 33,939,644 26,063,947 58,524,498 128,236,388 Held to maturity investments 1,690,141 - 3,000,000 Cash and bank balances 152,638,877 5,444,860 - - - 4,690,141 158,083,737 164,037,317 39,384,504 29,063,947 60,050,200 292,535,968 There is no significant difference between contractual repricing or maturity dates. - 4.75 6.86 1.48 - 5.72 5.99 1.16 The following table demonstrates the sensitivity of income statement to reasonably possible changes in interest rates, with all other variables held constant. The sensitivity of the income statement is the effect of the assumed changes in interest rates on the Group’s profit for the year, based on the floating rate financial assets and financial liabilities held at 31 December. 2012 2011 Increase/ decrease in basis points Effect on profit for the year USD 671,076 (1,342,152) 576,571 (1,153,142) + 25 - 50 + 25 - 50 foreign currency risk Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. Management believes that there is minimal risk of significant losses due to exchange rate fluctuations since predominantly 88% of the business transactions are in US Dollars and consequently the Group does not hedge its foreign currency exposure. 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 Group is exposed to credit risk primarily from unpaid insurance receivables and fixed income instruments. The Group has in place credit appraisal policies and procedures for inward business and receivables from insurance transactions are monitored on an ongoing basis to restrict Group’s exposure to doubtful debts. The Group has in place security standards applicable to all reinsurance purchases and monitors the financial status of all reinsurance debtors at regular intervals. The Group’s portfolio of fixed income investment is managed by the investments committee in accordance with the investment policy established by the board of directors which has various credit standards for investment in fixed income securities. Reinsurance and fixed income investments are monitored for the occurrence of a downgrade or other changes that might casue them to fall below the Group’s security standards. If this occurs, management takes appropriate action to mitigate any loss to the Group. The Group’s bank balances are maintained with a range of international and local banks in accordance with limits set by the board of directors. 42 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 43 24. RISK MANAGeMeNT (continued) 24. RISK MANAGeMeNT (continued) There are no significant concentrations of credit risk within the Group. The table below provides information regarding the credit risk exposure of the Group by classifying assets according to the Group’s credit rating of counterparties: The following table provides an aging analysis of trade receivables arising from Specialty Mall customers past due but not impaired: Neither past due nor impaired Investment grade Non investment grade (satisfactory) Non investment grade (un-satisfactory) Past due but not impaired 2012 USD USD USD USD Total USD Available-for-sale investments 58,705,108 86,528,765 Investments held for trading Held to maturity investments Insurance receivables Reinsurance assets - 3,000,000 - - 1,461,920 1,520,649 73,585,206 86,177,127 Cash and bank balances 109,458,867 85,041,645 171,163,975 334,315,312 2011 Available-for-sale investments 67,375,228 60,861,160 Investments held for trading Held to maturity investments Insurance receivables Reinsurance assets - 3,000,000 - - 1,525,702 1,690,141 68,876,450 94,332,057 Cash and bank balances 90,093,897 67,989, 840 160,469,125 295,275,350 - - - - - - - - - - - - - - - - - 145,233,873 1,461,920 4,520,649 24,157,055 97,742,261 - - 86,177,127 194,500,512 24,157,055 529,636,342 - - - 128,236,388 1,525,702 4,690,141 31,525,783 100,402,233 - - 94,332,057 158,083,737 31,525,783 487,270,258 The following table provides an aging analysis of receivables arising from insurance and reinsurance contracts past due but not impaired: Past due but not impaired Neither past due nor impaired Up to 90 days 91 to 180 days 181 to 270 days 271 to 360 days Over 360 days Total USD USD USD USD USD USD USD 31 december 2012 73,585,206 14,359,342 5,226,747 2,664,185 1,906,781 - 97,742,261 31 December 2011 68,876,450 15,765,386 7,351,315 3,279,923 3,488,433 1,640,726 100,402,233 For assets to be classified as ‘past due and impaired’ contractual payments are in arrears for more than 360 days and an impairment adjustment is recorded in the consolidated statement of income for this. When the credit exposure is adequately secured, arrears more than 360 days might still be classified as ‘past due but not impaired’, with no impairment adjustment recorded. Past due but not impaired Neither past due nor impaired Up to 90 days 91 to 180 days USD USD USD Total USD 31 december 2012 31 December 2011 85,607 129,946 30,591 85,636 21,784 20,712 137,982 236,294 For assets to be classified as ‘past due and impaired’ contractual payments are in arrears for more than 360 days and an impairment adjustment is recorded in the consolidated statement of income for this. When the credit exposure is adequately secured, arrears more than 360 days might still be classified as ‘past due but not impaired”, with no impairment adjustment recorded. Market price risk Market price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual security, or its issuer, or factors affecting all securities traded in the market. The Group’s equity price risk exposure relates to financial assets whose values will fluctuate as a result of changes in market prices. The following table demonstrates the sensitivity of the profit for the period and the cumulative changes in fair value to reasonably possible changes in equity prices, with all other variables held constant. The effect of decreases in equity prices is expected to be equal and opposite to the effect of the increases shown. Change in equity price Effect on profit for the year Effect on equity USD USD 2012 New York Stock Exchange Amman Stock Exchange Saudi Stock Exchange Qatar Stock Exchange NASDAQ Dubai Other quoted 2011 New York Stock Exchange Amman Stock Exchange Saudi Stock Exchange Qatar Stock Exchange NASDAQ Dubai Other quoted USD +5% +5% +5% +5% +5% +5% - - - - - 73,096 Change in equity price Effect on profit for the year USD +5% +5% +5% +5% +5% +5% USD - - - - - 76,285 725,665 49,153 1,216,700 563,495 426,262 945,291 Effect on equity USD 302,082 79,190 701,272 512,236 393,980 541,119 44 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 45 24. RISK MANAGeMeNT (continued) The Group also has unquoted investments carried at cost where the impact of changes in equity prices will only be reflected when the investment is sold or deemed to be impaired, when the consolidated statement of income will be impacted. The Group limits market risk by maintaining a diversified portfolio and by monitoring of developments in equity markets. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its commitments associated with insurance contracts and financial liabilities as they fall due. The Group continually monitors its cash and investments to ensure that the Group meets its liquidity requirements. The Group’s asset allocation is designed to enable insurance liabilities to be met with current assets. All liabilities are non-interest bearing liabilities. The table below summarises the maturity profile of the company’s financial liabilities at 31 December based on contractual undiscounted payments: 2012 Less than one year More than one year No term USD USD USD Total USD Insurance contracts liabilities 258,606,393 86,202,131 Other liabilities Insurance payable Unearned commissions Total liabilities 2011 3,649,283 19,567,472 - - 6,537,835 2,179,278 288,360,983 88,381,409 Insurance contracts liabilities 231,402,281 77,134,094 Other liabilities Insurance payable Unearned commissions Total liabilities 2,885,594 37,827,012 - - 6,910,793 2,303,598 279,025,680 79,437,692 - - - - - - - - - - 344,808,524 3,649,283 19,567,472 8,717,113 376,742,392 308,536,375 2,885,594 37,827,012 9,214,391 358,463,372 24. RISK MANAGeMeNT (continued) Maturity analysis of assets and liabilities The table below shows analysis of assets and liabilities analysed according to when they are expected to be recovered or settled: ASSeTS Premises and equipment Intangible assets Investment in associated companies Investments Investment properties 2012 Less than one year More than one year No term USD USD USD Total USD - - - 3,525,920 250,498 - - 3,525,920 250,498 - 12,228,572 12,228,572 14,751,763 59,178,109 77,286,570 151,216,442 - - 29,339,762 29,339,762 Deferred policy acquisition costs 23,065,944 7,688,648 Insurance receivables Trade receivables Other assets Reinsurance assets Cash and bank balances ToTAL ASSeTS eQUITY ANd LIABILITIeS equity Issued share capital Foreign currency translation reserve Cumulative changes in fair values of investments Retained earnings Total equity Liabilities 97,742,261 137,982 2,854,158 - - 155,407 66,730,607 19,446,520 194,500,512 - - - - - - - 30,754,592 97,742,261 137,982 3,009,565 86,177,127 194,500,512 399,783,227 90,245,102 118,854,904 608,883,233 - - - - - - - - - - 143,375,678 143,375,678 (230,995) (230,995) 15,325,027 15,325,027 73,671,131 73,671,131 232,140,841 232,140,841 Insurance contracts liabilities 258,606,393 86,202,131 Other liabilities Insurance payable Unearned commissions Total liabilities 3,649,283 19,567,472 - - 6,537,835 2,179,278 288,360,983 88,381,409 - - - - - 344,808,524 3,649,283 19,567,472 8,717,113 376,742,392 ToTAL eQUITY ANd LIABILITIeS 288,360,983 88,381,409 232,140,841 608,883,233 46 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 International General Insurance Holdings Limited NoTeS To THe coNSoLIdATed fINANcIAL STATeMeNTS AT 31 DeceMBer 2012 47 24. RISK MANAGeMeNT (continued) 24. RISK MANAGeMeNT (continued) 2011 fair value The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation techniques: ASSeTS Premises and equipment Intangible assets Investment in associated companies Investments Investment properties Deferred policy acquisition costs Insurance receivables Trade receivables Other assets Reinsurance assets Cash and bank balances ToTAL ASSeTS eQUITY ANd LIABILITIeS Equity Issued share capital Foreign currency translation reserve Cumulative changes in fair values of investments Retained earnings Total equity Liabilities Less than one year More than one year No term USD USD USD Total USD - - - - 3,191,687 210,238 - - 3,191,687 210,238 - - 11,702,917 11,702,917 29,163,154 29,163,154 11,398,440 63,003,591 60,050,200 134,452,231 22,088,960 98,761,507 236,294 2,670,664 7,362,986 1,640,726 - - 72,371,502 21,960,555 152,639,577 5,444,160 - - - - - - 29,451,946 100,402,233 236,294 2,670,664 94,332,057 158,083,737 360,166,944 102,813,943 100,916,271 563,897,158 - - - - - - - - - - 143,375,678 143,375,678 (286,652) (286,652) 5,326,279 5,326,279 57,018,481 57,018,481 205,433,786 205,433,786 Insurance contracts liabilities 231,402,281 77,134,094 Other liabilities Insurance payable Unearned commissions Total liabilities 2,885,594 37,827,012 - - 6,910,793 2,303,598 279,025,680 79,437,692 - - - - - 308,536,375 2,885,594 37,827,012 9,214,391 358,463,372 ToTAL eQUITY ANd LIABILITIeS 279,025,680 79,437,692 205,433,786 563,897,158 capital management The Group manages its capital by ‘Enterprise Risk Management’ techniques, using a dynamic financial analysis model. The Asset Liability match is reviewed and monitored on regular basis to maintain a strong credit rating and healthy capital adequacy ratios to support its business objectives and maximise shareholders’ value. Adjustments to capital levels are made in light of changes in market conditions and risk characteristics of the Group’s activities. Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. Held for trading Available-for-sale Held for trading Available-for-sale Level 1 USD 1,461,920 137,902,657 139,364,577 Level 1 USD 1,525,702 120,949,270 122,474,972 31 December 2012 Level 2 USD - 7,331,216 7,331,216 31 December 2011 Level 2 USD - 7,287,118 7,287,118 Total USD 1,461,920 145,233,873 146,695,793 Total USD 1,525,702 128,236,388 129,762,090 There were no transfers between Level 1, 2 and 3 during the year or in either the years ended 31 December 2012 or 31 December 2011. There are no level 3 investments. 25. comparative figures Some of 2011 balances were reclassified to correspond with 31 December 2012. Classifications have no effect on net profit and equity. 26. subsequent events There have been no material events between 31 December 2012 and the date of this report which are required to be disclosed. 48 49 iGi offices WorldWide Bermuda Amman Kuala Lumpur Dubai London
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