Financial Review

Saudi Re has demonstrated an exceptionally strong performance that was driven by the Company’s client-centric approach, commitment to market development and diversification, and adherence to sustainable business practices. This is evident in the results of operations and the growth in business volumes recorded during the year.

A forward-looking strategy enabled Saudi Re to leverage opportunities in its key classes of business and develop revenue streams across domestic and international markets. Total revenues rose to SR 942.7 million and net profit increased by 8% to reach SR 41.4 million, compared to SR 874.4 million and SR 38.3 million respectively, in 2021. Additionally, shareholder equity grew by 3.7% to reach SR 1 Billion and total assets exceeded SR 4.2 billion.

With 26% growth in Gross Written Premium (GWP) reaching SR 1.4 billion during the year and strong ratings upheld by international ratings agencies, Saudi Re is well set for a period of stable, diversified, and sustainable growth.

9.1 Revenue

In accordance with the Saudi Arabian Insurance Regulations, separate books of accounts are maintained for policyholder operations and shareholders operations. Incomes, expenses, assets, liabilities are all attributed to either party or shared between them. All reinsurance revenues and related costs are all attributed to the reinsurance activity. Other operating expenses and incomes are either assigned to shareholders or apportioned. Finally the bulk of the surplus income from reinsurance operations is transferred to shareholders operations. This structure is maintained parallel to the conventional account presentation.

A strong 5-year growth momentum was maintained with a 26% increase in GWP in 2022. The continuing growth of Saudi Re in 2022 was mainly driven by the Saudi and Middle East Markets, with most classes of business witnessing increases in 2022. The Inherent Defects Insurance (IDI), was a key contributor to the growth in Gross Written Premium (GWP), reaching SR 1.4 million in 2022 from SR 1.1 million the previous year. This is the highest premium recorded by Saudi Re, and holds the Company in good stead with regard to its plans for continued growth and expansion. The IDI, which represents 28% of Saudi Re’s 2022 GWP, also indicates upbeat future prospects based on the company retaining exclusive privilege to reinsure the mandatory IDI program.

The home market of Saudi Arabia achieved the highest geographic growth of 63% in GWP, rising from SR 482 million in 2021 to SR 788 million in 2022. The Middle East segment also increased by 50% from SR 92 million the previous year, to SR 137 million in 2022.

The business segments of Fire, Others, and General Accidents contributed significantly to GWP growth with 19%, 19% and 18% respectively; while the IDI line of business represents 28% of 2022 GWP. This reflects Saudi Re’s continuing focus on diversification and healthy spread of risks across its business classes.

The 2022 earnings were supported by a 78% increase in Underwriting (UW) results, which reached SR 127 million in 2022, compared to 71 million the previous year. Concurrently, there was an 8% increase in Total Underwriting Revenue (TUR), touching SR 942.7 million in 2022, up from SR 874.4 million in 2021. Saudi Arabia marked a 11% increase while all other territories in combination recorded 6% growth.

Total Underwriting Revenue (TUR)

2022 (SR ’000) 2021 (SR ’000) Change %
Within the Kingdom of Saudi Arabia 342,255 309,097 11
Outside the Kingdom of Saudi Arabia 600,452 565,308 6

Key operational ratios (2018-2022)

2022 % 2021 % 2020 % 2019 % 2018 %
Premium Growth 26 19 18 10 -23
Retention Ratio 64.04 85.9 83 82 85
Net Claims Ratio 64.1 66.1 61 65 66
Net Acquisition cost ratio 22.1 25.5 29 25 26
Technical Ratio 86.3 91.6 89 90 92
G&A Expense Ratio 10.2 7.50 8 8 8
Combined Ratio 96.4 99.1 97 97 100

9.2 Underwriting costs and expenses

Although net claims increased by 5% overall when compared to last year, the Loss Ratio dropped by 2 points to reach 64.1% against 66.1% the previous year. Change was mainly on account of non-renewals of unprofitable contracts and better management of exposures lines of business such as Life, Marine Hull, and Health. Net Acquisition Cost saw a decrease of 3.3 points compared to the previous year, primarily due to reduction in the Special Risk line of business, which saw reductions due to increase in the loss ratio.

Underwriting costs and expenses (2018-2022)

2022 (SR ’000) 2021 (SR ’000) 2020 (SR ’000) 2019 (SR ’000) 2018 (SR ’000)
Gross claims paid (537,845) (471,216) (481,191) (436,701) (389,327)
Retroceded share of claims paid 75,974 61,707 181,476 60,006 24,638
Net claims incurred (595,044) (565,312) (391,980) (417,070) (404,054)
Policy acquisition costs and profit commissions (218,199) (232,404) (194,682) (172,781) (172,472)
Other underwriting expenses (1,995) (5,063) (4,002) (3,616) (1,997)
Total underwriting costs and expenses (815,238) (802,779) (590,665) (593,467) (578,523)
Net underwriting income 127,468 71,626 69,149 67,244 51,560

9.3 Net Income

Net income for policyholder operations more than doubled in 2022, reaching SR 5.3 million from 2.5 million in the previous year, while net income for shareholders’ operations showed a stable increase to SR 56.7 million in the current year, up from SR 53.3 million in 2021.

Investment income

The interest rate hike experienced during the year resulted in underperformance of the available for-sale fixed income and listed equity investments, which impacted the Company’s net profit.

2022 (SR ’000) 2021 (SR ’000) 2020 (SR ’000) 2019 (SR ’000) 2018 (SR ’000)
Shareholders’ investment net income 26,645 42,969 33,765 36,341 9,702
Reinsurance investment net income 1,666 3,975 3,674 9,139 4,936
Total net investment income 28,311 46,944 37,439 45,479 14,638

Total comprehensive income (2018-2022)

2022 (SR ’000) 2021 (SR ’000) 2020 (SR ’000) 2019 (SR ’000) 2018 (SR ’000)
Net income for the year 41,479 38,310 45,918 45,444 13,721
Other comprehensive income/(loss) (8,721) (2,124) 2,190 (3,021) 3,036
Total comprehensive income for the year 32,758 36,185 48,109 42,423 16,758
2022 (SR ’000) 2021 (SR ’000) Change %
Total income for the year before Zakat and tax 62,104 55,886 11
Total income attributed to the reinsurance operations (5,359) (2,571) 108
Net income for the year before Zakat and tax attributable to the shareholders 56,744 53,315 6
Zakat and tax charge for the year (15,265) (15,006) 2
Net income for the year after Zakat and tax attributable to the shareholders 41,479 38,309 8
Basic and diluted earnings per share for the year (SR) 0.47 0.43 9

9.4 Assets

The Company’s GWP growth was also reflected in Assets, which increased by SR 1.1 billion, led by Accrued reinsurance premiums and retroceded share of unearned premiums at 582% and 560% growth, respectively. Meanwhile, net technical reserves reached SR 1.7 billion as of 31 December 2022.

Assets for the period (2018-2022)

2022 (SR ’000) 2021 (SR ’000) 2020 (SR ’000) 2019 (SR ’000) 2018 (SR ’000)
Cash and cash equivalents 31,556 27,807 13,157 13,169 31,886
Time deposits 746,956 243,382 193,459 378,031 270,132
Accrued special commission income from time deposits 7,674 2,310 3,211 7,974 2,080
Reinsurance premiums receivable, net 320,974 242,230 293,755 233,392 200,024
Investments held at fair value through income statement 287,154 803,584 512,081 417,848 552,574
Held-to-maturity investments 387,652 298,022 184,023 37,500 0
Accrued dividends and special commission income from bonds, sukuk and held-to-maturity investments 5,176 6,810 6,181 2,793 2,664
Accrued reinsurance premiums 1,077,467 680,470 594,263 467,071 409,778
Retrocession balances receivable 23,731 13,064 29,509 11,744 11,432
Retroceded share of unearned premiums 449,092 67,953 71,862 50,837 33,081
Deferred excess of loss premiums 15,410 12,050 12,784
Retroceded share of outstanding claims 167,701 149,333 154,674 282,719 198,433
Retroceded share of claims incurred but not reported 31,631 38,033 45,796 34,812 59,937
Deferred policies costs 231,430 168,598 149,403 106,279 99,896
Prepaid expenses, deposits and other assets 148,418 246,581 289,099 244,640 208,959
Due from shareholders’ operations 0 0 0 0 0
Property and equipment, net 36,379 37,156 33,625 33,576 32,589
Investment in an equity-accounted investee 156,803 142,000 120,141 101,446 97,294
Statutory deposit 89,100 89,100 81,000 121,500 121,500
Accrued income on statutory deposit 22,084 20,962 20,186 17,992 15,549
Total assets 4,236,390 3,117,469 2,808,210 2,563,323 2,347,806

9.5 Liabilities

Liabilities for the period (2018-2022)

2022 (SR ’000) 2021 (SR ’000) 2020 (SR ’000) 2019 (SR ’000) 2018 (SR ’000)
Accounts payable 70,483 44,042 31,975 39,929 19,928
Margin loan payable 56,797 56,797 23,117
Retrocession balances payable 136,374 48,772 77,220 46,173 22,899
Accrued retroceded premiums 333,254 35,492 39,812 21,741 15,840
Unearned premiums 1,000,718 648,869 548,541 401,998 380,171
Outstanding claims 822,405 782,991 716,947 737,229 662,467
Claims incurred but not reported 533,121 427,397 350,742 355,255 330,481
Unearned retrocession commission 104,561 17,150 15,805 8,396 6,410
Accrued expenses and other liabilities 105,133 29,897 23,861 19,421 12,547
Employees’ end of service benefits 13,868 12,288 10,673 8,829 6,594
Provision for Zakat and tax 17,533 15,266 15,174 23,742 38,244
Accrued commission income payable to SAMA 23,219 20,962 20,186 17,992 15,549
Total liabilities excluding reinsurance operations’ surplus 3,217,464 2,139,923 1,874,052 1,680,705 1,511,130

9.6 Equity

Shareholder equity increased by 3.7% from SR 963 million to SR 1 billion by end of 2022. In April 2022, Saudi Re’s Board of Directors made a recommendation to increase the company's capital through a rights issue of 50%, with a targeted amount of SR 445.5 million. This was approved by the Saudi Central Bank (SAMA) in May 2022, indicating that all necessary regulatory requirements have been met. Al Rajhi Capital has been appointed as the financial adviser to manage subscriptions to the rights issues.

Raising the capital from SR 891 million to SR 1.336 billion will strengthen the capital base and support future expansions – domestic and international – under the umbrella of Strategy Toward 2026. At the same time, this agenda will boost Saudi Re's ongoing efforts to generate better returns and create greater shareholder value.

9.7 Dividends

No cash dividends were distributed for 2022.

9.8 Dividend Policy

To achieve suitable returns to the Company’s shareholders in one or more of the following:

  1. Distribution of cash dividends to the shareholders taking into consideration the financial position of the Company, solvency margin requirements, available credit lines, and the general economic situation.
  2. Stock dividends taking into consideration the requirements and conditions related to retained earnings and other stockholders’ equity in the balance sheet.
  3. Shareholders who are registered at the end of trading before the General Assembly at which dividend preeminent is approved will be entitled for the dividends.
  4. The Company pays the profits to be distributed to the shareholders at the dates specified by the Board of Directors. According to the Articles of Association of the Company, profits are distributed according to the decision of the General Assembly, and this is done as follows:
  • Set aside Zakat and assessed income tax.
  • Set aside 10% of the profit to form a statutory reserve and the Ordinary General Assembly may stop this appropriation when the total reserve reaches 30% of the paid-up capital.
  • Once determining the stock shares in net profits, the Ordinary General Assembly has the right to form other reserves, to the extent that it achieves the interest of the Company or ensured distribution of fixed profits to shareholders.
  • After that, the first payment shall be distributed to the shareholders, with the condition that it is not less than 1% of the paid-up capital.

9.9 Zakat, taxes, fees, and other charges

Description Reasons Paid Amount (SR ’000) Outstanding amount at end of financial period (SR ’000)
Zakat and income tax The Company’s share according to Zakat and tax regulations in the Kingdom 12,998 17,533
WHT The Company’s share according to Zakat and tax regulations in the Kingdom 2,050 467
VAT The Company’s share according to Zakat and tax regulations in the Kingdom 45,830 19,644
SAMA fees Supervision fees for the Central Bank of Saudi Arabia 6,017 1,032
GOSI Social insurance contributions for Company employees to the General Organization for Social Insurance 2,588 243

9.10 Solvency and rating

Capital adequacy

Solvency margin





Total equity reached

SR 1 billion

9.11 Credit ratings

S&P Global 2022
long-term issuer credit and insurer financial strength A-
GCC regional scale rating gcAA+

S&P highlighted that Saudi Re has continued to strengthen its competitive position via profitable business growth and diversification in recent years, thanks to local and international expansion. In its report published on 16 December 2022 S&P mentioned that Saudi Re's exposure to catastrophe and other large risks is relatively modest and the company maintains capital adequacy above the “AAA” level in S&P’s model.

According to S&P, the planned capital increase through a rights issue in early 2023 will further support Saudi Re’s growth plans. The stable outlook reflects that Saudi Re will maintain excellent capital adequacy and continue to profitably expand and diversify its business over the next two years.

Furthermore, S&P views the governance practices at Saudi Re as effective and appropriate. It also regards the consistency in strategy and management's expertise and experience as a benefit to the Company.

Moody’s 2022
Insurance Financial Strength Rating (IFSR) international scale A3
Insurance Financial Strength Rating (IFSR) National scale A1.sa

The financial rating of Saudi Re reflects its:

  1. Strong brand and market position in Saudi Arabia as the sole Saudi professional reinsurer as well as a growing presence in its target markets of Asia, Africa and Lloyd's.
  2. Preferential position in Saudi market due to a right of first refusal on a portion of premiums ceded by primary carriers in the Saudi market.
  3. Strong asset quality exemplified by its conservative investment portfolio.
  4. Good capital adequacy, both in terms of capital levels, and relatively modest exposure to natural catastrophe risk.
  5. Strong financial flexibility with non-existent leverage and good access to capital markets in Saudi Arabia given its listing on the Saudi stock exchange, and broad investor base.

9.12 Prospects and outlook

The global reinsurance market has shown considerable hardening on account of inflation, rising interest rates, reducing retro/reinsurance capacities, and the ongoing Russia-Ukraine conflict.

In Saudi Arabia, systemic volatility caused by increasing interest rates and foreign currency fluctuations affected the first half of 2022. Given the current investment norms and projections of no-decrease in interest rates, the cost of capital for reinsurance firms is likely to increase. As a result, some hardening is expected locally, although the degree of its impact remains unpredictable.

SAMA introduced a new mechanism in October 2022 to improve enforcement of local retention of reinsurance premiums within the country. According to this mechanism, insurance companies are required to cede a share of all their reinsurance treaties, proportional and non-proportional, to the local resonance market with effect from 1 January 2023. The cession share which starts at 20% will gradually increase to 25% in 2024, and 30% in 2025.

This increased retention of reinsurance premiums is expected to have a positive impact on the domestic insurance market, strengthen the financial stability of the sector, and enable the national reinsurance market to play a more active role.

Saudi Re continues to maintain a well-balanced underwriting portfolio with 44% international business, while keeping focus on risk selection which in turn reflects positively on the underwriting performance. The Company has recorded decent growth on the back of business written in other markets, especially in Asia, and this opens up other opportunities in the region. Additionally, Saudi Re’s “A-” rating from S&P Global Ratings enables access to quality markets and unique treaties, and the confidence to tap into different market segments.

Probitas Holdings (Bermuda), in which Saudi Re acquired a 49.9% share in 2017, is registering strong performance and this opens more doors to write business from international markets via their Lloyd's syndicate. The company is also open to other acquisitions that can help us grow in a studied and sensible manner, and help is achieve the goal of become one of the world’s top 50 global reinsurers by 2026.

Saudi Re remains committed to its profitable growth strategy, and seeks to seize the opportunities resulting from favorable developments in the local market and hardening trend in the global reinsurance market.

9.13 Probitas Holdings (Bermuda) Limited

On 6 October 2017, Saudi Re have acquired 49.9% of the ordinary shares of Probitas Holdings (Bermuda) Limited (“PHBL”) for a total of $ 25 million (SR 94 million). Subsequently in June 2020 a further $ 985,840 (SR 3.7 million) was invested in PHBL. Saudi Re has accounted for this investment as an associate (equity accounted investee). The carrying value of the investment as at 31 December 2022 is SR 156.8 million. PHBL operates in insurance and reinsurance businesses including Lloyd’s market in London, United Kingdom.

Probitas Group via its wholly owned subsidiary Probitas Corporate Capital Limited (PCCL) provides capital to Syndicate No. 1492 which is a syndicate at Lloyd’s of London specializing in property, construction and casualty (re)insurance solutions. Probitas Managing Agency Ltd. which also is a wholly owned subsidiary of Probitas Group manages the Syndicate 1492.

In addition to its investment in PHBL, Saudi Re also writes reinsurance contracts from PCCL, During the financial year these contracts had an estimated gross written premiums (GWP) value of SR 158.7 million. The contributions of these contracts to the underwriting profitability of Saudi Re book is shown within the Segmental Information under the headings; Specialty in Business Segments and Other Territories in Geographical Segments.

Representing Saudi Re Mr Hesham Al-Shaikh, Chairman, Mr Fahad Al-Hesni, Managing Director and Mr Jean-Luc Gourgeon, Non-Executive Director are holding Non-Executive Director positions of PHBL and its Subsidiaries (Probitas Group) Boards. By virtue of these Board memberships an indirect interest is present in the reinsurance contracts written by Saudi Re from PCCL. (As disclosed in the Related Party Transaction section Page).

Whilst this venture provides access to one of the oldest and largest specialist insurance and reinsurance markets in the world, it further helps Saudi Re diversify its underwriting portfolio and develop its technical expertise.

9.14 Return on Investment in PHBL

The following table summarizes the financial information of PHBL as included in its own financial statements. The table also reconciles the summarized financial information to the carrying amount of the Company’s interest in PHBL.

2022 SR 2021 SR
Percentage ownership interest 49.90% 49.90%
Total assets 1,504,915,644 1,360,963,729
Total liabilities 1,220,017,201 1,105,729,202
Net assets (100%) 284,898,443 255,234,527
Company’s share of net assets (49.90%) 142,164,323 127,362,029
Goodwill 14,638,344 14,638,344
Carrying amount of interest in associate (Balance Sheet Note 17) 156,802,667 142,000,373
2022 SR 2021 SR
Revenue 326,139,109 266,178,903
Profit from continuing operations 39,677,269 37,390,624
Other comprehensive income - Impact of foreign currency exchange (16,549,948) (2,865,670)
Total comprehensive income (100%) 23,127,321 34,524,954
Company’s share of profit 19,798,957 18,657,921
Company’s share of other comprehensive income – Impact of foreign currency exchange (8,258,424) (1,429,969)
Company’s share (49.90%)of total comprehensive income recognized during the period 11,540,533 17,227,952

9.15 IFRS 17 – Insurance Contracts

IFRS 17 replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023, with early adoption permitted. The Company expects to first apply IFRS 17 on that date. IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts, reinsurance contracts and investment contracts with direct participation features (“DPF”).

  • Structure and status of the Implementation project

The Company considers implementing IFRS 17 as a significant project and therefore has set up a multidisciplinary implementation team with members from its Actuarial, Finance, IT, Operations and other respective businesses to achieve a successful and robust implementation. The project is managed internally through a dedicated IFRS 17 team and governed by a steering committee. The preparation for IFRS 17 has required significant changes to the Company’s reporting systems. The Company is well prepared for the reporting requirements from 1 January 2023 onwards.

As part of the four-phase approach for the transition from IFRS 4 to IFRS 17 mandated by Saudi Central Bank (“SAMA”), the Company has submitted the operational gap assessment, financial impact assessment, implementation plan and multiple dry runs using the FY20, FY21 and June 2022 data to SAMA.

  • Significant Judgements and Accounting Policy Choices

The Company is expected to apply the following significant accounting policies in the preparation of financial statements on the effective date of this Standard i.e., 1 January 2023:

(a) Contracts within/outside the scope of IFRS 17

A contract is reinsurance contract that falls under the scope of IFRS 17 if it transfers significant insurance risk or it is an investment contract with Discretionary Participation Features (“DPF”). IFRS 17 identifies reinsurance contracts as those contracts under which the Company accepts significant insurance risk from another party (the insurer), by agreeing to compensate the insurer if a specified uncertain future event (the insured event), adversely affects the insurer.

A retrocession contract held is defined as an insurance contract issued by one entity (the retrocessionaires), to compensate another entity for claims arising from one or more reinsurance contracts issued by that other entity (reinsurance contracts). Even if a retrocession contract does not expose the issuer to the possibility of a significant loss, that contract is deemed to transfer significant insurance risk if it transfers to the retrocessionaires substantially all the insurance risk relating to the reinsured portions of the underlying reinsurance contracts.

An assessment of the reinsurance contracts issued, and retrocession contracts held by the Company reveal that they all qualify for measurement and presentation under IFRS 17.

(b) Combination/ Unbundling of Contracts

At inception, the Company separates the following components from reinsurance or retrocession contract and accounts for them as if they were stand-alone financial instruments:

– derivatives embedded in the contract whose economic characteristics and risks are not closely related to those of the host contract, and whose terms would not meet the definition of reinsurance or retrocession contract as a stand-alone instrument; and

– distinct investment components: i.e. investment components that are not highly inter-related with the insurance components and for which contracts with equivalent terms are sold, or could be sold, separately in the same market or the same jurisdiction.

– any promises to transfer distinct goods or non-insurance services: The Company separates any promises to transfer distinct goods or non-insurance services and accounts for them as separate contracts with customers (i.e., not as insurance contracts). A good or service is distinct if the insurer can benefit from it either on its own or with other resources that are readily available to the insurer. A good or service is not distinct and is accounted for together with the reinsurance component if the cash flows and risks associated with the good or service are highly inter-related with the cash flows and risks associated with the reinsurance component, and the Company provides a significant service of integrating the good or service with the reinsurance component.

The Company does not underwrite any reinsurance or retrocession contracts that contain embedded derivatives or distinct investment components. Furthermore, the Company's reinsurance portfolio does not contain any non-insurance components that will need to be unbundled from reinsurance contracts.

(c) Level of Aggregation

The Company identifies portfolios of reinsurance contracts. Each portfolio comprises contracts that are subject to similar risks and managed together, and is divided into three groups:

  • any contracts that are onerous on initial recognition;
  • any contracts that, on initial recognition, have no significant possibility of becoming onerous subsequently; and
  • any remaining contracts in the portfolio.

Contracts within a portfolio that would fall into different groups only because law or regulation specifically constrains the Company's practical ability to set a different price or level of benefits for insurers with different characteristics are included in the same group.

As for reinsurance contracts issued, the Company identifies portfolios of retrocession contracts which are subject to similar risks and are managed together. Contracts within a portfolio are then grouped into cohorts by issue date not further than a year apart. Cohorts are divided into “groups” at inception that at least separate retrocession contracts between those that are a net gain at initial recognition, a net cost at initial recognition but have no significant likelihood of becoming a net gain and the remaining contracts.

The Company will categorize each retrocession contract as a unique portfolio. As with the reinsurance contracts, all retrocession contracts held are to be grouped into annual cohorts and split into profitability groups based on the best estimate expected profitability of the groups at inception.

(d) Measurement – Overview

IFRS 17 introduces 3 new measurement models, reflecting the nature of reinsurance contracts.

General Measurement Model

IFRS 17 introduces a generalized measurement model called the General Measurement Model (GMM) which shall be applicable to all kinds of reinsurance and retrocession contracts, to the extent that they do not contain any direct participation features in any underlying invested assets.

The General Measurement Model has he following building blocks:

(a) the fulfilment cash flows (FCF), which comprise:

  • probability-weighted estimates of future cash flows,
  • an adjustment to reflect the time value of money (i.e., discounting) and the financial risks associated with those future cash flows,
  • and a risk adjustment for non-financial risk.

(b) the Contractual Service Margin (CSM). The CSM represents the unearned profit for a group of reinsurance contracts and will be recognized as the Company provides services in the future. The CSM cannot be negative at inception; any net negative amount of the fulfilment cash flows at inception will be recorded in profit or loss immediately.

At the end of each subsequent reporting period the carrying amount of a group of reinsurance contracts is remeasured to be the sum of:

  • the liability for remaining coverage (LRC), which comprises the FCF related to future services and the CSM of the group at that date;
  • and the liability for incurred claims (LIC), which is measured as the FCF related to past services allocated to the group at that date.

The CSM is adjusted subsequently for changes in cash flows related to future services, but the CSM cannot be negative, so changes in future cash flows that are greater than the remaining CSM are recognized in profit or loss. Interest is also accreted on the CSM at rates locked in at initial recognition of a contract (i.e., discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM will be released into profit or loss based on coverage units, reflecting the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the group.

The GMM is also applicable for the measurement of the liability for incurred claims. However, the Companies are not required to adjust future cash flows for the time value of money and the effect of financial risk if those cash flows are expected to be paid/received in one year or less from the date the claims are incurred.

The Variable Fee Approach (VFA)

VFA is a mandatory model for measuring contracts with direct participation features (also referred to as “direct participating contracts”). This assessment of whether the contract meets these criteria is made at inception of the contract and not reassessed subsequently. For these contracts, in addition to adjustment under GMM, the CSM is also adjusted for:

  • the Company’s share of the changes in the fair value of underlying items.
  • the effect of changes in the time value of money and financial risks not relating to the underlying items.

Premium Allocation Approach (PAA)

It is permitted for the measurement of the liability for the remaining coverage if it provides a measurement that is not materially different from the General Measurement Model for the group of contracts or if the coverage period for each contract in the group is one year or less. The PAA behaves in a very similar manner as the current unearned premium and acquisition expenses approach under IFRS 4 with some notable differences as the introduction of a financing component for contracts having premiums and services more than 1 year apart as well as the method to recognize loss components.

The Company will apply the GMM to both reinsurance contracts issued, and retrocession contracts held for all the segments. When measuring liabilities for remaining coverage, the Company will now discount the future cash flows and includes an explicit risk adjustment for non-financial risk.

(e) Significant Judgements and Estimates

i. PAA eligibility assessment approach

The Company has opted to apply the GMM to all reinsurance and retrocession contracts and hence will not be required to carry out a PAA Eligibility Assessment.

ii. Discount rates

Discount rates refer to the interest rates used in discounting cash flows to determine the present value of future cash flows. Discount rates are primarily used to adjust the estimates of future cash flows to reflect the time value of money and to accrete interest on the best estimate liability, risk adjustment and contractual service margin. The discount rates applied to the estimates of the future cash flows in discounting shall:

  • Reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the reinsurance contracts;
  • Be consistent with observable current market prices (if any) for financial instruments with cash flows whose characteristics are consistent with those of the insurance contracts, in terms of, for example, timing, currency and liquidity; and
  • Exclude the effect of factors that influence observable market prices but do not affect the future cash flows of the insurance contracts.

The bottom-up approach will be used to derive the discount rate. Under this approach, the discount rate is determined as the risk-free yield adjusted for differences in liquidity characteristics between the financial assets used to derive the risk-free yield and the relevant liability cash flows (known as an illiquidity premium). The yield curve will be derived from each currency’s risk-free yield curve, plus illiquidity premium as follows:

  • The currencies will have its own curve if the currencies current reserves is more than 1% of the total. The remaining will be grouped into the USD currency.
  • The risk-free curves for each currency are local government or semi-government issued bonds denominated in local currency
  • One “illiquidity premium” will be calculated and applied to all the yield curves and it is assumed 0.5% based on Solvency II.

iii. Risk adjustment for non-financial risk

The purpose of the risk adjustment for non-financial risk is to measure the effect of uncertainty in the cash flow that arise from reinsurance contracts, other than uncertainty arising from financial risk.

Risk adjustment considers the risk appetite of the Company and applies the Cost of Capital Approach based on the Company’s Internal Capital Model as base Capital Requirement to arrive at the required Risk Adjustment. The total provision including the Best Estimate Liability and Risk Adjustment are expected to fall between the 62nd to 67th percentile of the Loss Distribution.

The Company will adjust the estimate of the present value of the future cashflows to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk.

iv. CSM release pattern

The amount of the CSM recognized in the statement of income for services provided in the period is determined by the allocation of the CSM remaining at the end of the reporting period over the current and remaining expected coverage period of the group of reinsurance contracts based on coverage units.

The total number of coverage units in a group is the quantity of coverage provided by the contracts in the group over the expected coverage period. The coverage units are determined at each reporting period-end prospectively by considering:

  • the quantity of benefits provided by contracts in the Group.
  • the expected coverage duration of contracts in the Group; and
  • the likelihood of insured events occurring, only to the extent that they affect the expected duration of contracts in the Group.

The Company uses the amount that it expects the insurers to be able to validly claim in each period if an insured event occurs as the basis for the quantity of benefits.

v. Onerousity determination

To facilitate aggregation and composition of groups of contracts, the Company will carry out a profitability grouping exercise of contracts at their inception. For each contract, the Company will estimate the combined ratio at initial recognition of the contract. The combined ratio considers the expected loss, attributable expenses, risk adjustment and discount factor. Based on the estimated combined ratio, the Company will use rule-based assessment to determine the onerousity grouping as follows:

  • Contract is onerous if combined ratio is above 100%.
  • Contract is profitable with no significant possibility of becoming onerous if combined ratio is below 95%.
  • Otherwise, contract is profitable with significant possibility of becoming onerous.

vi. Provision for Doubtful Debts

The impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 has not been finalized as at the date of these financial statements. The Company is progressing to quantify the impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 and expects the amount to be available for first IFRS 17 and 9 financial statements for the period ended 31 March 2023.

vii. Retrocessionaire default provision

The impact of expected receipts from retrocession contracts written under IFRS 17 has not been finalized as at the date of these financial statements. The Company is progressing to quantify the impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 and expects the amount to be available for first IFRS 17 and 9 financial statements for the period ended 31 March 2023.

viii. VAT treatment

VAT is generally made part of the fulfilment cash flows only to the extent of non-recoverable VAT paid also being recorded as part of the G&A expenses of the Company and subsequently under IFRS 17 is considered part of attributable expenses. This non-recoverable VAT is minimal compared to overall G&A Expenses.

(f) Accounting Policy Choices

i. Length of Cohorts

Under the guidance of the IFRS 17, the Company shall not include contracts issued more than one year apart in the same group in reference to grouping annual/semi-annual/quarterly/monthly cohorts of new business, since it determines a corresponding time limit.

This enables the option to further divide the groups into smaller groups based on smaller cohorts. However, having smaller cohorts would result in multiple groups and would result in increased measurement requirements.

The Company has decided the length of cohort to be on an annual basis.

ii. Use of OCI for Insurance Finance Income or Expense

In reference to the presentation in statement of income – Insurance finance income or expense, the Company has decided that the entire insurance finance income or expense for the period will be presented in the statement of income.

iii. Unwinding of Discount on Risk Adjustment

In reference to the presentation in statement of income – Disaggregation of risk adjustment, the Company has decided that the entire change in risk adjustment will be presented in the insurance service results.

iv. Expense Attribution

The expense attribution under IFRS 17 requires Companies to categorize expenses as acquisition, attributable and non-attributable expenses. In this regard, the Company allocates expenses based on activity-based costing also taking in regards the recommendations made by the SAMA IFRS 17 Working Group.

v. Deferral of Acquisition Cost

In reference to the recognition of acquisition costs, the Company has decided to amortize the acquisition cost over the contract period instead of immediately recognizing it as an expense.

vi. Policyholder Surplus accounting

The policyholder surplus being an accumulation of the 10% profit sharing with policyholders is accounted for as a deposit and kept outside the scope of IFRS 17. Currently, for the Company being a reinsurer, there is not much clarity on the treatment or use of the policyholder surplus.

(g) Presentation and disclosures

In the statement of financial position, deferred acquisition costs and reinsurance-related receivables will no longer be presented separately but as part of the reinsurance liabilities. This change in presentation will lead to a reduction in total assets, offset by a reduction in total liabilities.

The amounts presented in the statement of income need to be disaggregated into an insurance service result, consisting of the insurance revenue and the insurance service expenses, and insurance finance income and expenses. Income or expenses from retrocession contracts held need to be presented separately from the expenses or income from reinsurance contracts issued.

IFRS 17 contains an accounting policy option to recognize changes in financial parameters either in statement of income or in other comprehensive income. The Company has opted to include all reinsurance finance income or expense for the year in the statement of income.

(h) Transition

i. Choice of Method

For the purposes of transition, the Company will use modified retrospective approach for all lines of business which allows the companies to adjust initial recognition calculations for already written business to equal actual transactions up to the transition date and projected cash-flows thereafter without going back to adjusting the CSM roll-forward up to the transition dates based on the past estimates at interim reporting periods.

  • Transition impact

The Company estimates that, on adoption of IFRS 17, the impact of these changes (before tax) is a reduction in the Company’s total equity of by SR 29.88 million to SR 59.36 million at 1 January 2022. The impact on equity at 1 January 2023 is currently being estimated and shall be disclosed in the financial reporting for the period 1 January 2023 to 31 March 2023.

Drivers of changes in equity Impact on equity on transition to IFRS 17 on 1 January 2022
Changes in measurement of reinsurance contracts issued Decrease by SR 42.85 million to SR 57.08 million
Changes in measurement of retrocession contracts held Decrease by SR 16.51 million to increase by SR 27.20 million
Total impact Decrease by 29.88 million to SR 59.36 million

Impact on Liabilities and Assets

Particulars Impact on transition to IFRS 17 on 1 January 2022
Risk adjustment Increase by SR 22.49 million to SR 24.61 million
Discounting Decrease by 39.68 million to SR 75.45 million
CSM Increase by SR 121.70 million to SR 157.18 million
Other drivers Decrease by SR 49.35 million to SR 61.67 million
Total Impact on Reinsurance Liabilities Increase by SR 42.85 million to SR 57.08 million
Risk adjustment Increase by SR 4.32 million to SR 5.01 million
Discounting Decrease by SR 12.06 million to SR 17.35 million
Other drivers Decrease by SR 8.77 million to increase by SR 39.55 million
Total Impact on Retrocession Assets Decrease by SR 16.52 million to increase by SR 27.20 million

The estimated range of change in shareholders’ equity includes the impact of risk adjustment, loss component, discounting, and conversion of numbers as per IFRS 4 to estimated cashflows as per IFRS 17. The assessment made by the Company is preliminary as not all transition work requirements have been finalized and therefore may be subject to adjustment. The actual effect of the implementation of IFRS 17 on the Company could vary from this estimated range if a different set of assumptions and policy choices are made. The Company continues to refine assumptions, methodologies and controls in advance of IFRS 17 adoption on 1 January 2023. Although dry runs were carried out in 2022, the new systems and associated controls in place have not been operational for an extended time. As a result, the Company has not finalized the testing and assessment of controls over its new IT systems and changes to its governance framework.

9.16 IFRS 9 – Financial Instruments

IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January 2018. However, the Company has met the relevant criteria and has applied the temporary exemption from IFRS 9 for annual periods before 1 January 2023. Consequently, the Company will apply IFRS 9 for the first time on 1 January 2023.

(a) Financial assets – classification

The Company conducted a preliminary IFRS 9 Classification and Measurement assessment (“C&M”) for the financial assets held as at 31 December 2021 in response to SAMA’s circular No. 239.

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through statement of income (“FVSI”). This classification is generally based, except equity instruments and derivatives, on the business model in which a financial asset is managed and its contractual cash flows. Except for financial assets that are designated at initial recognition as at FVSI, a financial asset is classified on the basis of both:

a. the entity’s business model for managing the financial asset; and

b. the contractual cash flow characteristics of the financial asset.

The Company exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and profit income on the principal outstanding and so may qualify for amortized cost measurement. In making the assessment the Company considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage.

The Company classifies its financial assets in the following measurement categories:

– Fair value through statement of income (FVSI);

– Fair value through other comprehensive income (FVOCI); or

– Held at amortized cost.

The classification requirements for debt and equity instruments are described below:

Debt instruments

Classification and subsequent measurement of debt instruments depend on:

– the Company’s business model for managing the financial assets; and

– the contractual cash flow characteristics of the financial assets.

Business model

The business model reflects how the Company manages the assets in order to generate cash flows. That is, whether the Company’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of “other” business model and measured at FVSI.

Solely payments of principal and profit

Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Company assesses whether the financial instruments’ cash flows represent solely payments of principal and profit. In making this assessment, the Company considers whether the contractual cash flows are consistent with the financing agreement i.e. profit includes only consideration for the time value of resources, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVSI.

Based on these factors, the Company will classify its debt instruments into one of the following three measurement categories:

– Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and profit, and that are not designated at FVSI, are measured at amortized cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognized. Profit income from these financial assets is included in “Special commission income” using the effective profit method.

– Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principal and profit, and that are not designated at FVSI, are designated as fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, special commission income and foreign exchange gains and losses on the instrument’s amortized cost which are recognized in the statement of income. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to statement of income. Profit income from these financial assets is included in ‘Special commission income’ using the effective profit rate method. As at 31 December 2022, the Company does not have any equity instruments classified under this category.

- Fair value through statement of income (FVSI): Assets that are held for trading purpose or assets that do not meet the criteria for amortized cost or FVOCI are measured at FVSI. A gain or loss on a debt investment that is subsequently measured at FVSI presented in the statement of income in the period in which it arises.

Equity instruments

Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares.

The Company will classify all equity investments at FVSI, except where the Company’s management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. The Company’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, transaction costs are made part of the cost at initial recognition and subsequent fair value gains and losses (unrealized) are recognized in OCI and are not subsequently reclassified to the statement of income, including on disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognized in the statement of income as “Dividend income” when the Company’s right to receive payments is established. As at 31 December 2022, the Company does not have any equity instruments classified under this category.

Reclassification of financial assets

The Company will reclassify the financial assets between FVTPL and amortized cost if and only if under rare circumstances and if its business model objective for its financial assets changes so its previous business model assessment would no longer apply. Financial assets are not reclassified after their initial recognition, except in the period after the entity changes its business model for managing financial assets.

(b) Financial assets – impairment

ECL is a probability-weighted estimate of credit losses. It is measured as follows:

  • financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the entity expects to receive);
  • financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;

The key inputs into the measurement of ECL are the term structure of the following variables;

  • Probability of default (“PD”),
  • Loss given default (“LGD”), and
  • Exposure at default (“EAD”).

IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarized below:

– A financial instrument that is not credit-impaired on initial recognition is classified in “Stage 1” and has its credit risk continuously monitored by the Company.

– If a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit impaired.

– If the financial instrument is credit-impaired, the financial instrument is then moved to “Stage 3”.

– Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis.

– A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward looking information.

The Company incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. Based on consideration of a variety of external actual and forecast information, the Company formulates a 'base case' view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome.

A global database of sovereign and corporate credit ratings and GDP movements was built dating from 1969 to present day, with specific emphasis placed on data post 1990. The objective of these studies was to understand the movement of credit ratings in times of economic stress and any subsequent/lagging effects. Relative movements in credit ratings and PDs were modelled rather than actual default rates given the superior model fits that could be obtained and better back-testing of model results and diagnostics.

For sovereign counterparties, S&P’s 2020 Sovereign Default Rate Study was used in the mapping of rating movements to PDs. These rating changes could then be mapped to relative changes in risk over time implied by the PDs. These PD changes were then regressed on the historical GDP growth. The period over which to fit the regression model was informed through a combination of maximizing correlation between GDP and historical growth as well as expert judgement. The final regression model forecasts future rating change movements and hence scalars to apply to sovereign PDs relevant to current risk levels.

A KSA specific model was created in addition to a peer group model and regional model. Peer group was established as all A rated entities classified as high-income segments by World Bank. The regional Group comprised primarily of Middle Eastern and North African sovereigns. In order to use the Saudi Arabian GDP forecasts in the peer and regional group forecasts, the GDP forecasts are mapped onto a normal distribution, parameterized on historical GDP growth rates, and the equivalent percentile is then used in the alternative models.

Each of the above three models produce forward-looking adjustment scalars. The model allows the user to assign weights to each of the model outputs. The final forward-looking adjustment scalar is then calculated as a weighted average of the three model outputs. Management applied judgement when assigning weights to the scalars.

(c) Financial liabilities

IFRS 9 largely retains the requirements in IAS 39 for the classification and measurement of financial liabilities. However, under IAS 39 all fair value changes of financial liabilities designated as at FVSI are recognized in the statement of income, whereas under IFRS 9 these fair value changes will generally be presented as follows:

  • The amount of the change in the fair value that is attributable to changes in the credit risk of the liability will be presented in Other Comprehensive Income (OCI);
  • The remaining amount of the change in the fair value is presented in the statement of income.

(d) Transition

Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below:

  • Comparative periods have not been restated. A difference in the carrying amounts of financial assets resulting from the adoption of IFRS 9 are recognized in retained earnings.
  • The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application.
  1. The determination of the business model within which a financial asset is held.
  2. The designation and revocation of previous designated financial assets and liabilities as measured at FVSI. This category includes financial assets that were previously designated as held for trading or those that were classified as available for sale.
  3. The designation of certain investments in equity instruments not held for trading as FVOCI. In general, cash and cash equivalents, short term deposits and debt securities held until maturity have been designated as such.

Estimated Change in the Company’s Total Equity due to initial application of IFRS 9

Company has assessed the estimated impact that the initial application of IFRS 9 will have on its financial statements. Based on assessments undertaken to date, the total adjustment (before tax) to the balance of the Company’s total equity is estimated to be a reduction of SR 1.51 million at 1 January 2022, as summarized below. The impact on equity at 1 January 2023 is currently being estimated and shall be disclosed in the financial reporting for the period 1 January 2023 to 31 March 2023

Adjustments due to adoption of IFRS 9 1 January 2022
Classification of financial assets Increase by SR 0.09 million
Impairment of financial assets Decrease by SR 1.60 million
Total impact Decrease by SR 1.51 million

Overall Impact on Equity due to Transition to IFRS 17 and IFRS 9

Company estimates that, on adoption of IFRS 17 and IFRS 9, the impact of these changes before tax is a reduction in the total equity of SR 31.39 million to SR 60.87 million at 1 January 2022.

Transition to Change in Equity @ 1 January 2022
IFRS 17 Decrease by SR 29.88 million to SR 59.36 million
IFRS 9 Decrease by SR 1.51 million
Total impact Decrease by SR 31.39 million to SR 60.87 million

The Company has investment in ordinary shares of Probitas Holdings (Bermuda) Limited (“PHBL”) which is disclosed in note 17. The Company has accounted for this investment as an equity accounted investee. PHBL operates in insurance and reinsurance businesses including Lloyd’s market in London, United Kingdom. PHBL is at its initial phase of carrying out the IFRS 17 and 9 implementation exercise and implementing the IFRS 17 and 9 calculation engines and IT systems. Therefore, the impact of IFRS 17 and 9 implementation of PHBL cannot be quantified at the present stage. Accordingly, the IFRS 17 and 9 transition impact on the Company’s equity disclosed above does not include the effect of any changes in PHBL’s numbers due to the adoption of IFRS 17 and 9.