Notes to the Financial Statements

Saudi Reinsurance Company (the “Company”) is a Saudi Joint Stock Company registered in the Kingdom of Saudi Arabia under commercial registration number 1010250125 (Entity number: 7001556021) dated 12 Jumad Al-Awal 1429H (corresponding to 17 May 2008) with a branch in the Federal Territory of Labuan, Malaysia with license number IS2014146. The address of the Company’s registered office is at 4130 Northern Ring Road Al Wadi, Unit number 1, Riyadh 13313-6684, Kingdom of Saudi Arabia.

The objective of the Company is to transact cooperative reinsurance and related activities inside and outside the Kingdom of Saudi Arabia.

Statement of compliance

The Financial Statements of the Company as at and for the year ended 31 December 2023 have been prepared in accordance with IFRS Accounting Standards as issued by the International Accounting Standards Board (“IFRS Accounting Standards”) that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organization for Chartered and Professional Accountants (“SOCPA”).

The Company’s statement of financial position is not presented using a current/non-current classification. However, the following balances would generally be classified as current: cash and cash equivalents, financial investments at fair value through income statement, prepaid expenses, deposits and other assets, accrued expenses and other liabilities, provision for Zakat and tax and accumulated surplus. All other financial statement line items would generally be classified as noncurrent unless stated otherwise.

As required by the Saudi Arabian Insurance Regulations (the Implementation Regulations), the Company maintains separate books of accounts for “Reinsurance Operations” and “Shareholders’ Operations”. Accordingly, assets, liabilities, revenues and expenses clearly attributable to either operation, are recorded in the respective books of accounts.

During the year, the Insurance Authority has been established by a Royal Decree as the insurance regulator. Previously issued regulations by SAMA will be upheld until the Insurance Authority issued updated regulations.

Basis of measurement

These Financial Statements have been prepared under the going concern basis and the historical cost convention, except for reinsurance and retrocession contracts which are measured at the present value of estimated fulfillment cash flows that are expected to arise as the Company fulfills its contractual obligations and a contractual service margin (“CSM”) in accordance with IFRS 17, the measurement at fair value of financial investments at fair value through income statement, financial investments at fair value through other comprehensive income, investment in an equity accounted investee which is accounted for under the equity method and employees’ end of service benefits (EOSB) measured at present value of future obligations using projected unit credit method.

The new Companies Law issued through Royal Decree M/132 on 1/12/1443H (corresponding to 30 June 2022) (hereinafter referred as "the Law”) came into force on 26/6/1444H (corresponding to 19 January 2023). For certain provisions of the Law, full compliance is expected not later than two years from 26/6/1444H (corresponding to 19 January 2023). The Management is in process of assessing the impact of the New Companies Law and will amend its Articles of Association/By-Laws for any changes to align the Articles to the provisions of the Law. Consequently, the Company shall present the amended Articles of Association/By-Laws to the shareholders/partners in their Extraordinary/Annual General Assembly Meeting for their ratification.

Functional and presentation currency

These Financial Statements have been presented in Saudi Arabian Riyals (SR), which is the functional and presentational currency of the Company. All financial information presented has been rounded off to the nearest Saudi Arabian Riyal.

Fiscal year

The Company’s fiscal year is aligned with the calendar year i.e. it begins at 1 January and ends at 31 December.

The accounting policies adopted in the preparation of the Financial Statements are consistent with those followed in the preparation of the Company’s Financial Statements for the year ended 31 December 2022, except for the adoption of new standards effective as of 1 January 2023. The Company has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

New standards not yet effective

The Company adopted Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) from 1 January 2023. The amendments require the disclosure of “material” rather than “significant” accounting policies. Although the amendments did not result in any changes to the accounting policy themselves, they impacted the accounting policy information disclosed in certain instances.

In addition, the Company has initially applied IFRS 17 and IFRS 9, including any consequential amendments to other standards, from 1 January 2023. These standards have brought significant changes to the accounting for reinsurance and retrocession contracts and financial instruments. As a result, the Company has restated certain comparative amounts for the prior year.

Except for the changes below and accounting policies explained in Note 4, the Company has consistently applied the accounting policies used in the preparation of the annual Financial Statements for the year ended 31 December 2022.

The nature and effects of the key changes in the Company’s accounting policies resulting from its adoption of IFRS 17 and IFRS 9 are summarised below:

IFRS 17 – Insurance Contracts

(i) Recognition, measurement, and presentation of reinsurance contracts

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of reinsurance contracts, retrocession contracts and investment contracts with discretionary participation features. It introduces a model that measures groups of contracts based on the Company’s estimates of the present value of future cash flows that are expected to arise as the Company fulfills the contracts, an explicit risk adjustment for non-financial risk and a Contractual Service Margin (CSM).

Under IFRS 17, reinsurance revenue in each reporting period represents the changes in the liabilities for remaining coverage that relate to services for which the Company expects to receive consideration and an allocation of premiums that relate to recovering insurance acquisition cash flows. In addition, investment components are no longer included in reinsurance revenue and reinsurance service expenses. Reinsurance finance income and expenses are presented separately from reinsurance revenue and reinsurance service expenses.

The Company applies the General Measurement Model (GMM) to both reinsurance contracts issued, and retrocession contracts held for all the segments.

Previously, all acquisition costs were recognized and presented as a separate asset from the related reinsurance contracts (“deferred acquisition costs”) until those costs were included in income statement. Under IFRS 17, only reinsurance acquisition cash flows that arise before the recognition of the related reinsurance contracts are recognized as separate assets and are tested for recoverability. These assets are presented in the carrying amount of the related portfolio of contracts and are derecognized once the related contracts have been recognized.

Income and expenses from retrocession contracts other than retrocession finance income and expenses are now presented as a single net amount in income statement. Previously, amounts recovered from retrocessionaires and retrocession expenses were presented separately.

(ii) Presentation and disclosures

For presentation in the statement of financial position, the line items for reinsurance contracts issued and retrocession contracts held have been changed significantly compared with last year. Previously balance sheet items related to reinsurance and retrocession contracts were split into the following line items:

• Assets
  • Accrued reinsurance premiums
  • Reinsurance premium receivables, net
  • Deferred policy acquisition costs
  • Retrocession balances receivable
  • Retroceded share of unearned premiums
  • Deferred excess of loss premiums
  • Retroceded share of outstanding claims
  • Retroceded share of claims incurred but not reported

• Liabilities
  • Accounts payable
  • Retrocession balances payable
  • Accrued retroceded premiums
  • Unearned premiums
  • Outstanding claims
  • Claims incurred but not reported

Under IFRS 17, the Company aggregates reinsurance contracts issued, and retrocession contracts held, respectively and presents separately on the balance sheet:

• Portfolios of reinsurance contracts issued that are assets;
• Portfolios of reinsurance contracts issued that are liabilities;
• Portfolios of retrocession contracts held that are assets; and
• Portfolios of retrocession contracts held that are liabilities.

The portfolios referred to above are those established at initial recognition in accordance with the IFRS 17 requirements.

The line item descriptions in the statement of income and other comprehensive income have been changed significantly compared with last year. Previously, the Company reported the following line items:

• Gross written premiums
• Retroceded premiums
• Excess of loss expenses
• Change in net unearned premiums
• Retrocession commissions
• Gross claims paid
• Retroceded share of claims paid
• Change in outstanding claims, net
• Changes in incurred but not reported claims, net
• Policy acquisition costs and profit commissions
• Other underwriting expenses

Instead, IFRS 17 requires separate presentation of:

• Reinsurance revenue
• Reinsurance service expenses
• Net expenses from retrocession contracts
• Finance income/(expenses) from reinsurance contracts issued
• Finance income/(expenses) from retrocession contracts

The Company provides disaggregated qualitative and quantitative information about:

• Amounts recognized in its Financial Statements from reinsurance contracts and retrocession contracts; and
• Significant judgments, and changes in those judgments, when applying the standard.

(iii) Transition

Changes in accounting policies resulting from the adoption of IFRS 17 have been applied using a modified retrospective approach because it was impracticable to apply the full retrospective approach. The Company considered the full retrospective approach impracticable under the following circumstances;

• The effects of retrospective application were not determinable because the information required had not been collected (or had not been collected with sufficient granularity) and was unavailable because of system migrations, data retention requirements or other reasons. Such information included for certain contracts:
• expectations about a contract’s profitability and risks of becoming onerous required for identifying groups of contracts;
• information about historical cash flows and discount rates required for determining the estimates of cash flows on initial recognition and subsequent changes on a retrospective basis;
• information required to allocate fixed and variable overheads to groups of contracts, because the Company’s previous accounting policies did not require such information; and
• information about changes in assumptions and estimates, which might not have been documented on an ongoing basis.
• The full retrospective approach required assumptions about what Company Management’s intentions would have been in previous periods or significant accounting estimates that could not be made without the use of hindsight. Such assumptions and estimates included for certain contracts:
• assumptions about discount rates, because the Company had not been subject to any accounting or regulatory framework that required reinsurance contracts to be measured on a present value basis;
• assumptions about the risk adjustment for non-financial risk, because the Company had not been subject to any accounting or regulatory framework that required an explicit margin for non-financial risk.

The Company has applied the transition provisions in IFRS 17 and has not disclosed the impact of the adoption of IFRS 17 on each financial statement line item and EPS.
The effects of adopting IFRS 17 on the Financial Statements at 1 January 2022 are presented in the statement of changes in equity.

Impact on equity

Drivers of changes in equity	Impact on equity on transition to IFRS 17 at 1 January 2022 SR
Changes in measurement of reinsurance contracts issued	(17,952,391)
Changes in measurement of retrocession contracts held	20,532,068
Total impact	2,579,677

Impact on reinsurance contracts liabilities

Drivers of changes in equity	Impact on liabilities on transition to IFRS 17 at 1 January 2022 SR
Discounting	(65,064,828)
Risk adjustment	53,879,884
CSM, transition to best estimate liability and other drivers	29,137,335
Total impact	17,952,391

Impact on retrocession contracts held

Drivers of changes in equity	Impact on assets on transition to IFRS 17 at 1 January 2022 SR
Discounting	(12,917,611)
Risk adjustment	8,959,055
CSM, transition to best estimate liability and other drivers	24,490,624
Total impact	20,532,068

IFRS 9 – Financial Instruments

(i) Classification of financial assets and financial liabilities

IFRS 9 includes three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income and fair value through income statement. The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous IAS 39 categories of held-to-maturity investments, loans and receivables, and available-for-sale financial assets. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of IFRS 9 are not separated. Instead, the hybrid financial instrument as a whole is assessed for classification. IFRS 9 has not had a significant effect on the Group’s accounting policies for financial liabilities.

(ii) Impairment of financial assets

IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward-looking “expected credit loss” model. The new impairment model applies to financial assets measured at amortised cost, debt investments at FVOCI and lease receivables. Under IFRS 9, credit losses are recognized earlier than under IAS 39.

(iii) Transition

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

• The comparative period has been restated. However, information about financial instruments that had already been derecognized at 1 January 2023 continues to be reported in accordance with IAS 39 for the comparative period.
• The following assessments have been made on the basis of the facts and circumstances that existed at initial application:
• The determination of the business model within which a financial asset is held.
• The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL.
• The designation of certain investments in equity instruments not held for trading as at FVOCI.

The adoption of IFRS 9 has not had a material impact on the Company’s basic or diluted EPS for the year ended 31 December 2023 and 2022. Details of the changes and implications resulting from the adoption of IFRS 9 are presented in (iv) below:

(iv) Effect of initial application

(a) Classification of financial assets and financial liabilities on the date of initial application of IFRS 9

The following table below explain the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company's financial assets and financial liabilities as at 1 January 2023.

Financial assets	Original classification under lAS 39	New classification under lFRS 9	Original carrying amount under IAS 39 SR	New carrying amount under IFRS 9 SR
Cash and cash equivalents	Loans and receivables	Amortized cost	31,556,704	31,556,652
Time deposits including accrued special commission income from time deposits	Loans and receivables	Amortized cost	754,630,389	754,290,068
Statutory deposits including accrued commission income on statutory deposits	Loans and receivables	Amortized cost	111,184,429	111,184,071
Held-to-maturity investments	Held to maturity	Amortized cost	263,938,021	261,342,898
	Held to maturity	Fair value through other comprehensive income	128,890,396	119,921,195
Investments held at fair value through income statement	FVIS (Held for trading)	Fair value through income statement	272,653,544	272,653,544
		Amortized cost	14,500,749	14,500,749
Total financial assets			1,577,354,232	1,565,449,177
Financial liabilities
Accrued expenses and other liabilities	Amortized cost	Amortized cost	80,591,465	80,591,465
Margin loan payable	Amortized cost	Amortized cost	56,797,019	56,797,019
Total financial liabilities			137,388,484	137,388,484

(b) Reconciliation of carrying amounts under IAS 39 to carrying amounts under IFRS 9 at the adoption of IFRS 9

	31 December 2022 (SR)
Financial assets	IAS 39 carrying amount as at 31 December 2022	Reclassification	Remeasurement	IFRS 9 carrying amount as at 31 December 2022
Bank balances and cash	31,556,704	(31,556,704)	–	–
Time deposits	746,955,702	(746,955,702)	–	–
Accrued commission income on time deposits	7,674,687	(7,674,687)	–	–
Investment held at fair value through income statement	287,154,293	(287,154,293)	–	–
Accrued special commission income from bonds, sukuk and held-to-maturity/investments	5,175,895	(5,175,895)	–	–
Held-to-maturity/investments	387,652,522	(387,652,522)	–	–
Statutory deposits	89,100,000	–	–	89,100,000
Accrued commission income on statutory deposits	22,084,429	–	(358)	22,084,071
Cash and cash equivalents	–	31,556,704	(52)	31,556,652
Financial investments at fair value through income statement	–	272,653,544	–	272,653,544
Financial investments at fair value through other comprehensive income	–	128,890,396	(8,969,201)	119,921,195
Financial investments at amortized cost	–	1,033,069,159	(2,935,444)	1,030,133,715
Total financial assets	1,577,354,232	–	(11,905,055)	1,565,449,177

There has not been any reclassification or remeasurement under financial liabilities.

	1 January 2022 (SR)
Financial assets	IAS 39 carrying amount as at 1 January 2022	Reclassification	Remeasurement	IFRS 9 carrying amount as at 1 January 2022
Bank balances and cash	27,807,294	(27,807,294)	–	–
Time deposits	243,382,085	(243,382,085)	–	–
Accrued commission income on time deposits	2,310,102	(2,310,102)	–	–
Investment held at fair value through income statement	803,584,596	(803,584,596)	–	–
Accrued special commission income from bonds, sukuk and held-to-maturity/investments	6,810,473	(6,810,473)	–	–
Held-to-maturity/investments	298,022,312	(298,022,312)	–	–
Statutory deposits	89,100,000	–	–	89,100,000
Accrued commission income on statutory deposits	20,962,172	–	(358)	20,961,814
Cash and cash equivalents	–	27,807,294	–	27,807,294
Financial investments at fair value through income statement	–	762,723,099	–	762,723,099
Financial investments at fair value through other comprehensive income	–	93,554,824	(684,160)	92,870,664
Financial investments at amortized cost	–	497,831,645	(1,595,544)	496,236,101
Total financial assets	1,491,979,034	–	(2,280,062)	1,489,698,972

There has not been any reclassification or remeasurement under financial liabilities.

The following table summarises the effects of the reclassification of financial assets out of FVIS to the amortized cost category as a result of transition to IFRS 9:

	31 December 2022
Fair value	14,500,749
Fair value loss that would have been recognized in the statement of income during the year if the financial assets had not been reclassified	(498,774)
Effective interest rate determined	3.21%
Special commission income recognized	481,500

The financial assets reclassified out of FVIS to the amortized cost have matured during 2023.

(c) Impact on retained earnings and other reserves

	Retained earnings (SR)	Other reserves
Closing balance at 31 December 2021	35,495,182	2,751,420
Recognition of expected credit losses under IFRS 9	(1,595,902)	–
Reclassification under IFRS 9	–	(684,160)
Adjustment on initial application of IFRS 17	2,579,677	–
Adjustment on initial application of IFRS 17 by equity accounted investee	(9,420,847)	–
Restated opening balance as at 1 January 2022	27,058,110	2,067,260

The material accounting policies adopted in the preparation of these Financial Statements are set out below.

IFRS 17 – Insurance Contracts

(i) Definition and classification

Reinsurance contracts are contracts under which the Company accepts significant insurance risk from an insurer by agreeing to compensate the insurer if a specified uncertain future event adversely affects the insurer. In making this assessment, all substantive rights, and obligations, including those arising from law or regulation, are considered on a contract-by-contract basis. The Company uses judgment to assess whether a contract transfers insurance risk (i.e. if there is a scenario with commercial substance in which the Company has the possibility of a loss on a present value basis) and whether the accepted insurance risk is significant.

The Company uses retrocession agreements, to reduce its exposure to risks assumed, to increase its aggregate underwriting capacity. The ceding of risk to retrocessionaires does not relieve the Company from its direct obligations to its ceding companies. All references to reinsurance contracts and retrocession contracts held in the Financial Statements apply to reinsurance contracts issued or acquired and retrocession contracts held unless specifically stated otherwise.

The Company has assessed that all contracts currently classified as reinsurance and retrocession contracts under IFRS 4 meet the definition of reinsurance and retrocession contracts under IFRS 17. The Company does not write any investment contracts with discretionary participation features or reinsurance contracts with direct participation features.

(ii) Level of aggregation

Reinsurance contracts

Reinsurance contracts are aggregated into groups for measurement purposes. Groups of reinsurance contracts are determined by identifying portfolios of reinsurance contracts, each comprising contracts subject to similar risks and managed together. The Company manages reinsurance contracts issued by product lines within an operating segment, where each product line includes contracts that are subject to similar risks. Each portfolio is further divided into annual cohorts (i.e. by year of issue) and each annual cohort into three groups based on the profitability of contracts:

• 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 annual cohort.

These groups represent the level of aggregation at which reinsurance contracts are initially recognized and measured. Groups of contracts are established on initial recognition and their composition is not revised once all contracts have been added to the group. For each portfolio of contracts, the Company determines the appropriate level at which reasonable and supportable information is available to assess whether these contracts are onerous at initial recognition and whether non-onerous contracts have a significant possibility of becoming onerous. This level of granularity determines sets of contracts.

The Company uses significant judgment to determine at what level of granularity the Company has reasonable and supportable information that is sufficient to conclude that all contracts within a set are sufficiently homogeneous and will be allocated to the same group without performing an individual contract assessment.

Retrocession contracts

Groups of retrocession contracts are established such that each group comprises a single contract. Some retrocession contracts provide cover for underlying contracts that are included in different groups. However, the Company concludes that the retrocession contract’s legal form of a single contract reflects the substance of the Company’s contractual rights and obligations, considering that the different covers lapse together and are not sold separately. As a result, the retrocession contract is not separated into multiple reinsurance components that relate to different underlying groups.

Portfolios of retrocession contracts held are assessed for aggregation separately from portfolios of reinsurance contracts issued. Applying the grouping requirements to retrocession contracts held, the Company aggregates retrocession contracts held concluded within a calendar year (annual cohorts) into groups of:

• contracts for which there is a net gain at initial recognition, if any;
• contracts for which at initial recognition there is no significant possibility of a net gain arising subsequently; and
• remaining contracts in the portfolio, if any.

(iii) Recognition and derecognition

Groups of reinsurance contracts are initially recognized the earliest of:

• the beginning of its coverage period (i.e. the period during which the Company provides services in respect of any premiums within the boundary of the contract);
• when the first payment from the insurer becomes due or, if there is no contractual due date, when it is received from the insurer; and
• when facts and circumstances indicate that the contract is onerous.

Retrocession contracts held are recognized as follows:

• A group of retrocession contracts held that provide proportionate coverage is recognized at the later of the beginning of the coverage period of the group and the initial recognition of any underlying reinsurance contract; and
• All other groups of retrocession contracts held are recognized from the beginning of the coverage period of the group of retrocession contracts held; unless the Company entered into the retrocession contract held at or before the date when an onerous group of underlying contracts is recognized prior to the beginning of the coverage period of the group of retrocession contracts held, in which case the retrocession contract held is recognized at the same time as the group of underlying reinsurance contracts is recognized.

Only contracts that individually meet the recognition criteria by the end of the reporting period are included in the groups. When contracts meet the recognition criteria in the groups after the reporting date, they are added to the groups in the reporting period in which they meet the recognition criteria, subject to the cohort restriction. Composition of the groups is not reassessed in subsequent periods.

The Company derecognizes a contract when it is extinguished – i.e. when the specified obligations in the contract expire or are discharged or cancelled. The Company also derecognizes a contract if its terms are modified in a way that would have changed the accounting for the contract significantly had the new terms always existed, in which case a new contract based on the modified terms is recognized. If a contract modification does not result in derecognition, then the Company treats the changes in cash flows caused by the modification as changes in estimates of fulfillment cash flows.

On derecognition of a contract from within a group of contracts:

• the fulfillment cash flows allocated to the group are adjusted to eliminate those that relate to the rights and obligations derecognized;
• the CSM of the group is adjusted for the change in the fulfillment cash flows, except where such changes are allocated to a loss component; and
• the number of coverage units for the expected remaining services is adjusted to reflect the coverage units derecognized from the group.

If a contract is derecognized because it is transferred to a third party, then the CSM is also adjusted for the premium charged by the third party, unless the group is onerous.

If a contract is derecognized because its terms are modified, then the CSM is also adjusted for the premium that would have been charged had the Company entered into a contract with the new contract’s terms at the date of modification, less any additional premium charged for the modification. The new contract recognized is measured assuming that, at the date of modification, the Company received the premium that it would have charged less any additional premium charged for the modification.

(v) Reinsurance acquisition cashflows

The Company defines acquisition cash flows as cash flows that arise from costs of selling, underwriting, and starting a group of reinsurance contracts (issued or expected to be issued) and that are directly attributable to the portfolio of reinsurance contracts to which the group belongs. Reinsurance acquisition cash flows are allocated to groups of reinsurance contracts using a systematic and rational method and considering, in an unbiased way, all reasonable and supportable information that is available without undue cost or effort.

(vi) Contract boundaries

The Company uses the concept of contract boundary to determine what cash flows should be considered in the measurement of groups of reinsurance contracts. The measurement of a group of contracts includes all the future cash flows within the boundary of each reinsurance and retrocession contract in the group. Cash flows are within the boundary of a contract if they arise from substantive rights and obligations that exist during the reporting period under which the Company can compel the insurer to pay premiums or has a substantive obligation to provide services. A substantive obligation to provide services ends when:

• the Company has the practical ability to reassess the risks of the particular insurer and can set a price or level of benefits that fully reflects those reassessed risks; or
• the Company has the practical ability to reassess the risks of the portfolio that contains the contract and can set a price or level of benefits that fully reflects the risks of that portfolio; and the pricing of the premiums for coverage up to the reassessment date does not take into account risks that relate to periods after the reassessment date.

The Company writes contracts on both a risk-attaching and losses-occurring basis and distinction is made depending on the basis of the contract being valued for determining the contract boundary. In particular:

• For contracts written on a losses-occurring basis, the coverage period will be equal to the duration between the effective dates of the contract i.e. the term of the contract being valued.
• For contracts written on a risk-attaching basis, the coverage period will be equal to duration between the attachment point of first attaching risk and expiry date of last attaching risk i.e. the term of the contract being valued plus term of the last underlying risk that attaches to the contract.

For groups of retrocession contracts held, cash flows are within the contract boundary if they arise from substantive rights and obligations of the Company that exist during the reporting period in which the Company is compelled to pay amounts to the retrocessionaire or in which the Company has a substantive right to receive services from the retrocessionaire.

A substantive right to receive services from the retrocessionaire ends when the retrocessionaire:

• has the practical ability to reassess the risks transferred to it and can set a price or level of benefits that fully reflects those reassessed risks; or
• has a substantive right to terminate the coverage.

Treaty retrocession contracts are written on a losses-occurring and risk attaching basis, renewed annually. However, the facultative arrangement covering all risk written in the KSA region is written on a risk-attaching basis. At initial recognition of the risk-attaching retrocession contract, it would be necessary to allow for expected new business to be written over the year in the best estimate cash flows. Given the uncertainty in contract duration of the business expected to be written over the course of the year, this creates a contract boundary that depends on the duration of the underlying ceded risks. This facultative retrocession contract will thus be recognized on the earlier of when retrocession coverage starts or when onerous underlying contracts are recognized. However, to the extent that the group of underlying contracts are recognized after the group of retrocession contracts, the latter will only be recognized when the group of underlying contracts are recognized. These groups are recognized when the coverage of the first retrocession contract in that group starts or when onerous underlying contracts are recognized, depending on which is earlier.

The remaining treaty contracts, written on a losses-occurring basis and renewed annually, will lead to a 12-month contract boundary.

(vii) Initial measurement

On initial recognition, the Company measures a group of reinsurance and retrocession contracts as the total of;

• the fulfillment cash flows, which comprise estimates of future cash flows, adjusted to reflect the time value of money and the associated financial risks, and a risk adjustment for non-financial risk; and
• the Contractual Service Margin (CSM).

The risk adjustment for non-financial risk for a group of reinsurance contracts, determined separately from the other estimates, is the compensation required for bearing uncertainty about the amount and timing of the cash flows that arises from non-financial risk. The fulfillment cash flows of a group of reinsurance contracts do not reflect the Company's non-performance risk.

The CSM of a group of reinsurance contracts represents the unearned profit that the Company will recognize as it provides services under those contracts. On initial recognition of a group of reinsurance contracts, if the total of

• the fulfillment cash flows,
• any cash flows arising at that date and
• any amount arising from the derecognition of any assets or liabilities previously recognized for cash flows related to the group is a net inflow, then the group is not onerous. In this case, the CSM is measured as the equal and opposite amount of the net inflow, which results in no income or expenses arising on initial recognition.

If the total is a net outflow, then the group is onerous. In this case, the net outflow is recognized as a loss in statement of income. A loss component is created to depict the amount of the net cash outflow, which determines the amounts that are subsequently presented in statement of income as reversals of losses on onerous contracts and are excluded from reinsurance revenue.

For groups of retrocession contracts held, any net gain or loss at initial recognition is recognized as the CSM unless the net cost of purchasing retrocession relates to past events, in which case the Company recognizes the net cost immediately in statement of income. For retrocession contracts held, the CSM represents a deferred gain or loss that the Company will recognize as a retrocession expense as it receives retrocession coverage in the future.

A loss-recovery component is established or adjusted within the remaining coverage for retrocession contracts held for income recognized in statement of income when the entity recognizes a loss on initial recognition of an onerous group of underlying reinsurance contracts or on addition of onerous underlying reinsurance contracts to that group. This amount is calculated by multiplying the loss recognized on underlying reinsurance contracts by the percentage of claims on underlying insurance contracts that the Company expects to recover from the reinsurance contracts held that are entered into before or at the same time as the loss is recognized on the underlying insurance contracts. When underlying reinsurance contracts are included in the same group with reinsurance contracts issued that are not retroceded, the Company applies a systematic and rational method of allocation to determine the portion of losses that relates to underlying reinsurance contracts.

Fulfillment cash flows (FCF) within contract boundary

Cash flows within the boundary of reinsurance contract are those that relate directly to the fulfillment of the contract, including cash flows for which the entity has discretion over the amount or timing. The cash flows within the boundary include:

• premiums (including premium adjustments and installment premiums) from an insurer and any additional cash flows that result from those premiums.
• payments to (or on behalf of) an insurer, including claims that have already been reported but have not yet been paid (i.e. reported claims), incurred claims for events that have occurred but for which claims have not been reported and all future claims for which the entity has a substantive obligation.
• payments to (or on behalf of) an insurer that vary depending on returns on underlying items.
• an allocation of insurance acquisition cash flows attributable to the portfolio to which the contract belongs.
• claim handling costs (i.e. the costs the entity will incur in investigating, processing and resolving claims under existing insurance contracts, including legal and loss-adjusters’ fees and internal costs of investigating claims and processing claim payments).
• policy administration and maintenance costs, such as costs of premium billing and handling policy changes (for example, conversions and reinstatements). Such costs also include recurring commissions that are expected to be paid to intermediaries if a particular insurer continues to pay the premiums within the boundary of the insurance contract.
• transaction-based taxes (such as premium taxes, value added taxes and goods and services taxes) and levies that arise directly from existing insurance contracts, or that can be attributed to them on a reasonable and consistent basis.
• payments by the insurer in a fiduciary capacity to meet tax obligations incurred by the insurer, and related receipts.
• an allocation of fixed and variable overheads (such as the costs of accounting, human resources, information technology and support, building depreciation, rent, and maintenance and utilities) directly attributable to fulfilling insurance contracts. Such overheads are allocated to groups of contracts using methods that are systematic and rational and are consistently applied to all costs that have similar characteristics.
• any other costs specifically chargeable to the insurer under the terms of the contract.

Risk of the Company’s non-performance is not included in the measurement of groups of reinsurance contracts issued. In the measurement of retrocession contracts held, the probability weighted estimates of the present value of future cash flows include the potential credit losses and other disputes of the retrocessionaires to reflect the non-performance risk of the retrocessionaires. The Company estimates certain FCF at the portfolio level or higher and then allocates such estimates to groups of contracts. The Company uses consistent assumptions to measure the estimates of the present value of future cash flows for the group of retrocession contracts held and such estimates for the groups of underlying reinsurance contracts.

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, and contractual service margin. After estimating the future cash flows arising from the insurance contracts, discounting shall be used to calculate the present value of these cash flows, to reflect the time value of money and the financial risks associated with these cash flows. This is done to the extent that the financial risks are not already included in the cash flow estimates.

Risk adjustment for non-financial risk

The risk adjustment for non-financial risk is the compensation that is required for bearing the uncertainty about the amount and timing of cash flows that arises from non-financial risk as the reinsurance contract is fulfilled. Because the risk adjustment represents compensation for uncertainty, estimates are made on the degree of diversification benefits and expected favorable and unfavorable outcomes in a way that reflects the Company’s degree of risk aversion. The Company estimates an adjustment for non-financial risk separately from all other estimates.

(viii) Subsequent measurement

The carrying amount of a group of reinsurance contracts issued at each reporting date is the sum of the liability for remaining coverage and the liability for incurred claims;

• the Liability for Remaining Coverage (LRC) comprises (a) the fulfillment cash flows that relate to services that will be provided under the contracts in future periods and (b) any remaining CSM at that date.
• the liability for incurred claims (LIC) includes the fulfillment cash flows for incurred claims and expenses that have not yet been paid, including claims that have been incurred but not yet reported.

The carrying amount of a group of retrocession contracts at each reporting date is the sum of the asset for remaining coverage and the asset for incurred claims. The asset for remaining coverage comprises (a) the fulfillment cash flows that relate to services that will be received under the contracts in future periods and (b) any remaining CSM at that date.

The fulfillment cash flows of groups of reinsurance and retrocession contracts are measured at the reporting date using current estimates of future cash flows, current discount rates and current estimates of the risk adjustment for non-financial risk.

Changes in fulfillment cash flows

The FCF are updated by the Company for current assumptions at the end of every reporting period, using the current estimates of the amount, timing, and uncertainty of future cash flows and of discount rates. The way in which the changes in estimates of the FCF are treated depends on which estimate is being updated:

• changes that relate to current or past service are recognized in statement of income; and
• changes that relate to future service are recognized by adjusting the CSM or the loss component within the LRC as per the policy below (Changes to the CSM).

The following adjustments relate to future service and thus adjust the CSM:

• experience adjustments arising from premiums received in the period that relate to future service and related cash flows such as insurance acquisition cash flows (experience adjustments represents the differences between the estimate, at the beginning of the period, of amounts expected in the period and the actual payments during the period);
• changes in estimates of the present value of future cash flows in the LRC, except those relating to the effect of the time value of money and the effect of financial risk and changes thereof;
• changes in the risk adjustment for non-financial risk that relate to future service.

For reinsurance contracts, the following adjustments do not relate to future service and thus do not adjust the CSM:

• changes in the FCF for the effect of the time value of money and the effect of financial risk and changes thereof.
• changes in the FCF relating to the LIC.
• experience adjustments – arising from premiums received in the period that do not relate to future service and related cash flows, such as reinsurance acquisition cash flows; and
• experience adjustments relating to reinsurance service expenses (excluding insurance acquisition cash flows).

Changes to the Contractual Service Margin (CSM)

For reinsurance contracts issued, the carrying amount of the CSM at each reporting date is the carrying amount at the start of the year, adjusted for:

• the CSM of any new contracts that are added to the group in the year;
• interest accreted on the carrying amount of the CSM during the period,
• changes in fulfillment cash flows that relate to future services, except to the extent that:
• any increases in the fulfillment cash flows exceed the carrying amount of the CSM, in which case the excess is recognized as a loss in profit or loss and creates a loss component; or
• any decreases in the fulfillment cash flows are allocated to the loss component, reversing losses previously recognized in statement of income;
  • the effect of any currency exchange differences on the CSM; and
  • the amount recognized as insurance revenue because of the services provided in the period.

  For a group of retrocession contracts held, the carrying amount of the CSM at the end of each reporting period is adjusted to reflect changes in the FCF in the same manner as a group of underlying reinsurance contracts issued, except that when underlying contracts are onerous and thus changes in the underlying FCF related to future service are recognized in reinsurance service expenses by adjusting the loss component, respective changes in the FCF of retrocession contracts held are also recognized in the reinsurance service result. The contractual service margin for a retrocession contract held represents the cost of purchasing retrocession. This is different from the contractual service margin for underlying reinsurance contracts which represents unearned profit on those contracts. The cost of purchasing retrocession is recognized as services are received under the retrocession contract held. As an exception, if the retrocession contract held covers events that have already occurred, the net cost at initial recognition is recognized immediately in statement of income.

  The Company applies year to date (YTD) approach. Any changes in estimates of cash flows relating to service during the current year relative to estimates at the start of the year are included as experience adjustments in statement of income, even if those estimates were updated at a previous interim reporting period.

  Interest accretion on the CSM

  Interest is accreted on the CSM using discount rates determined at initial recognition (locked-in discount rates). If more contracts are added to the existing groups in the subsequent reporting periods, the Company revises the locked-in discount curves by calculating discount rate applicable at the initial recognition of the first contract over the period that contracts in the group are issued. The discount curves are determined by multiplying the new CSM added to the group and their corresponding discount curves over the total CSM.

  Release of the CSM to statement of income

  The amount of the CSM recognized in the statement of income for reinsurance contract services 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 insurance contracts based on coverage units.

  The coverage period is defined as a period during which the entity provides reinsurance contract services. Reinsurance contract services include coverage for an reinsured event (reinsurance coverage). The coverage period used corresponds with the term of the contracts. The total number of coverage units in a group is the quantity of service provided by the contracts in the group over the expected coverage period.

  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 insurer to be able to validly claim in each period if an insured event occurs as the basis for the quantity of benefits.

  For reinsurance contracts issued and retrocession contracts held, the CSM is released to statement of income as services, both provided and received, are recognized in the reporting period. Coverage units for the retrocession contracts are based on the insurance coverage provided by the retrocessionaires and are determined by the ceded policies’ fixed face values considering new business projected within the retrocession contract boundary. The coverage period for these contracts is determined based on the coverage of all underlying contracts whose cash flows are included in the reinsurance contract boundary.

  Onerous contracts – loss component

  When adjustments to the CSM exceed the amount of the CSM, the group of contracts becomes onerous and the Company recognizes the excess in insurance service expenses, and it records the excess as a loss component in the LRC.

  When a loss component exists, the Company allocates the following between the loss component and the remaining component of the LRC for the respective group of contracts, based on the ratio of the loss component to the FCF relating to the expected future cash flows:

  • expected incurred claims and other directly attributable expenses for the period;
  • changes in the RA for the risk expired; and
  • finance income or expenses from insurance recontracts issued.

  The amounts of loss component allocation in point a) and b) above reduce the respective components of reinsurance revenue and are reflected in reinsurance service expenses. Decreases in the FCF in subsequent periods reduce the remaining loss component and reinstate the CSM after the loss component is reduced to zero. Increases in the FCF in subsequent periods increase the loss component.

  Loss recovery component

  A loss-recovery component is established or adjusted within the remaining coverage for retrocession contracts held for the amount of income recognized when a loss component is set up for the group of onerous underlying reinsurance contracts.

  This amount is calculated by multiplying the loss recognized on underlying reinsurance contracts by the percentage of claims on underlying reinsurance contracts that the Company expects to recover from the retrocession contracts held that are entered into before or at the same time as the loss is recognized on the underlying reinsurance contracts. When underlying reinsurance contracts are included in the same group with reinsurance contracts issued that are not reinsured, the Company applies a systematic and rational method of allocation to determine the portion of losses that relates to underlying reinsurance contracts.

  Subsequently, the loss recovery component is adjusted to reflect changes in the loss component of an onerous group of underlying reinsurance contracts. The loss recovery component is further adjusted, if required, to ensure that it does not exceed the portion of the carrying amount of the loss component of the onerous group of underlying reinsurance contracts that the Company expects to recover from the group of reinsurance contracts held.

  (ix) Presentation

  Reinsurance revenue

  As the Company provides services under the group of reinsurance contracts, it reduces the LRC and recognises reinsurance revenue. The amount of reinsurance revenue recognized in the reporting period depicts the transfer of promised services at an amount that reflects the portion of consideration the Company expects to be entitled to in exchange for those services.

  Contracts measured under the GMM, reinsurance revenue comprises the following:

  • Amounts relating to the changes in the LRC:
    • a reinsurance claims and expenses incurred in the period measured at the amounts expected at the beginning of the period, excluding:
    • amounts related to the loss component.
    • repayments of investment components; and
    • reinsurance acquisition expenses.
    • b changes in the risk adjustment for non-financial risk, excluding:
    • changes included in insurance finance income (expenses);
    • changes that relate to future coverage (which adjust the CSM); and
    • amounts allocated to the loss component.
    • c amounts of the CSM recognized in statement of income for the services provided in the period; and
    • d experience adjustments arising from premiums received in the period that relate to past and current service and related cash flows such as reinsurance acquisition cash flows and premium-based taxes.
    • Reinsurance acquisition cash flows recovery is determined by allocating the portion of premiums related to the recovery of those cash flows on the basis of the passage of time over the expected coverage of a group of contracts.

    Reinsurance service expenses

    Reinsurance service expenses arising from reinsurance contracts are recognized in statement of income generally as they are incurred. They exclude repayments of investment components and comprise the following items.

    • Incurred claims and other insurance service expenses
    • Amortization of reinsurance acquisition cash flows. This is equal to the amount of insurance revenue recognized in the year that relates to recovering insurance acquisition cash flows.
    • Losses on onerous contracts and reversals of such losses.
    • Adjustments to the liabilities for incurred claims that do not arise from the effects of the time value of money, financial risk and changes therein.

    Net expenses from retrocession contracts

    The Company presents financial performance of groups of retrocession contracts held on a net basis in net expenses or income from retrocession contracts held, comprising the following amounts:

    • actual claims and other expenses recovered during the period;
    • the effect of changes in the risk of retrocessionaires’ non-performance;
    • expected claims and other expenses recovery excluding amounts allocated to the loss-recovery component and repayments of investment components
    • losses recovered on underlying contracts and reversal of such recoveries;
    • changes that relate to past service adjustments to incurred claims component;
    • other incurred directly attributable expenses;
    • expected claims and other expenses recovery;
    • changes in the RA recognised for the risk expired;
    • CSM recognised for the services received; and
    • premium (and other related cash flows) experience adjustments relating to current service.

    Reinsurance finance income or expenses

    Reinsurance finance income or expenses comprise the change in the carrying amount of the group of reinsurance contracts arising from:

    • the effect of the time value of money and changes in the time value of money; and
    • the effect of financial risk and changes in financial risk.

    For contracts measured under the GMM, the main amounts within insurance finance income or expenses are:

    • interest accreted on the FCF and the CSM;
    • the effect of changes in interest rates and other financial assumptions; and
    • foreign exchange difference arising from contracts denominated in a foreign currency

    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 had met the relevant criteria and applied the temporary exemption from IFRS 9 for annual periods before 1 January 2023. Consequently, the Company has applied IFRS 9 for the first time on 1 January 2023.

    (i) Classification

    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 (“FVIS”). On initial recognition, a financial asset is either classified as measured at amortised cost, FVOCI or FVIS.

    Financial assets are not reclassified subsequent to their initial recognition unless the Company changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model.

    A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVIS:

    • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
    • its contractual terms give rise on specified dates to cash flows that are SPPI.

    A financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at FVIS:

    • it is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and
    • its contractual terms give rise on specified dates to cash flows that are SPPI.

    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.

    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.

    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, then the financial assets are measured at FVIS.

    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 FVIS.

    Based on these factors, the Company classifies 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 FVIS, are measured at amortised cost. The carrying amount of these assets is adjusted by any expected credit loss allowance. 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 FVIS, 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.
    • Fair value through statement of income (FVIS): Financial assets that are held for trading purpose or assets that do not meet the criteria for amortized cost or FVOCI are measured at FVIS. A gain or loss on a debt instrument that is subsequently measured at FVIS is 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.

    The Company will classify all equity investments at FVIS, 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” included in “Net income/(loss) from financial investments measured at FVIS” when the Company’s right to receive payments is established.

    (ii) Impairment

    In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model as opposed to an incurred credit loss model under IAS 39. The Company applies the expected credit losses (“ECL”) on its financial assets measured at amortized cost, and FVOCI, which are in the scope of IFRS 9 for impairment. The Company recognizes a loss allowance for such losses at each reporting date. The loss allowance is based on the Expected Credit Losses (“ECLs”) associated with the Probability of Default (“PD”) in the next twelve months unless there has been a Significant Increase in Credit Risk (“SICR”) since origination.

    The Company measures loss allowances at an amount equal to lifetime ECL, except for the following, for which they are measured as 12-month ECL:

    • debt investment securities that are determined to have low credit risk at the reporting date; and
    • other financial instruments on which credit risk has not increased significantly since their initial recognition.

    12-month ECL is the portion of ECL that result from default events on a financial instrument that are possible within the 12 months after the reporting date. Financial assets, for which 12-month ECLs are recognized, are referred to as “Stage1” financial instruments. Financial instruments allocated to Stage 1 have not undergone a significant increase in credit risk since initial recognition and are not credit impaired.

    Lifetime ECL is the ECL that result from all possible default events over the expected life of the financial instrument or the maximum contractual period of exposure. Financial instruments for which lifetime ECL are recognized but that are not credit-impaired are referred to as “Stage 2” financial instruments. Financial instruments allocated to Stage 2 are those that have experienced a significant increase in credit risk since initial recognition but are not credit impaired.

    Financial assets for which the lifetime ECLs are recognized and that are credit-impaired are referred to as “Stage 3” financial instruments.

    Cash and cash equivalents

    Cash and cash equivalents comprise cash in hand, cash at banks and time deposits with an original maturity of less than three months from the date of acquisition.

    Investment in an equity accounted investee

    Associates are those entities in which the Company has significant influence, but not control or joint control, over the financial and operating policies. Interests in associates are accounted for using the equity method. They are initially recognised at cost. Subsequent to initial recognition, the Financial Statements include the share of the profit or loss and other comprehensive income of associates, until the date on which significant influence ceases.

    End of service benefits

    The Company operates an end of service benefit plan for its employees based on the prevailing Saudi Labor Laws. Accruals are made at the present value of expected future payments in respect of services provided by the employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of high-quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. The benefit payments obligation is discharged as and when it falls due. Remeasurements (actuarial gains/losses) as a result of experience adjustments and changes in actuarial assumptions are recognised in statement of comprehensive income.

    Short-term employee benefits

    Short-term employee benefits obligation are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or any other benefits if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

    Zakat

    The Company is subject to Zakat in accordance with the regulations of the Zakat, Tax and Customs Authority (“ZATCA”). Zakat expense is charged to the statement of income. Zakat is not accounted for as income tax and as such no deferred tax is calculated relating to Zakat.

    Adjustments arising from the final Zakat assessments are recorded in the period in which such assessments are made.

    Income tax

    The income tax expense or credit for the year is the tax payable on the current year’s taxable income, based on the applicable income tax rate for each jurisdiction.

    The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company, its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

    Adjustments arising from the final income tax assessments are recorded in the period in which such assessments are made.

    Withholding tax

    The Company withholds taxes on certain transactions with non-resident parties in the Kingdom of Saudi Arabia as required under Saudi Arabian Income Tax Law. Withholding taxes paid on behalf of non-resident parties, which are not recoverable from such parties, are expensed.

    Value Added Tax (VAT)

    Output VAT related to revenue is payable to tax authorities on the earlier of:

    • collection of receivables from customers or
    • delivery of services to customers.

    Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales/services and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and a liability.

    VAT that is not recoverable is charged to statement of income as expense.

    Provisions

    Provisions are recognized when the Company has an obligation (legal or constructive) as a result of past events, and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.

    Special commission income

    Special commission income is recognized on an effective yield basis taking account of the principal outstanding and the applicable special commission rate.

    Dividend income

    Dividend income is recognised when the right to receive payment is established, which is generally when shareholders approve the dividend.

    Segmental reporting

    An operating segment is a component of the Company that is engaged in business activities from which it may earn revenues, incur expenses, whose operating results are reviewed regularly by the Company management committee (being the Company’s chief operating decision maker) to make decisions about resources allocated to the segment and assess its performance, and for which discrete financial information is available.

    The Company has following five strategic segments. These segments offer different products and services, and are managed separately because they require different operational, risk management and marketing strategies. The Company management committee reviews the internal management reports of each division at least every three months. The following summary describes products and services that each reportable segment offers.

    Reportable segment	Products and services
    Property and Casualty (P&C)	Contracts issued to medium and large businesses provide coverage for property and casualty risks, including Engineering, Fire, Marine, General Accident, Specialty and other business segments (Whole Accounts, Aviation, Energy, Agriculture and Political Risk etc).
    Motor	Motor insurance pays for loss or damage to own motor vehicles involved in accidents. It also pays for losses caused by its use to third party properties and bodily injuries.
    Protection	Protection includes term and credit life insurance. Term life insurance is used to provide financial aid for dependents in case of death and in certain cases of illness or disability. It can be an individual or a group policy with set duration limit on the coverage with the option to renew the policy or not. Credit life insurance is used to pay off a borrower’s debt if that borrower dies, with set duration limit on coverage with the option to renew the policy or not.
    Health	Contracts issued to businesses provide coverage for medical bills and hospitalization.
    Inherent Defects Insurance (IDI)	Inherent Defects Insurance provides cover against inherent defects in the structural works or the Envelope weakening the strength and steadiness or stability of the Premises and attributable to a fault, error or omission in design, materials, geological investigation, or construction.

    Segment performance is evaluated based on profit or loss which, in certain respects, is measured differently from profit or loss in the Financial Statements.

    No inter-segment transactions occurred during the year. If any transaction were to occur, transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment income, expense and results will then include those transfers between business segments which will then be eliminated at the level of Financial Statements of the Company.

    Contingencies and commitments

    Contingent liability is:

    • a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
    • a present obligation that arises from past events but is not recognised because:
    • it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
    • the amount of the obligation cannot be measured with sufficient reliability.

    Contingent assets are not recognised in the consolidated Financial Statements and are disclosed, unless the probability of an outflow of resources embodying economic benefits is remote.

    Commitments represent binding agreements of the Company to carry out specified courses of action involving in a transfer of cash or other asset to the respective counterparties.

The preparation of the Company’s Financial Statements requires the use of estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial Statements and the reported amounts of revenues and expenses during the reporting year. Although these estimates and judgments are based on Management’s best knowledge of current events and actions, actual results ultimately may differ from those estimates.

Estimates and judgments are continuously being evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date are discussed below:

(i) Fulfillment cash flows

Fulfillment cash flows comprise estimates of future cash flows, an adjustment to reflect the time value of money and the financial risks related to future cash flows, to the extent that the financial risks are not included in the estimates of future cash flows, and a risk adjustment for non-financial risk.

Estimates of future cash flows

The best estimate liability (BEL) includes the best estimate of future cash flows, the effects of discounting and financial risks, and a LIC relating to past coverage on subsequent valuation dates. The Company’s objective in estimating future cash flows is to determine the expected value of a range of scenarios that reflects the full range of possible outcomes. In estimating future cash flows, the Company incorporates, in an unbiased way, all reasonable and supportable information that is available without undue cost or effort at the reporting date. This information includes both internal and external historical data about claims and other experiences, updated to reflect current expectations of future events.

When estimating future cash flows, the Company takes into account current expectations of future events that might affect those cash flows. However, expectations of future changes in legislation that would change or discharge a present obligation or create new obligations under existing contracts are not taken into account until the change in legislation is substantively enacted.

Cash flows within the boundary of a contract relate directly to the fulfillment of the contract, including those for which the Company has discretion over the amount or timing. These include payments to (or on behalf of insurer), reinsurance acquisition cash flows and other costs that are incurred in fulfilling the contracts.

The Company estimates which cash flows are expected and the probability that they will occur as at the measurement date. In making these expectations, the Company applies the following principles:

• Where there is sufficient data, experience investigations are performed, with adjustments made or any trends as well as to account for external considerations and business strategy; or
• Where data is insufficient or lacks credibility, benchmarks and industry experience would be considered, with appropriate and justifiable adjustments.

The Company makes use of estimates that are current by ensuring that:

• Updates are made to assumptions such that they faithfully represent the conditions at the valuation date;
• The changes in estimates faithfully represent the changes in conditions during the period; and
• Future changes in legislation are not taken into account, unless they have been substantively enacted.

The Company makes use of the following assumptions to project the cash flows:

• Claims ratios and claims payment patterns;
• Expense ratios and expense payment patterns;
• Premium receipt patterns;
• Expected incidence of risk;
• Discount rates and;
• Measurement allocation assumptions, to the extent that there are differences between the modeling segmentation and the chosen level of aggregation.

Company’s current methodology involves projecting the future cash flow expected to be paid for incurred claims (LIC) and Future Claims (LRC). The methodology is based on standard actuarial techniques and reflects the best estimate view required under IFRS 17.

For the measurement of the LIC, the Company uses different approaches (i.e. the chain-ladder, Bornhuetter Ferguson and expected loss ratio techniques) for estimating the Incurred But Not Reported Reserves (IBNR) and Incurred But Not Enough Reserves (IBNER). The Company performs the calculations using quarterly claims development for all portfolios.

Risk adjustment for non-financial risk

The Company adjusts the estimate of the present value of the future cash flows to reflect the compensation that the Company requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk. The purpose of the risk adjustment for non-financial risk is to measure the effect of uncertainty in the cash flows that arise from reinsurance contracts, other than uncertainty arising from financial risk. The risk adjustment for non-financial risk relates to risk arising from insurance contracts other than financial risk. Financial risk is included in the estimates of the future cash flows, or the discount rate used to adjust the cash flows. The risks covered by the risk adjustment for non-financial risk are insurance risk and other non-financial risks such as lapse risk and expense risk.

The risk adjustment was calculated at the line of business level and then allocated down to each group of contracts in accordance with the inherent uncertainty within the future cash flows for that group. The Cost of Capital (CoC) approach was used to derive the overall risk adjustment for non-financial risk. In the CoC method, the Company uses Insurance Authority’s capital model to calculate the required capital, and then applied a 6% per annum cost of capital to obtain the line of business level risk adjustment. The resulting amount of the calculated risk adjustment corresponds to the confidence level 66%.

Discount rates

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 insurance 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 was used to derive the discount rate for the cash flows. 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. This methodology is followed for all currencies with the exception of SAR and AED for which the curves are based on the USD adjusted with the country risk premium.
• illiquidity premium will be calculated and applied to all the yield curves and it is assumed 0.5% based on the illiquidity premium using EIOPA's volatility adjustment.

(ii) Contractual service margin

The CSM of a group of contracts is recognized in profit or loss to reflect services provided in each year based on the number of coverage units provided in the year, which is determined by considering for each contract the quantity of the benefits provided and its expected coverage period. The coverage units are reviewed and updated at each reporting date.

(iii) Measurement of the expected credit loss allowance

Assessment of whether credit risk on the financial asset has increased significantly since initial recognition and incorporation of forward-looking information in the measurement of Expected Credit Losses (“ECL”) requires the use of complex models and significant assumptions about future economic conditions and credit behavior. The Company considers a financial asset to be in default when the borrower is unlikely to pay its credit obligations to the Company in full, without recourse by the Company to actions such as realising security (if any is held).

A number of factors are also considered in applying the accounting requirements for measuring ECL, such as:

• determining the criteria for significant increase in credit risk;
• determining the criteria and definition of default;
• choosing appropriate models and assumptions for the measurement of ECL; and
• establishing groups of similar financial assets for the purposes of measuring ECL.

When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and informed credit assessment and including forward-looking information.

In the process of applying the Company’s accounting policies, Management has made the following judgments, apart from those involving estimations, which have the most significant effect in the amounts recognized in the Financial Statements.

(i) Classification of investments

Management decides on acquisition of an investment whether it should be classified as investments carried at fair value or amortized cost on the basis of both:

• its business model for managing the financial assets; and
• the contractual cash flow characteristics of the financial asset.

For equity investments carried at fair value, Management decides whether it should be classified as financial assets carried at fair value through other comprehensive income (FVOCI) or fair value through statement of income (FVIS). Investments in equity instruments are classified and measured at FVIS except if the equity investment is not held for trading and is designated by the Company at FVOCI.

Further, even if the asset meets the amortized cost criteria the Company may choose at initial recognition to designate the financial asset as at FVIS if doing so eliminates or significantly reduces an accounting mismatch. For debt securities acquired to match its business model of development of the line of business, the Company classifies these investments as financial assets at fair value through other comprehensive income.

(ii) Level of aggregation

Judgment is involved in the identification of portfolios of contracts, as required by paragraph 14 of IFRS 17 (that is, having similar risks and being managed together).

Aggregation of insurance contracts issued on initial recognition into groups of onerous contracts, groups of contracts with no significant possibility of becoming onerous, and groups of other contracts. Similar grouping assessment is required for retrocession contracts held. Areas of potential judgments include:

• the determination of contract sets within portfolios and whether the Company has reasonable and supportable information to conclude that all contracts within a set would fall into the same group; and
• judgments might be applied on initial recognition to distinguish between non-onerous contracts (those having no significant possibility of becoming onerous) and other contracts.

For contracts measured under the GMM, the assessment of the likelihood of adverse changes in assumptions that might result in contracts becoming onerous is an area of potential judgment.

(iii) Recognition and derecognition

When contracts are modified, judgment might be applied to establish if the modification meets the criteria for recognition. In particular, after the modification, judgment is applied to determine whether:

• significant insurance risk still exists;
• there are elements that are to be distinct from the contract;
• contract boundaries have changed; and
• the contract would have to be included in a different group, subject to aggregation requirements.

(iv) Contract boundary

The concept of a contract boundary is used to determine which future cash flows should be considered in the measurement of a contract within the scope of IFRS 17. Judgments might be involved to determine when the Company is capable of repricing the entire contract to reflect the reassessed risks, when insurers are obliged to pay premiums, and when premiums reflect risks beyond the coverage period.

Where features such as options and guarantees are included in the reinsurance contracts, judgment might be required to assess the entity’s practical ability to reprice the entire contract to determine if related cash flows are within the contract boundary.

An entity can use judgment to determine which cash flows within the boundary of reinsurance contracts are those that relate directly to the fulfillment of the contracts.

The determination of what constitutes an investment component might be an area of judgment significantly affecting amounts of recognized insurance revenue and insurance service expenses, because investment components should be excluded from those.

(v) Revenue recognition

Reinsurance revenue and retrocession expenses – methods and assumptions used in the determination of the contractual service margin (CSM) to be recognized in statement of income for the reinsurance contract services provided or retrocession services received in the period.

Areas of potential judgment are:

• the determination of the expected coverage period over which the CSM is allocated into statement of income for the services provided or received, that is, the determination of expected reinsurance coverage period;
• the determination of the coverage units provided or received in the current period and expected to be provided in future periods, including the determination of the relative weighting of the benefits provided by insurance coverage; and
• factoring in the time value of money when determining the equal allocation of the CSM to the coverage units provided or received.

An entity might apply judgment to determine whether the treatment of certain consequential insurance risks within Liability for Remaining Coverage (LRC) or Liability for Incurred Claims (LIC) reflects the most useful information about the reinsurance services provided by the entity to the insurer.

For contracts measured under the General Measurement Model (GMM) in which the Company has discretion over the cash flows to be paid to the insurers, judgment might be involved in the determination of what the Company considers its commitment on initial recognition of such contracts. Further, judgment might be required to distinguish subsequent changes in the fulfillment cash flows (FCF) resulting from changes in the Group’s commitment and those resulting from changes in assumptions that relate to the financial risk on that commitment.

(vi) Determination of whether control exist over associate

The Company has investment in an associate which is not “controlled” by the Company and therefore, the associate is not consolidated in these Financial Statements. Determining whether the Company controls the associate usually focuses on the assessment whether the Company is exposed to, or has the right to, variable returns from its involvement with the associate and has the ability to affect those returns through its power over the investee. The Company reassesses whether it has control if there are changes to one or more of the elements of control.

Bank balances and cash includes call account balance of SR 0.2 million (31 December 2022: SR 2.3 million, 1 January 2022: SR 1.4 million). Cash at banks are placed with counterparties which have credit ratings of BBB+ and above under Standard and Poor's and Moody’s ratings methodology. Cash and bank balances are stated net of expected credit losses amounting to SR 702 (31 December 2022: SR 52, 1 January 2022: NIL).

i. Financial investments held by the Company consist of the following as at:

Time deposits are placed with banks which have credit ratings of BBB and above. Such deposits earn special commission at an average effective commission rate of 5.21% (2022: 3.72%) per annum and have average term of four years
(2022: four years).

*At 31 December 2022 and 1 January 2022, debt securities classified under financial investments designated at fair value through income statement comprised Funds at Lloyd’s (FAL) amounting to SR 150,558,366 and SR 171,976,458 respectively. During the period, these investments have been liquidated and placed with Custodian from Lloyd’s earning average interest ranging from 4.33% to 4.82%. These funds serve as collateral for participation in Lloyd’s Syndicates for the underwriting years 2021, 2022, and 2023. Due to the restricted nature of these funds, they have been classified under prepaid expenses, deposits, and other assets as at 31 December 2023.

ii. Movement in expected credit losses for financial investments held at amortized cost is as follows:

The value of investments classified at Stage 1 and Stage 3 amounts to SR 1,128,895,377 and SR 1,477,524 respectively
(31 December 2022: Stage 1 – SR 1,031,694,663 Stage 3 – SR 1,374,496).

iii. The movement of financial investments is as follows:

A. Movements in reinsurance and retrocession contract balances

The following reconciliations show how the net carrying amounts of reinsurance and retrocession contracts in each segment changed during the year as a result of cash flows and amounts recognised in the statement of income.

For each segment, the Company presents a table that separately analyses movements in the liabilities for remaining coverage and movements in the liabilities for incurred claims and reconciles these movements to the line items in the statement of income.

A second reconciliation is presented, which separately analyses changes in the estimates of the present value of future cash flows, the risk adjustment for non-financial risk and the CSM.

i. Property and Casualty

Reinsurance contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

Retrocession contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

ii. Motor

Reinsurance contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

Retrocession contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

iii. Protection

Reinsurance contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

Retrocession contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

iv. Medical

Reinsurance contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

v. Inherent Defects Insurance

Reinsurance contracts

Analysis by remaining coverage and incurred claims

Analysis by measurement component

Retrocession contracts

Analysis by remaining coverage and incurred claims