1. General information - Legal status and principal activities

Gulf Union Cooperative Insurance Company (the “Company”) is a Saudi joint stock company registered on 13 Sha’aban, 1428H (August 26, 2007) under Commercial Registration (“CR”) number 2050056228. The Company’s principal place of business is in Dammam, Kingdom of Saudi Arabia.

The purpose of the Company is to transact cooperative insurance operations and all related activities. Its principal lines of business include medical, motor, marine, fire and engineering insurance.

On Jamad Al-Thani 2, 1424H , corresponding to (July 31, 2003G), the Law on the Supervision of Cooperative Insurance Companies (“Insurance Law”) was promulgated by Royal Decree Number (M/32). On Shaban 29, 1428 H, corresponding to September 11, 2007, the Saudi Arabian Monetary Authority (“SAMA”), as the principal authority responsible for the application and administration of the Insurance Law and its Implementing Regulations, granted the Company a license to transact insurance activities in the Kingdom of Saudi Arabia.

The Company received from SAMA on 27 Jumada II, 1435H (April 27, 2014), the approval of its request to change its license of transacting insurance and reinsurance business to insurance business.

In accordance with the requirements of Implementing Regulation for Co-operative Insurance Companies (the “Regulations”) issued by SAMA and as per by-laws of the Company, shareholders of the Company are to receive 90% of the annual surplus from insurance operations and the policyholders are to receive the remaining 10%. Any deficit arising from insurance operations is transferred to the shareholder’s operations in full.

The Company operates through three main branches and various point of sale stores located in the Kingdom of Saudi Arabia. Following are the commercial registration numbers of three main branches:

Proposed merger

Pursuant to the approval of Board of Directors and the Saudi Arabian Monetary Authority (“SAMA”), in 2018 the shareholders of the Company approved the proposed merger with Al Ahlia Cooperative Insurance Company (“Al Ahlia”) in an Extra Ordinary General Meeting (“EGM”) held on 22 Jumada II, 1440H (corresponding to January 28, 2019). However, in an EGM held on 13 Jumada II, 1440H (corresponding to February 18, 2019), the shareholders of Al Ahlia Cooperative Insurance Company opposed and rejected the merger and the merger was called off.

Shareholding percentage

The shareholding percentage of the Company at June 30, 2019 and December 31, 2018 was as follows:

1. General information - Legal status and principal activities

Gulf Union Cooperative Insurance Company (the “Company”) is a Saudi joint stock company registered on 13 Sha’aban, 1428H (August 26, 2007) under Commercial Registration (“CR”) number 2050056228. The Company’s principal place of business is in Dammam, Kingdom of Saudi Arabia.

The purpose of the Company is to transact cooperative insurance operations and all related activities. Its principal lines of business include medical, motor, marine, fire and engineering insurance.

On Jamad Al-Thani 2, 1424H , corresponding to (July 31, 2003G), the Law on the Supervision of Cooperative Insurance Companies (“Insurance Law”) was promulgated by Royal Decree Number (M/32). On Shaban 29, 1428 H, corresponding to September 11, 2007, the Saudi Arabian Monetary Authority (“SAMA”), as the principal authority responsible for the application and administration of the Insurance Law and its Implementing Regulations, granted the Company a license to transact insurance activities in the Kingdom of Saudi Arabia.

The Company received from SAMA on 27 Jumada II, 1435H (April 27, 2014), the approval of its request to change its license of transacting insurance and reinsurance business to insurance business.

In accordance with the requirements of Implementing Regulation for Co-operative Insurance Companies (the “Regulations”) issued by SAMA and as per by-laws of the Company, shareholders of the Company are to receive 90% of the annual surplus from insurance operations and the policyholders are to receive the remaining 10%. Any deficit arising from insurance operations is transferred to the shareholder’s operations in full.

The Company operates through three main branches and various point of sale stores located in the Kingdom of Saudi Arabia. Following are the commercial registration numbers of three main branches:

Proposed merger

Pursuant to the approval of Board of Directors and the Saudi Arabian Monetary Authority (“SAMA”), in 2018 the shareholders of the Company approved the proposed merger with Al Ahlia Cooperative Insurance Company (“Al Ahlia”) in an Extra Ordinary General Meeting (“EGM”) held on 22 Jumada II, 1440H (corresponding to January 28, 2019). However, in an EGM held on 13 Jumada II, 1440H (corresponding to February 18, 2019), the shareholders of Al Ahlia Cooperative Insurance Company opposed and rejected the merger and the merger was called off.

Shareholding percentage

The shareholding percentage of the Company at June 30, 2019 and December 31, 2018 was as follows:

1. Basis of preparation

(a) Statement of compliance

The interim condensed financial information of the Company has been prepared in accordance with ‘International Accounting Standard 34 - Interim Financial Reporting ("IAS 34") as endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (“SOCPA”).

The interim condensed financial information and financial statements of the Company as at and for the period and year ended March 31, 2019 and December 31, 2018, respectively, were prepared in compliance with the IAS 34 and the International Financial Reporting Standards (“IFRS”), respectively, as modified by SAMA for the accounting of zakat and income tax (relating to the application of IAS 12 - “Income Taxes” and IFRIC 21 - “Levies” so far as these relate to zakat and income tax).

During July 2019, SAMA instructed the insurance companies in the Kingdom of Saudi Arabia to account for the zakat and income taxes in the interim condensed statement of income. This aligns with the IFRS and its interpretations as issued by the International Accounting Standards Board (“IASB”) and as endorsed in the Kingdom of Saudi Arabia and with the other standards and pronouncements that are issued by the SOCPA (collectively referred to as “IFRS as endorsed in the Kingdom of Saudi Arabia”).

Accordingly, the Company changed its accounting treatment for zakat and income tax by retrospectively adjusting the impact in line with International Accounting Standard 8 - Accounting Policies, Changes in Accounting Estimates and Errors (as disclosed in Note 3.3 and the effects of this change are disclosed in Note 13 (a) to the interim condensed financial information).

The interim condensed statements of financial position, income, comprehensive income and cash flows of the insurance operations and shareholders operations are presented on pages 40 to 50 of the interim condensed financial information have been provided as supplementary financial information and to comply with the requirements of the guidelines issued by SAMA implementing regulations. SAMA implementing regulations requires the clear segregation of the assets, liabilities, income and expenses of the insurance operations and the shareholders operations. Accordingly, the interim condensed statements of financial position, income, comprehensive income and cash flows prepared for the insurance operations and shareholders’ operations as referred to above, reflect only the assets, liabilities, income, expenses and comprehensive gains or losses of the respective operations.

In preparing the Company’s financial information in compliance with IFRS as endorsed in the Kingdom of Saudi Arabia, the balances and transactions of the insurance operations are amalgamated and combined with those of the shareholders’ operations. Interoperation balances, transactions and unrealized gains or losses, if any, are eliminated in full during amalgamation. The accounting policies adopted for the insurance operations and shareholders’ operations are uniform for like transactions and events in similar circumstances.

As required by the Saudi Arabian Insurance Regulations, the Company maintains separate books of accounts for insurance operations and shareholders’ operations and presents the financial information accordingly. Assets, liabilities, revenues and expenses clearly attributable to either activity are recorded in the respective accounts. The basis of allocation of expenses from joint operations is determined and approved by management of the Company and the Board of Directors.

2. Basis of preparation (continued)

(b) Basis of measurement

The interim condensed financial information is prepared under the going concern basis and the historical cost convention, except for the measurement at fair value of available-for-sale investments and employee benefit obligations. The Company’s interim condensed 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, short term deposits, premiums and reinsurers’ receivable - net, premiums receivable - related parties, net, deferred excess of loss premiums, due from a related party, prepaid expenses and other assets, accrued income on statutory deposit, accounts payable, accrued and other liabilities, reinsurers' balances payable, zakat and income tax, surplus distribution payable. The following balances would generally be classified as non-current: reinsurers’ share of unearned premiums, reinsurers’ share of outstanding claims, reinsurers’ share of claims incurred but not reported, deferred policy acquisition costs, investments, long term deposits, property and equipment, right-of-use assets, intangible assets, statutory deposit, unearned premiums, unearned reinsurance commission, outstanding claims, claims incurred but not reported, additional premium reserves, other technical reserves, lease Liabilities, employee benefit obligations, accrued commission income payable to SAMA.

The inclusion of separate information of the insurance operations with the interim condensed financial information of the Company in the interim condensed statements of financial position, income, comprehensive income and cash flows as well as certain relevant notes to the financial information represents additional supplementary information as required by the Implementing Regulations.

The interim condensed financial information do not include all of the information required for full annual financial information and should be read in conjunction with the annual financial information as of and for the year ended December 31, 2018.

(c) Functional and presentation currency

This interim condensed financial information is expressed in Saudi Arabian Riyals (“Saudi Riyals”) which is the functional and presentation currency of the Company.

(d) Critical accounting judgments, estimates and assumptions

The preparation of interim financial information requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these interim condensed financial information, the significant judgments made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty including the risk management policies were the same as those that applied to the annual financial information as at and for the year ended December 31, 2018.

Following are the accounting judgments and estimates that are critical in preparation of this interim condensed financial information:

(i) Liability arising from claims under insurance contracts

Considerable judgement by management is required in the estimation of amounts due to policyholders arising from claims made under insurance policies. Such estimates are necessarily based on significant assumptions about several factors involving varying, and possible significant, degrees of judgement and uncertainty and actual results may differ from management’s estimates resulting in future changes in estimated liabilities.

2 Basis of preparation (continued)

(d) Critical accounting judgments, estimates and assumptions (continued)

(i) Liability arising from claims under insurance contracts (continued)

In particular, estimates have to be made both for the expected ultimate cost of claims reported at the date of statement of financial position and for the expected ultimate cost of IBNR claims at the reporting date. The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using past claim settlement trends to predict future claims settlement trends.

Claims requiring court or arbitration decisions, if any, are estimated individually. Independent loss adjusters normally estimate property claims. Management reviews its provisions for claims incurred and claims incurred but not reported, on a quarterly basis.

The Company is exposed to disputes with, and possibility of defaults by, its reinsurers. The Company monitors on a quarterly basis the evolution of disputes with and the strength of its reinsurers.

(ii) Impairment of premiums and insurance balances receivable

An estimate of the uncollectible amount of premiums receivable, if any, is made when collection of the full amount of the receivables as per the original terms of the insurance policy is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and an allowance applied according to the length of time past due and Company’s past experience.

(e) Seasonality of operations

There are no seasonal changes that may affect insurance operations of the Company.

3. Significant accounting policies

The accounting policies, estimates and assumptions used in the preparation of this interim condensed financial information are consistent with those used in the preparation of the annual financial information for the year ended December 31, 2018 except as explained below:

3.1 New and amended standards adopted by the Company

- IFRS 16, ‘Leases’

The Company adopted IFRS 16 from 1 January 2019 using the simplified transition approach. IFRS 16 was issued in January 2016 and it replaces IAS 17 ‘Leases’, IFRIC 4 ‘Determining whether an Arrangement contains a Lease’, SIC - 15 ‘Operating Leases - Incentives’ and SIC - 27 ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees - leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e. leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e. the right-of-use assets). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use assets. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use assets. Lessor accounting under IFRS 16 is substantially unchanged from previous guidance under IAS 17. Lessors will continue to classify all leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.

3. Significant accounting policies (continued)

3.2 New standards, amendments and interpretations not yet applied by the Company

- IFRS 9, ‘Financial Instruments’ (including amendments to IFRS 4, Insurance Contracts)

In July 2014, the IASB published IFRS 9 Financial Instruments which will replace IAS 39 Financial Instruments: Recognition and Measurement. The standard incorporates new classification and measurements requirements for financial assets, the introduction of an expected credit loss impairment model which will replace the incurred loss model of IAS 39, and new hedge accounting requirements. Under IFRS 9, all financial assets will be measured at either amortized cost or fair value through profit or loss (“FVTPL”). The basis of classification will depend on the business model and the contractual cash flow characteristics of the financial assets. The standard retains most of IAS 39’s requirements for financial liabilities except for those designated at FVTPL whereby that part of the fair value changes attributable to own credit is to be recognized in the statement of comprehensive income instead of the statement of income. The hedge accounting requirements are more closely aligned with

risk management practices and follow a more principle based approach.

In September 2016, the IASB published amendments to IFRS 4 Insurance Contracts that address the accounting consequences of the application of IFRS 9 to insurers prior to the publication of the forthcoming accounting standard for insurance contracts. The amendments introduce two options for insurers: the deferral approach and the overlay approach. The deferral approach provides an entity, if eligible, with a temporary exemption from applying IFRS 9 until the earlier of the effective date of a new insurance contract standard or 2022. The overlay approach allows an entity to remove from profit or loss the effects of some of the accounting mismatches that may occur before the new insurance contracts standard is applied.

The Company is eligible and have chosen to apply the deferral approach under the amendments to IFRS 4. The impact of the adoption of IFRS 9 on the Company’s financial information will, to a large extent, have to take into account the interaction with the forthcoming insurance contracts standard. As such, it is not possible to fully assess the effect of the adoption of IFRS 9.

- IFRS 17, ‘Insurance Contracts’

Applicable for the period beginning on or after January 1, 2022, and will supersede IFRS 4 “Insurance Contracts”. Earlier adoption permitted if both IFRS 15 'Revenue from Contracts with Customers' and IFRS 9 'Financial Instruments' have also been applied. The Company expects a material impact on measurement and disclosure of insurance and reinsurance that will affect both the statement of income and the statement of financial position. The Company has decided not to early adopt this new standard.

3. Significant accounting policies (continued)

3.3 Change in accounting policies

3.3.1 Change in accounting policy for zakat and income tax

As mentioned in Note 2 (a) above, the basis of preparation has been changed for the three-month and six-month periods ended June 30, 2019 based on the latest instructions from SAMA received during July 2019. Previously, zakat and income tax were recognized in the statement of changes in equity as per SAMA circular number 381000074519 dated April 11, 2017. As per SAMA instructions received during July 2019, the zakat and income tax shall be recognized in the interim condensed statement of income. The Company has accounted for this change in the accounting for zakat and income tax retrospectively (the effects of the above change are disclosed in Note 13 to the interim condensed financial information). The change has resulted in a reduction of reported income of the Company for the three-month and six-month periods ended June 30, 2018 by Saudi Riyals 0.00 million and Saudi Riyals 2.4 million, respectively. The change had no impact on the interim condensed statement of cash flows for the six-month period ended June 30, 2018.

a) Zakat

The Company is subject to zakat in accordance with the regulations of the General Authority of Zakat and Income Tax (“GAZT”). Zakat expense is charged to the profit or loss. Zakat is not accounted for as income tax and as such no deferred tax is calculated relating to zakat.

b) Income tax

The income tax expense or credit for the period is the tax payable on the current period’s taxable income, based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses, and is charged to the interim condensed statement of income.

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 the Company operates and generates 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.

c) Deferred tax

Deferred income tax is recognized using the liability method on temporary differences arising between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for the taxation purposes. The amount of deferred tax recognized is based on the expected manner of realization or settlement of the carrying amounts of assets and liabilities using the tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and the tax credits can be utilized. Deferred tax asset is reduced to the extent that it is no longer probable that the related tax benefits will be realized.

Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity.

2. Significant accounting policies (continued)

3.3 Change in accounting policies (continued)

3.3.2 Right-of-use assets and lease liabilities

Until 2018, all leases of the Company were assessed to be operating leases and payments made under such leases were charged to profit or loss on a straight-line basis over the period of the lease.

Starting 1 January 2019, the Company assesses whether a contract is or contains a lease, at inception of a contract. The Company recognises a RoU asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of twelve months or less) and leases of low value assets. For these leases, the Company recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

fixed lease payments, less any lease incentives;

variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;

the amount expected to be payable by the lessee under residual value guarantees;

the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and

payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.

The lease liability is presented as a separate line in the condensed interim statement of financial position.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest rate method) and by reducing the carrying amount to reflect the lease payments made.

The Company remeasures the lease liability (and makes a corresponding adjustment to the related RoU asset) whenever:

the lease term has changed or there is a change in the assessment of exercise of a purchase option,

in which case the lease liability is remeasured by discounting the revised lease payments using a

revised discount rate;

the lease payments change due to changes in an index or rate or a change in expected payment under

a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised

lease payments using the initial discount rate (unless the lease payments change is due to a change

in a floating interest rate, in which case a revised discount rate is used); and

a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The RoU assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and accumulated impairment losses, if any.

Whenever the Company incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37 “Provisions, contingent liabilities and contingent assets”. The costs are included in the related RoU asset, unless those costs are incurred to produce inventories.

3. Significant accounting policies (continued)

3.3 Change in accounting policies (continued)

3.3.2 Right-of-use assets and lease liabilities (continued)

RoU assets are depreciated over the shorter period of lease term or the economic useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the RoU asset reflects that the Company expects to exercise a purchase option, the related RoU asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The RoU assets are presented as a separate line in the condensed interim statement of financial position.

The Company applies IAS 36 “Impairment of Assets” to determine whether a RoU asset is impaired and accounts for any identified impairment loss.

RoU assets

The RoU assets and corresponding lease liabilities relate to the following type of assets:

iv) Reconciliation of operating lease commitments disclosed as at 31 December 2018 and lease

liability recognized as at 1 January 2019 is as follows:

3.4 Risk management

The Company’s activities expose it to variety of financial risks: market risk (including commission rate risk, currency risk, fair value interest rate risk and price risk), credit risk and liquidity risk.

The interim condensed financial information does not include all financial risk management information and disclosures required in the annual financial statements and therefore should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2018. There have been no changes in the risk management department or in any risk management policies since the year end.

7.1 Net outstanding claims and reserves

Net outstanding claims and reserves comprise of the following:

7.2 Movement in net unearned premiums

Movement in unearned premiums comprise of the following:

4. Short-term and long-term deposits

Short-term deposits are placed with local banks and financial institutions with an original maturity of more than three months but less than or equal to twelve months from the date of placement. These deposits earn commission income at an average rate of 2.77% to 5.24% (December 31, 2018: 2.30% to 4.50%) per annum.

Long-term deposits represent deposits with maturity of more than one year from the date of placement and are placed with banks carrying commission income at an average rate of 2.85% to 2.95% (December 31, 2018: 2.70% to 2.90%) per annum.

10. Fair value of financial instruments

The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments:

- Level 1 - quoted (unadjusted) market prices in active markets for identical assets or liabilities;

- Level 2 - valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; and

- Level 3 - valuation techniques for which the lowest level input that is significant to the fair value

measurement is unobservable.

The following table shows the fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy for financial instruments measured at fair value. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation to fair value.

a. Carrying amounts and fair value

10. Fair value of financial instruments (continued)

Level 3 investments comprise of equity investment of 192,308 shares of Najm for Insurance Services (Najm) (2018: 192,308 shares), where cost approximates their fair value.

During the period, there have been no transfers between level 1, level 2 and level 3.

4. Premiums and reinsurers’ receivable - net

Receivables comprise amounts due from the following: