1. General - Legal status and principal activities

Al Sagr Cooperative Insurance Company (the “Company") is a Saudi Joint Stock Company established in Dammam, Kingdom of Saudi Arabia and incorporated on 26 Muharram 1429H (corresponding to February 4, 2008) under commercial registration number 1010243765 which was later amended to 2051036871 dated March 30, 2008 (corresponding to 22 Rabi' I 1429H). The Company has been licensed to conduct cooperative insurance business in the Kingdom of Saudi Arabia under cooperative principles in accordance with Royal Decree number 60/M dated October 11, 2006 (corresponding to 18 Ramadan 1427H), pursuant to Council of Ministers resolution number 233 dated October 9, 2006 (corresponding to 16 Ramadan 1427H). The Company’s registered address is P.O. Box 3501, Dammam 32241, Kingdom of Saudi Arabia.

The purpose of the Company is to transact in cooperative insurance and reinsurance operations and all related activities in accordance with the Law on Supervision of Cooperative Insurance Companies in the Kingdom of Saudi Arabia (the “Law") and its implementing regulations. The Company obtained license from the Saudi Arabian Monetary Authority (“SAMA”) to practice general and health insurance and reinsurance business in the Kingdom of Saudi Arabia vide license number TMN/13/20083, dated March 31, 2008 (corresponding to 23 Rabi' I 1429H). The Company commenced insurance operations on January 1, 2009 (corresponding to 4 Muharram 1430H). On June 28, 2015 (corresponding to 11 Ramadan 1436H) the Company received approval from SAMA to cancel its reinsurance license.

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

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 three-month period and year ended March 31, 2019 and December 31, 2018, respectively, were prepared in accordance with 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).

(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 three-month period and year ended March 31, 2019 and December 31, 2018, respectively, were prepared in accordance with 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 insurance companies in the Kingdom of Saudi Arabia to account for 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 SOCPA (collectively referred to as “IFRS as endorsed in the Kingdom of Saudi Arabia”).

Accordingly, the Company changed its accounting treatment for zakat 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 (e) 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 which are presented on pages 38 to 49 of the 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 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.

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 statements for the year ended December 31, 2018 except as explained below:

IFRS 16, ‘Leases’

The Company adopted IFRS 16 from January 1, 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 asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. 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 asset. 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.

The Company elected to apply the standard to contracts that were not previously identified as containing a lease applying IAS 17 and IFRIC 4. The Company elected to use the exemptions proposed by the standard on lease contracts for which the lease terms end within 12 months as of the date of initial application. Management of the Company has reviewed various leasing and non-leasing arrangements in light of the new lease accounting guidance in IFRS 16. Based on the impact assessment performed by management, the identified impact from the adoption of IFRS 16 was not material and, hence, no adjustments were recognized by management on the date of transition i.e. January 1, 2019.

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 has 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.

(b) Critical accounting judgments, estimates and assumptions

The preparation of interim condensed 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 this 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 statements 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.

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 and goodwill

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.

The recoverable amount of goodwill is estimated based on the present value of the future cash flows expected to be derived from the asset. In case, the recoverable amount is less than carrying value, the difference is charged to statement of income as impairment loss.

(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 of employee benefit obligations, financial asset at fair value through profit or loss and available-for-sale investments. 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 insurers’ balances receivable - net, prepaid expenses and other assets, accrued income on statutory deposit, accrued and other liabilities, reinsurers’ balances payable, due to a related party, zakat payable, accrued commission income payable to SAMA, dividend payable and accounts payable. The following balances would generally be classified as non-current: long-term deposits, deferred policy acquisition costs, investments, property and equipment, intangible assets, goodwill, statutory deposit, unearned premiums, unearned reinsurance commission, outstanding claims, claims incurred but not reported (“IBNR”), additional premium reserves, other technical reserves, reinsurers’ share of unearned premiums, outstanding claims and claims incurred but not reported, employee benefit obligations and surplus distribution payable.

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 does not include all of the information required for the annual financial statements and should be read in conjunction with the annual financial statements as of and for the year ended December 31, 2018.

(b) Functional and presentation currency

3. Significant accounting policies

8. Investments

a) Investments are classified as follows:

9.

b) Category wise investment analysis is as follows:

c) The analysis of the composition of investments is as follows:

Management has performed a review of the available-for-sale investments to assess whether impairment has occurred in the value of these investments. Based on specific information, management is of the view that no impairment is required in respect of the available-for-sale investments.

All investments are denominated in Saudi Riyals and United States Dollars. As at the reporting date investments amounting to Saudi Riyals 33.04 million (December 31, 2018: Saudi Riyals 38.30 million) are denominated in United States Dollars.

d) Movement in financial assets at fair value through profit or loss is as follows:

9.

e) Movement in available-for-sale investments is as follows:

f) Held-to-maturity investments are as follows:

Insurance operations

Shareholders’ operations

9.

g) Geographical concentration:

The maximum exposure to credit and price risk for financial assets at fair value through profit or loss, available-for-sale and held-to-maturity investments at the reporting date by geographic region is as follows:

5. Premiums and insurers’ balances receivable - net

Movement in the allowance for doubtful debts is as follows:

5. Cash and cash equivalents

Cash at banks is placed with counterparties that have investment grade credit ratings. As at June 30, 2019, time deposits are placed with local banks denominated in Saudi Riyals with original maturities of less than three months from the date of placement and earned commission income at an average rate of 2.90% to 3.35% per annum (December 31, 2018: 1.70% to 3.37% per annum).

10. Statutory deposit

8.2 Movement in net unearned premiums

Movement in net unearned premiums comprise of the following:

8.1 Net outstanding claims and reserves

Net outstanding claims and reserves comprise of the following:

10. Zakat

a) Zakat charge for the period

The charge for the period for zakat is as follows:

b) Zakat base

The principal elements of zakat base are as follows:

The difference between the financial results and adjusted net income is mainly due to adjustments for certain costs based on relevant regulations.

c) Movement in the provision for zakat during the period / year