Don’t just satisfy your customers, engage them ”...

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“ DON’T JUST SATISFY YOUR CUSTOMERS, ENGAGE THEM ” Annual report 2011 LEBANON | KUWAIT | BAHRAIN | QATAR | UAE OMAN | SAUDI ARABIA | SYRIA | JORDAN YOU ARE ON SOLID GROUNDS

Transcript of Don’t just satisfy your customers, engage them ”...

“ Don’t just satisfy your customers,engage them ”

annual report 2011LeBanon | KuWait | Bahrain | Qatar | uaeoman | sauDi araBia | syria | jorDan

YOU ARE ON SOLID GROUNDS

ARABIA’S BRANCH OFFICES ARABIA’S VISIONARABIA’S MISSIONARABIA’S GOALSSUBSIDIARIES AND AFFILIATED COMPANIESBOARD OF DIRECTORS AS OF 31/12/2011EXECUTIVE GENERAL MANAGEMENT (HEAD OFFICE)

CONSOLIDATED FINANCIAL STATEMENTS AND AUDITOR’S REPORT

3 OTHER

4 FINANCIAL INDICATORS (GROUP EXCLUDING AIC LIFE)

INVESTMENT PORTFOLIO HIGHLIGHTS

B LIFE DIVISION

1 LIFE ASSURANCE OPERATIONS2 INVESTMENT OPERATIONS

3-1 SHAREHOLDER’S EQUITY & DIVIDENDS DISTRIBUTION3-2 ACCOUNTS RECEIVABLE - CLIENTS3-3 GENERAL AND ADMINISTRATIVE EXPENSES3-4 HUMAN RESOURCES AND ADMINISTRATION DIVISION3-5 OPERATIONS DIVISION

1 INSURANCE OPERATIONS

2 INVESTEMENT OPERATIONS

1-1 GLOBAL OVERVIEW CONSOLIDATED OPERATIONS OF ARABIA INSURANCE GROUP1-2 MAJOR ACHIEVEMENTS CONSOLIDATED OPERATIONS OF ARABIA INSURANCE GROUP

2-1 INVESTMENT PORTFOLIO HIGHLIGHTS

Marine DepartmentMotor DepartmentProperty DepartmentGeneral Accidents DepartmentMedical DepartmentWorkmen’s Compensation DepartmentReinsurance Inwards

I EXECUTIVE SUMMARY II OPERATIONS OVERVIEW

A GENERAL INSURANCE DEPARTMENTS (NON LIFE)

REPORT OF THE BOARD OF DIRECTORS ON THE 67THFINANCIAL YEAR OF THE COMPANY’S OPERATIONS

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ANNUAL REPORT 2011Report of the Board of Directors and Statements of Accounts for the Financial year ending on 31/12/2011 submitted to the 67th Annual General Assembly of Shareholders . ESTABLISHED 1944

COUNTRY BRANCH LOCAL SPONSOR MANAGEMENT

Lebanon

Bahrain

Kuwait

Qatar

Sultanate of Oman

United Arab Emirates

Kuwait

Doha

Muscat

Salalah

DubaiSharjahAbu Dhabi Al-Ain

Claude Jabbour / Firas Shughry

Manama Mr. Mohammad Jalal

Mr. Mohammad Abdul RahmanAl Bahar

Ali Bin AliEstablishment

M/S. Moosa Abdul Rahman Hassan & Co

Mr. Juma Al MajidSheikh Khaled Al KassimiMr. Ahmed Bin GhanoumMr. Saeed Sultan Salmeen Bin Harmal Al-Dhahiri

Fadi Said Chammas - Country ManagerMaurice Shaheen / Ismat Bou DarghamBassam Ahmad Siam

Muhieddine KhartabilElham Lahoud / Antoine SfeirJihad Salamin /Hala AjharMohammad Kaddoura /Samer Halimeh

Suleiman Sukkar / Mohammad Othman

Fadi Al-Khatib / Alain Georr

Ain el Mreisseh TripoliZalkaSaidaChtaura

Ramez Hayeck / Rabih SaadIsmail El RifiAlexandre El Feghali / Joseph El YammouniToufic Derian Deeb Kazan

Sheikh Said Al Shanfari

HEAD OFFICE : ARABIA HOUSE Phoenicia street - Beirut - Lebanon / TEL. 961 - 1 - 363610 /363611 & 961 - 3 - 314350 / 314351 TELEFAX 961 - 1 - 365139 /363659 / P.O.BOX 11 - 2172 Beirut - Lebanon / E-MAIL [email protected] WEBSITE www.arabiainsurance.com

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BRANCH OFFICES

Annual Report 2011

ARABIA’S VISIONTo be the leading “customer centric” Arab Insurer.

ARABIA’S MISSIONTo provide accessible/simple/effective & client friendly products and services that respond to the evolving needs of our customers.

ARABIA’S GoalsEnhance Shareholder value.

Emphasize excellence in our relations with our stakeholders, while exercising good corporate governance/ enhancing our internal controls/ simplifying processes/and upholding professional ethics, integrity and social responsibility.

Respond to our customers’ needs by offering them transparent quality products, good investment opportunities, outstanding personalized services, dedicated personnel, and an elaborate, easily accessible, distribution & claims’ handling networks.

Achieve a fair return on equity, benchmarked with local markets' yields.

Sustain a culture of leadership, trust, open communication, transparency, efficiency, effectiveness and innovation, thus adding further value to our stakeholders.

Develop / Invest in /Empower our human capital to take on the challenges of a fast changing and growing industry, capitalizing on teamwork spirit and a "customer centric" culture.

Enhance our corporate brand by using an advanced & holistic marketing approach.

Play a positive role in the countries of our operations through local CSR activities.

Use state of the art technology.

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Annual Report 2011

SUBSIDIARIES & AFFILIATED COMPANIES

ARABIA s.a.l. Holding CompanyHEAD OFFICE Arabia House Building, Phoenicia St.TEL. 961 - 1 - 363610/1 & 961 - 3 - 314350/1FAX 961 - 1 - 362975P.O.BOX 11 - 2172 Beirut - LebanonEMAIL [email protected]

CHAIRMAN Mr. Hani Atallah FreijCHIEF EXECUTIVE OFFICER Mr. Fady Shammas

ARABIA INTERNATIONAL COMPANY B.S.C. ClosedOFFICE Bahrain Tower - Al Khalifa AvenueTEL. & FAX +973 - 17 - 214110P.O.BOX 11432 Diplomatic Area Manama - Bahrain

CHAIRMAN Mr. Hani Atallah FreijCHIEF EXECUTIVE OFFICER Mr. Fady Shammas

ARABIA INSURANCE BROKERS s.a.r.l.OFFICE Arabia House Building - Phoenicia St.TEL. 961 - 1 - 363610/1FAX 961 - 1 - 363659 / 365139P.O.BOX 11 - 2172 Beirut - Lebanon

AL MASHRIQ FINANCIAL INVESTMENT CO. s.a.l.OFFICE Arabia House Building - 131 Phoenicia St.TEL. 961 - 1 - 364700FAX 961 - 1 - 367087P.O.BOX 4068 Beirut - Lebanon

CHIEF EXECUTIVE OFFICER Mr. Fady Shammas

CHAIRMAN & GENERAL MANAGER Mr. Hani Atallah Freij

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COMPAN Y

ARABIA INSURANCE COOPERATIVE COMPANYHEAD OFFICE Bin Tami Center, King Abdel Aziz RoadTEL.966-1-2153360FAX 966-1-2153197P.O.BOX 286555 - 11323 Riyadh - KSA

CHAIRMAN Dr. Saleh El OmairGENERAL MANAGER Mr. Saad Khabbaz

ARABIA INSURANCE COMPANY - SYRIA S.A.HEAD OFFICE Mazzeh, Cheikh Saad StreetTEL. 963 - 11 - 6627745/6FAX 963 - 11 - 6627750P.O.BOX 34801 Damascus - SYRIAURL www.arabiasyria.com

CHAIRMAN Mr. Farouk Joud

Branches in SyriaDamascus Head Office: [email protected]

Damascus Branch: [email protected] Lattakia: [email protected]: [email protected]: [email protected]

Tartous: [email protected]: [email protected]

Branches in the Kingdom of Saudi Arabia:Riyah: Head Office: [email protected]

Jeddah Branch1: [email protected] Branch2: [email protected]

Makkah: [email protected]: [email protected]

Khamis Mushait: [email protected] Branch1: [email protected]

Riyadh Branch2: [email protected]: [email protected]

Khobar: [email protected]: [email protected]

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Annual Report 2011

ARABIA INSURANCE COMPANY - JORDAN LtdOFFICE Prince Mohamad Street - Salalem BuildingTEL. 962 - 6 - 4644335FAX 962 - 6 - 4659602P.O.BOX 20031 Amman (11118) Jordan EMAIL [email protected] www.gaic.jo

UPI (SERVICES) LIMITEDOFFICE 3, Chrysanthou - Mylona StreetTEL. & FAX 5340734P.O.BOX 6253 - 3305 Lemesos - Cyprus

CHAIRMAN Mr. Hani Atallah FreijGENERAL MANAGER Mr. Yacoub Sawalha

CHAIRMAN Mr. Hani Atallah FreijCHIEF EXECUTIVE OFFICER Mr. Fady Shammas

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Annual Report 2011

Mr. Wahbe ́A. Tamari (Chairman) Geneva

Miss Randa Tannous

Mr. Wafa Abulwafa Al Dajani Amman

Dr. Karma Fahoum El-Hassan Beirut

Mr. Basim Faris Athens

Mr. Tarek Al Suleiman JeddahMr. Emad Al Bahar Kuwait

Mr. Nadim Ghantous (representing Arab Bank plc starting June 13, 2012) Beirut

Mr. Hani Atallah Freij (Vice - Chairman) Beirut

(representing Suleiman Tannous & Sons Ltd.) Amman

Mr. Nadim Baroody Beirut

Arab Bank plc (represented by Mr. Riyad B. Kamal) Dubai

Mr. Muneer Boutros Moasher (representing Arab Bank plc) Amman

INVESTMENT COMMITTEE AUDIT COMMITTEE

SHARE TRANSFER COMMITTEE RISk COMMITTEE

Mr. Wahbe ́A. TamariMr. Hani Atallah Freij

Mr. Fady ShammasMr. Naji Fayad

Mr. Nadim Baroody Dr. Karma Fahoum El-HassanMr. Muneer Boutros Moasher

Mr. Wahbe ́A. TamariMr. Hani Atallah FreijMr. Nadim Baroody

Mr. Muneer Boutros Moasher Mr. Nadim GhantousMr. Fady ShammasMr. Naji Fayad

BOARD OF DIRECTORS as of 31/12/2011

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Mr. Guy Khoury (representing Arab Bank plc until October 9, 2011) AmmanSherif Fares Sharaf (representing Arab Bank plc from October 9, 2011 until June 13, 2012) Amman

REMUNERATION & NOMINATION COMMITTEE

STRATEGIC COMMITTEE

ExECUTIVE & ADMINISTRATIVE COMMITTEE

PAN ARAB ARABIA COMMITTEE

Mr. Wahbé A. TamariMr. Hani Atallah FreijMr. Nadim Baroody

Mr. Hani Atallah Freij Mr. Basem FaresDr. Karma Fahoum El-HassanMiss. Randa TannousMr. Fady Shammas

Mr. Fady ShammasMr. Hisham BarrajMr. Nabih Baaklini

Mr. Naji FayadMr. Carlos Saba

Mr. Fady Shammas Mr. Hisham BarrajMr. Nabih BaakliniMr. Naji FayadMr. Carlos SabaMr. Saad KhabbazMr. Yacoub Sawalha

Annual Report 2011

CHIEF ExECUTIVE OFFICER

CHIEF OFFICERS

Mr. Fady Shammas

ExECUTIVE GENERAL MANAGEMENT - HEAD OFFICE

Mr. Hisham Barraj Chief Insurance Officer

Mr. Fadi Sawaya Actuary

Mr. Carlos Saba Chief Resources Officer

Mrs. Sana Saoud Malti Accounts

Mr. Boutros Shemaly Non-Motor Senior Manager

Mr. Samir Karnabi Marine

Mr. Garo Sajian IT

Mr. Fouad Oleiwan Administration

Mr. Marwan Berjaoui Reinsurance

Ms. Siham Farha Secretary to the Board

Mr. Mohammad El-Hassan Operations

Mr. Elias Malek Treasury & InvestmentMr. Antoine Haddad Marketing

Mr. Nabih Baaklini Chief Operations Officer

Mr. Sadek Khoukas Life Sales

Mr. Naji Fayad Chief Financial Officer

Mrs. Danielle Salloum Medical

Mr. Ziad Jureidini Life-Senior Manager

Ms. Rana Chammas Human Capital

Mr. Jamal Arnaout General Accident

Ms. Siham Khairallah Shareholders Affairs Secretary

Mr. Abdul Hameed Haboub Motor

MANAGERS

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Mr. Dany Drakebly Business Development

Mr. Georges Bekhazi Risk ManagementMrs. Sabine Salloum H.R. Support

INTERNAL AUDIT

AUDITORS

LIFE AGENCIES

NON - LIFE AGENCIES

Deloitte & Touche

Mr. Wael El Bsat Manager

Elite Agency / Ashrafieh - Lebanon Managed by Mr. Antoine Zakhia

Falcons Agency / Abu Dhabi - UAE Managed by Mr. Hassan Al Khatib

Ashrafieh Agency / Beirut - Lebanon Managed by Mr. Antoine Zakhia

Mkalles Agency / Mkalles - Lebanon Managed by Mrs. Rachelle Abi LamaaCrystal Agency / Choueifat - Lebanon Managed by Mr. Camille Al Jurdi

Jounieh Agency / Jounieh - Lebanon Managed by Mrs. Maguy Ghosn

Matta Sakr Agency / Hadath - Lebanon Managed by Mr. Matta Sakr

Zahleh Agency / Zahleh - Lebanon Managed by Mr. Najib Khazzaka

Gateway International Assurance L.L.C / Dubai - UAE Managed by Mr. George Ashkar

Jib Jennine Agency / Jib Jennine - Lebanon Managed by Mr. Fady Bou Fares

Arrows Agency / Ain Mreisseh - Lebanon Managed by Mr. Nadim Damiani

Kyte Agency / Zouk - Lebanon Managed by Mr. George Saad

The A Team Agency / Dubai - UAE Managed by Mr Assaad Abou Seif

Banna Agency /Aley - Lebanon Managed by Mrs. Samar Banna

Antelias Agency /Antelias - Lebanon Managed by Mrs. Vera Atallah Aramouni

Rabieh Agency / Rabieh - Lebanon Managed by Mrs. Lydia Chedid

Annual Report 2011

Al Buraimi Agency / Sultanate of Oman Managed by Mr. Rached Al Jaberi

Future Safe Agency / Sultanate of Oman Managed by Mr. Nabih DrazAl Qandil Agency / Sultanate of Oman Managed by Mr. Jacob Kuriakose

Sohar Agency / Sultanate of Oman Managed by Mr. Abdallah Farsi

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Annual Report 2011

a customer is not a number, it all starts with a personal touch

REPORT OF THE BOARD OF DIRECTORS ON THE 67THFINANCIAL YEAR OF THE COMPANY’S OPERATIONS

I EXECUTIVE SUMMARY

Annual Report 2011

I EXECUTIVE SUMMARY

MAJOR ACHIEVEMENTS:

We would like to thank ARABIA's employees for their hard work and achievements, and to thank our valued clients and stakeholders for their appreciated business and continuous trust. We were able to attain, on a consolidated basis, a Gross Written Premiums (Life + Non Life) figure of US 177 M in 2011 (excluding Saudi Arabia GWP totaling US 151 M, which would bring the Grand Total to US 328 M). Our Net Insurance Income (net of allocated General and Administrative Expenses) reached US 15.9 M, an increase of 27.18% over 2010’s figure. Our sound underwriting policy proved effective, since all lines of Insurance showed profits. Net Income (per line of Insurance, before tax) amounted to: Motor US 7.2 M, Life US 2.4 M, Marine US 2.4 M, Property US 1.4 M, General Accidents US 1.3 M, Workmen's Compensation US 730 K, Medical US 318 K, and Reinsurance Inward US 177 K. The good performance in the Insurance portfolio demonstrates the underlying core strength of ARABIA.Our investment in our Saudi Arabia sister company (AICC) has generated an unrealized gain (from inception date) equivalent to SAR 43.11 M as of end 2011. The impact on the 2011 financials was an increase of Shareholders’ Equity equivalent to SAR 18 M.

Dear Shareholders, In 2011, ARABIA was able to generate a good Underwriting Income (before bad debt provision and tax) of US 15.9 M, and Investment Income (General) of US 5.1 M. Consolidated Net Profits reached US 10.1 M (before taxes), and Net Profits after tax increased by 7.3% to US 8.35 M. The reinsurance treaty renewals were extremely tough due to the hard reinsurance market, the high catastrophe losses suffered by the industry, and an unusual year of big property claims sustained by the Group. We continued to subscribe to a Group treaty covering the nine countries of our operations, which resulted in favorable terms.

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Our review of the major achievements in our sister Companies reveals the following:

- ARABIA Insurance Cooperative Company (AICC) achieved good net profits of US 4.6 M in 2011, compared to US 3 M in 2010, an increase of 53.3%. The publicly traded share price of AICC closed in 2011 at SAR 22.45 per share, i.e. 18.16 % above its year opening value (it was trading at SAR 19 per share at end 2010, and at SAR 25 as of 11/7/12). The Saudi market will continue witnessing good growth in Insurance Premiums, especially the compulsory lines of business.

- ARABIA Insurance Company - Jordan (AICJ) showed acceptable results, whereby net profits reached US 78 K (after taxes). AICJ Premiums increased from JD 11.1M in 2010 to JD 13.7M in 2011. Unfortunately, the Jordanian economy is not showing any signs of recovery, and the financial markets are at their lowest.

- ARABIA Insurance Company-Syria (AICS) has shown an encouraging increase (53%) in net profits (after taxes), whereby same increased from SYP 76 M to SYP 116 M. Underwriting Income increased by 14% from SYP 185 M to SYP 211 M. Life Premiums increased by 86%, Property Premiums by 42%, Engineering Premiums by 8%, and GA Premiums by 29%. The effects of the prevailing situation in Syria are now affecting our operations, and we are taking all necessary precautions to safeguard our personnel, assets, and operations.

WORLD ECONOMY AND FINANCIAL MARKETS

The year 2011 was a tough year on the world economy. A series of unforeseen events, such as the “Arab Spring”, the war in Libya and the tsunami in Japan, weakened the trend for global demand and further reduced the world economy’s growth potential. Furthermore, the European sovereign debt crisis worsened, partly due to the general economic slowdown, with the impact of the crisis extending to the entire Euro zone. This destabilization of the international financial markets led to increased volatility on the currency markets, and had a major impact on all the financial markets.The financial markets closed the year on a negative note, primarily because of the perceived risks in connection with the sustainability of Euro zone public finances. The worsening of the sovereign debt crisis eroded confidence & caused investors to flee from higher-risk assets. Countries with solid ratings, such as Germany, the United States and Switzerland, saw their yields fall to all-time lows, while yields rose on government bonds in economically weaker countries, resulting in some difficulty for these countries to obtain new financing.

Annual Report 2011

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INSURANCE INDUSTRY

In addition to the economic slowdown, the insurance industry faced two main challenges in 2011: The European sovereign debt crisis and the catastrophe-related losses that rose to over US 100 bn. Still, and despite this highly challenging environment, the insurance industry maintained its strong capital position.The global insurance industry is principally dominated by industrialized countries such as the US, Japan, the UK, Germany and France, who lead the life and non-life markets worldwide.In the property-casualty sector, premium growth was generally modest in the emerged markets (+1.9%), even if price increases gained momentum especially in the personal lines, with some signs of improvement in the commercial lines. Still, those price increases remain short of the required technical level. Premium growth in Eastern Europe and Latin America was high, while Asia remained the most dynamic, and leading insurers will continue to expand in China and other developing Asian markets. In the Life sector, global premiums fell by 2.7% in 2011. This downward move resulted from the downfall of life product sales in mature markets such as Germany, France and Italy, due to weaker investor confidence as a consequence of the difficult economic environment. Life premium growth in China dropped significantly due to new bancassurance regulation. On the other hand, the US market witnessed a double-digit percentage growth, especially in the sales of new annuities. Earnings for traditional life insurers declined because of lower interest rates. As a countermeasure to the general downswing in Life premiums, and the stiff competition in the long term savings products, life insurance providers are coming back with new sophisticated products having innovative features, coupled with more consolidation in the industry.On the technological level, the role of the internet as a distribution channel and a key platform for marketing and transacting insurance business in the global insurance industry is rapidly evolving, and is helping to significantly reduce the gap between the insurance provider and a large clientele by offering flexible and user-friendly interface. This is obviously allowing the insurance companies using those interfaces to reduce their administration and marketing costs, thus diminishing their expense ratios. The year 2011 was a year characterized by heavy natural catastrophes, whereby related total insured losses amounted to more than US 100 bn, at approximately twice the 2010 level. Major catastrophe events included the Japanese earthquake and tsunami and the resulting failure of the nuclear power plant in Fukushima, earthquakes in New Zealand, U.S. windstorms, and flooding in Australia and Thailand. In 2011, the world insurance market declined by 0.81% in real terms, but rose by 6% in nominal US to reach US 4.4 Trillion. A report published by the European insurance Federation found that 2011 premium collection by European insurers dwindled down by 1.5% at 1100 billion EUR. Assets under management amounted to 7700 billion EUR. Premiums decrease is accounted for by the bad performance of life insurance which reported a premiums volume 650 billion EUR, that is, a 4% fall in comparison with 2010. Out of the four most important markets (United Kingdom, France, Germany and Italy), only United Kingdom has posted a +8% growth while Italy and France went down respectively with (-18%) and (-14%).

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In the MENA region, the total MENA premiums grew by 17.1% to US 31.4 bn in 2011, representing 0.7% of global premiums. MENA average insurance density and penetration amounted to US 291 and 1.55% respectively, lagging far behind the world average of US 661 and 6.6% respectively. The fastest growing insurance market in the MENA was Iran with a 43.3% growth to US 8.3 bn, followed by Saudi Arabia at 13.8% to US 4.97 bn, Kuwait at 13.1% to US 812 M, and UAE at 11.2% to US 6.6 bn. According to a report by global management consultancy A.T. Kearney, Insurance profitability across top 30 conventional insurers in the GCC “dropped over the last four years from 28% in 2007 to 9% in 2011”.

With regards to the Lebanese insurance market, and on a positive note, global reinsurer Swiss Re has ranked Lebanon as the first in the MENA region and 46th out of 147 countries globally, in terms of total insurance premiums to gross domestic product in 2011. Lebanon has maintained its penetration level lead in the MENA region for the seventh year in a row, and its global rankings improved by six notches from 2010. According to the report carried out by Bank Audi Weekly Monitor, Lebanon’s insurance penetration (insurance premiums to GDP) was at 2.9% in 2011, compared to 2.8% in 2010. The share was equal to that of Morocco and higher than those of Bahrain and Jordan. It also exceeded that of the MENA region at 0.9%, and remains in line with that of the emerging markets which reached 2.7%.

In terms of insurance density (premiums per capita), Lebanon, with a total of US 287 in 2011 compared to US 253 in 2010, came in 5th place on a regional basis and 52nd place on a global basis. The country’s insurance density exceeded the US 86.4 recorded by the MENA region, and the US 117.8 recorded by the emerging markets. In terms of total premiums, and, according to the same report, Lebanon ranked 63rd in the world, with US 1,221 M in 2011, up by 9.6% from US 1,115 M in 2010.Life premiums in Lebanon accounted for 28% of total premiums in 2011 with US 343 M, while the non-life business continued to represent the bulk in Lebanon at 72%, or US 878 M. Life and non-life premiums in Lebanon increased by 10.4% and 9.3% respectively compared to 2010. Lebanon’s total share out of the MENA market reached 5.3% in 2011, ranking fifth after the UAE, Saudi Arabia, Morocco and Egypt.

CATASTROPHE MILESTONES

In 2011, 325 catastrophic events occurred, of which 175 were natural catastrophes and 150 were man-made disasters. It was one of the worst years for the insurance industry. Those 325 catastrophic events claimed the lives of nearly 35,000 people, of which some 19,000 died only in the massive earthquake that struck in Japan in March.

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In terms of economic losses, natural catastrophes and man-made disasters cost society approximately a record US 370 bn in 2011, versus US 218 bn in 2010. Of these, the insured losses amounted to a very high US 116 bn in 2011 (the second highest since 1980), versus US 40 bn in 2010. The Japan earthquake cost the insurance industry around US 35 bn, making it the most expensive earthquake in history, whereas the New Zealand earthquake which occurred in February 2011 was the third most expensive on record, with insured losses of US 12 bn.The year 2011 was also marked by high flood losses, mainly in Thailand where a river water flood event cost the insurance industry US 12 bn, the highest ever for such events. Another flood in Australia resulted in insured losses of US 2 bn.

AM BEST RATING

The Insurance Industry has shown true resilience in the face of the 2008 financial crisis, however, the coming period will probably be the most difficult. The monetary policies of the major central banks are pulling reference interest rates down to their lowest, in order to support the banking sector and alleviate the financing of Government debt. This resulted in an unprecedented decrease in the contribution made by asset management to Insurance and Reinsurance companies’ results. According to SCOR, global growth is losing steam, sovereign debts are raising worrying questions and monetary zones are being subjected to major tensions.In such a difficult environment, ARABIA’s aim is to give its customers a level of financial security and offer them the needed products and services. That’s why we have decided to go through a Rating exercise with one of the most professional Rating Companies in the Industry, AM Best.ARABIA is pleased to announce that A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of B++ (Good) and issuer credit rating of “BBB+” to ARABIA Insurance Company s.a.l. (Lebanon). The outlook assigned to both ratings is stable.

You will find, below, some excerpts of the A.M. Best press release dated April 26th, 2012:

“ FOR IMMEDIATE RELEASE LONDON, APRIL 26, 2012A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of B++ (Good) and issuer credit rating of “bbb+” to ARABIA Insurance Company s.a.l. (AIC) (Lebanon). The outlook assigned to both ratings is stable.The ratings reflect AIC’s good level of risk-adjusted capitalization together with a well diversified business profile and solid overall performance…..

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…..AIC’s reinsurers are generally of a good credit quality, and net premium leverage (net premiums written to capital and surplus) is unlikely to increase above 125% over the next two years…..…..AIC operates throughout the Middle East region. Along with its home operations in Lebanon, AIC has subsidiaries in Jordan (General ARABIA Insurance Company Ltd) and Syria (ARABIA Insurance Company – Syria S.A.) as well as branches and agencies in United Arab Emirates, Qatar, Oman, Bahrain and Kuwait. The company has a further affiliate in Saudi Arabia (ARABIA Insurance Cooperative Company), although common ownership is not sufficient to allow consolidation. AIC’s business is well diversified both by line of business and geographical distribution.

AIC has some concentration in the motor business, which accounts for nearly half of the company’s gross premium income, though this is common throughout the region…..

…..Overall earnings are expected to be good over the medium term, with a likely return on equity within the range of 7% to 12% over the next two years…..

…..Over time, a greater presence in core markets and development of enterprise-wide risk management, together with a stable underwriting performance and maintenance of a good level of risk-adjusted capitalization could put positive pressure on the ratings…..”

OUTLOOK FOR 2012 AND BEYOND:

We move forward towards the future with a stronger and “customer focused” ARABIA. In the Insurance industry, we are still witnessing (unfortunately) a gradual decrease in rates in some line of business in the Arab World. These markets are also facing decreasing returns on investments and on premiums. We will remain strongly committed to our policy of increasing the technical bottom line as a result of a sound underwriting policy, and targeted & selective growth in its premium income. We will endeavor to offer our clients the best products that match their needs, and an excellent and unmatched level of services. In the face of increased regulation, inflation, loss trends and so many uncertainties in our industry, we remain committed to our balanced underwriting policy, and our client focus, providing the added value that is the main reason behind our customers’ loyalty.

We will continue to put special emphasis on developing the Personal lines that are characterized by sustained profitability. Projects of setting up and exploiting new distribution channels such as bancassurance are already in the place. We will

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continue investing in our technology platform, in order to simplify our clients’ capacity to communicate with us, and receive the needed services electronically. We have started enhancing our Medical Underwriting and Claims Management “in-house” capacities to be able to face the future challenges of the rapidly growing Health Insurance.

The main pillar of our vision in maintaining a robust and a customer focused ARABIA, remains our Human Capital. We will spare no effort or means to continue developing our people in order to promote know-how and excellence across all levels, ensuring a culture of customer oriented added-value in our services to our client base.

We are proud of the results of the rating process with AM Best rating Agency, and this gives us more motivation to raise the bar in terms of providing excellence in our dealings with our stakeholders.

We would like to express, once more, our gratitude to our ARABIA colleagues for their hard work, loyalty, dedication and expertise. We would like to thank, as well, our esteemed clients for their appreciated confidence and continued support.We would also like to thank ARABIA Group’s members of the Board of Directors, Board Committees, Management and employees for their outstanding efforts in bringing about good results in the midst of the tougher and more competitive environment.You can keep counting on ARABIA to provide you with the best level of security, innovative products and solutions, and with the excellent level of SERVICE you rightly expect.

Yours very sincerely,

Wahbé Abdallah TamariCHAIRMAN OF THE BOARD

Fady ShammasCHIEF EXECUTIVE OFFICER

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you are our concern

II OPERATIONS OVERVIEW

Annual Report 2011

A – General Insurance Departments (non Life)

1 INSURANCE OPERATIONS

1-1 GLOBAL OVERVIEWCONSOLIDATED OPERATIONS OF ARABIA INSURANCE CO. S.A.L, ARABIA INSURANCE CO.-SYRIA AND GENERAL ARABIA INSURANCE CO. – JORDAN (HEREINAFTER REFERRED TO AS ARABIA).

The year 2011 was another good year in terms of underwriting profitability for ARABIA, whereby the technical results improved by around 33% compared to the previous year. Total premiums increased in the Marine, Motor and General Accidents lines, and profitability was achieved in all lines of business without exception. This was a result of our ongoing strategy to focus on technical profitability as the primary source of our total profitability, while considering investment income as an additional source of income. ARABIA has decided to be more proactive in implementing this strategy, by strengthening and consolidating its core insurance business and enhancing its risk management practices, in the midst of the uncertainties accompanying the worldwide financial crisis, and the resulting high volatility in the income from investments. As mentioned last year, the insurance operations of ARABIA’s composite and sister companies are protected by a Group Reinsurance treaty with preferential terms and underwriting capacities, enabling them to run their businesses effectively in their respective markets. As usual, ARABIA’s reinsurance treaties are always supported by first class reinsurance securities that provide it with solid financial leverage and risk protection, thus enhancing its solvency and underwriting capacity.

In spite of the urging need in our Arab markets to go back to the basics of proper underwriting and sound pricing, especially in light of the resulting decrease in the profit margins, the price competition continued to be the main headline of the insurance practice in the Arab region, where the insurance market remained soft, in terms of both conditions and rates.

II OPERATIONS OVERVIEW

30

ARABIA remained committed to adopting a balanced approach of both conservative and realistic underwriting. Recovering gradually from the recent worldwide financial crisis, its total gross premium income related to the general departments increased by 6.6%, from LBP 217.4 billion in 2010 to LBP 231.7 billion in 2011.

The overall net income of the general insurance departments in ARABIA, excluding investment income, recorded, as we mentioned, a good net profit of LBP 20.2 billion in 2011, at an increase of 32.9% over last year’s net profit of LBP 15.2 billion. This was a result of different factors disclosed in the departmental analysis hereunder.

1-2 MAJOR ACHIEVEMENTS CONSOLIDATED OPERATIONS OF ARABIA

Marine Department - The marine gross premiums increased by 7% from LBP 13 billion in 2010 to LBP 13.9 billion in 2011. Net profits slightly declined by 7.7% from LBP 3.9 billion in 2010 to LBP 3.6 billion in 2011.

2011 2010 VARIANCE

Lebanon 1,082,796 69,5381,013,2587.8 (6.2)7.85,105,780 532,7254,573,05536.8 11.635.31,402,226 442,436959,78910.1 46.17.4

549,200 (65,098)614,2974.0 (10.6)4.71,843,173 (109,545)1,952,71813.3 (5.6)15.1

265,593 7,301 258,2931.9 2.82.01,461,330 105,4461,355,88410.5 7.810.52,158,299 (80,705)2,239,00415.6 (3.6)17.3

13,868,397 902,09912,966,298100.0 7.0100.0

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

Geographical Distribution of Marine Gross Premiums*

* K.S.A. Gross Premiums are shown in separate financial statements

Annual Report 2011

31

Motor Department - The net profit increased by 63.6%, from LBP 6.6 billion in 2010 to LBP 10.8 billion in 2011. The continuous enhancement of the quality of the Motor portfolio, coupled with the vast experience and expertise ARABIA has gained in this difficult line of business, have kept the results of this department at fairly high levels.

The motor premiums observed an increase of 12.8%, from LBP 131 billion in 2010 to LBP 148 billion in 2011.

2011 2010 VARIANCE

Lebanon

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

Geographical Distribution of Motor Gross Premiums*

* K.S.A. Gross Premiums are shown in separate financial statements

21,821,076 43,773,981 23,613,559 10,023,630 12,279,634 5,790,955

13,963,508 16,782,665

148,049,008

13,472,511 50,675,193 21,263,409 3,481,040 9,888,764 5,891,204 8,887,163

17,636,642

131,195,927

8,348,565 (6,901,213)2,350,150 6,542,590 2,390,870 (100,250)5,076,345 (853,977)

16,853,081

14.729.615.96.88.33.99.4

11.3

100.0

10.338.616.22.77.54.56.8

13.4

100.0

62.0 (13.6)11.1

187.9 24.2-1.757.1-4.8

12.8

32

Property Department - The property net income rose by 75%, from LBP 1.2 billion in 2010 to LBP 2.1 billion in 2011. This was despite of a number of unfortunate mega fire losses in a number of areas of our operations, which, due to the efficiency of our reinsurance arrangements, did not jeopardize our net retained account. Production very slightly decreased by 5.6%, from LBP 21.4 billion in 2010 to LBP 20.2 billion in 2011.

2011 2010 VARIANCE

Lebanon

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

Geographical Distribution of Property Gross Premiums*

* K.S.A. Gross Premiums are shown in separate financial statements

2,978,458 4,521,126 1,208,999 1,042,966 2,511,738

880,541 4,668,912 2,388,287

20,201,027

4,851,560 4,414,280 1,081,431

983,613 2,924,294

631,400 4,820,506 1,697,382

21,404,466

(1,873,102)106,847 127,568 59,353

(412,556)249,141

(151,594)690,905

(1,203,439)

14.722.46.05.2

12.44.4

23.111.8

100.0

22.720.65.14.6

13.72.9

22.57.9

100.0

-38.62.4

11.86.0

-14.139.5-3.140.7

-5.6

Annual Report 2011

33

General Accidents Department - The net income of those lines declined by 26.9%, from LBP 2.6 billion in 2010 to LBP 1.9 billion in 2011. The gross premiums increased by 9.3%, from LBP 22.4 billion in 2010 to LBP 24.5 billion in 2011; a sign of some recovery from the negative impact of the recent recession.

2011 2010 VARIANCE

Lebanon

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

Geographical Distribution of General Accidents Gross Premiums*

* K.S.A. Gross Premiums are shown in separate financial statements

3,676,548 12,622,386 2,733,610

306,117 1,779,900

629,780 972,748

1,786,230

24,507,319

6,122,078 7,597,423 3,534,260

198,877 1,847,042

563,129 1,027,394 1,528,844

22,419,047

(2,445,530)5,024,963 (800,650)107,239 (67,142)66,651

(54,646)257,386

2,088,272

15.051.511.21.27.32.64.07.3

100.0

27.333.915.80.98.22.54.66.8

100.0

-39.966.1-22.753.9 -3.611.8 -5.316.8

9.3

34

Medical Department - The net result of this line showed a remarkable upswing, from a net loss of LBP 339.2 million in 2010, to a net profit of LBP 477 million in 2011. Gross medical premiums decreased by 13.9%, from LBP 22 billion in 2010 to LBP 18.9 billion in 2011.

Geographical Distribution of Medical Gross Premiums*

Annual Report 2011

35

2011 2010 VARIANCE

Lebanon

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

* K.S.A. Gross Premiums are shown in separate financial statements

6,096,619 4,276,445

97,296 19,682

1,117,184 203,409

5,031,615 2,021,376

18,863,627

3,870,557 10,067,444

237,393 0

28,833 216,742

5,110,380 2,375,445

21,906,796

2,226,062 (5,790,999)

(140,097)19,682

1,088,351 (13,333)(78,765)

(354,069)

(3,043,169)

32.322.70.50.15.91.1

26.710.7

100.0

17.746.01.10.00.11.0

23.310.8

100.0

57.5-57.5N/AN/AN/A-6.2-1.5

-14.9

-13.9

Workmen’s Compensation Department - The workmen’s compensation gross premiums slightly decreased by 4.6%, from LBP 6.2 billion in 2010 to LBP 5.9 billion in 2011. Net profits decreased by 26.7%, from LBP 1.5 billion in 2010 to LBP 1.1 billion in 2011.

Geographical Distribution of Workmen’s Compensation Gross Premiums*

36

2011 2010 VARIANCE

Lebanon

LBP'000 LBP'000LBP'000% %%

Kuwait

UAE

Bahrain

Oman

Qatar

JordanSyria

TOTAL

* K.S.A. Gross Premiums are shown in separate financial statements

2,665,929 1,442,549

226,994 421,139

1,137,200 22,591

0 0

5,916,403

2,232,037 2,155,904

193,971 373,920

1,224,716 24,381

0 0

6,204,929

433,892 (713,355)

33,024 47,219

(87,515)(1,790)

0 0

(288,526)

45.124.43.87.1

19.20.40.00.0

100.0

36.034.73.16.0

19.70.40.00.0

100.0

19.4-33.117.012.6 -7.1-7.3N/AN/A

-4.6

Reinsurance Inwards - The withdrawal of our participation in most of our inward reinsurance treaties, in order to limit our accumulation exposure, was reflected in the decrease in the corresponding premiums, from LBP 1.3 billion in 2010 to LBP 326.2 million in 2011. The results of this department recovered from a loss of LBP 369.9 million in 2010 to a profit of LBP 265.5 million in 2011.

It is to be noted that the unexpired risks reserves and outstanding claims reserves have been taken very conservatively to account for uncertainties associated with the nature of this business (retrocession), especially with the resulting delay in the receipt of the corresponding accounts for which we have to take extra provisions to be on the safe side.

2 INVESTMENT OPERATIONS (GENERAL DEPARTMENTS)

Invested assets in General insurance departments (excluding property & equipment) decreased by LBP 19.7 billion (-6.8%), from LBP 289 billion in 2010 to LBP 269.3 billion in 2011. This decrease was mainly due to settlement of payables to related companies.

The investment portfolio of the General departments recorded a gain of LBP 7.2 billion in 2011 versus a gain of LBP 10.54 in 2010. This decline was mainly due to the drop in the free cash term deposits during 2011 (down by LBP 19.7 billion), onetime gain from sale of strategic investments during 2010, onetime loss from the adoption of the new IFRS 9 during 2011 (Financial Instruments: classification & measurement), and finally the shift from high yield fixed income investments (preferred shares & perpetuities) into lower yielding investment grade bonds during 2011.

Annual Report 2011

37

Income LBP'000

Income LBP'000

2011

2010

Cash & Banks

Investment SecuritiesGain/(Loss) from securities Held at FVTPL & DerivativesExchange Gain/(Loss)TOTAL

Cash & Banks

Investment SecuritiesGain/(Loss) from securities Held at FVTPL & DerivativesExchange Gain/(Loss)TOTAL

Assets LBP'000

148,116,553

121,176,116

269,292,669

Assets LBP'000

5,730,143

3,037,555

(2,044,225)478,0817,201,554

5,885,016

3,841,1282,087,488 -1,272,12510,541,507

165,472,293

123,556,403

289,028,696

38

3 OTHER

3-1 SHAREHOLDER’S EQUITY & DIVIDENDS DISTRIBUTION

Total Shareholder’s Equity at December 31, 2011 amounted to LBP 172.2 billion, slightly decreasing by LBP 1.6 billion if compared to same period last year. This decrease is mainly attributed to the following:

Deductions:

• 2010 dividends distributed during 2011 amounting to LBP 8.1 billion.• Exchange differences arising on translating foreign subsidiaries amounting to LBP 6.4 billion.

Additions:

• The net profit of the year 2011 amounting to LBP 9.1 billion.• Change in fair value of available for sale securities amounting to LBP 4.1 billion.

The General Assembly decided to distribute LBP 7.65 billion, or 15% of Arabia’s capital, as dividends for the year 2011.

Annual Report 2011

39

3-2 ACCOUNTS RECEIVABLE – CLIENTS

Net Accounts receivable - clients as at year end 2011 (net of provision for doubtful accounts) amounted to LBP 80.7 billion, representing 35% of total 2011 gross production amounting to LBP 231.7 billion. Accounts receivable - clients increased by 6% from LBP 84.0 billion as at 31/12/2010 to LBP 88.6 billion as at 31/12/2011. The increase in receivables was accompanied with an increase of 7% in gross production, from LBP 217.4 billion in 2010 to LBP 231.7 billion in 2011. The percentage of net accounts receivable – clients to gross production stood at 35% as at 31/12/2011 remaining unchanged compared to 2010.Provision for doubtful accounts increased by 1% from LBP 7.89 billion in 2010 to LBP 7.96 billion in 2011, representing 9% of accounts receivable in 2011 remaining unchanged compared to 2010.

2011

Lebanon

Net Account Receivables

LBP’ 000

of %Total

of %Total

AR to GP(%)

Gross Production

LBP’ 000

Kuwait

UAE

Bahrain

Oman

QatarJordanSyriaTOTAL

21,829,588 29,562,098

8,646,518 1,700,344 4,140,456 8,271,145 4,641,560 1,898,725

80,690,434

38,647,603 71,742,271 29,282,684 12,362,734 7,792,868 20,668,830 26,098,110 25,136,858

231,731,958

273711

25

1062

100

173113

539

1111

100

56413014534018

835

40

The below pie charts show the geographical distribution of net accounts receivable and gross production for the year 2011:

Geographical Distribution of Net Accounts Receivable 2011

Geographical Distribution of Gross Production 2011

Lebanon UAE Oman KuwaitBahrain Qatar Jordan Syria

Lebanon UAE Oman KuwaitBahrain Qatar Jordan Syria

37%

31%

27%

11%

17%

2%

6%

11%

10%

9%

5%

3%

2%

5%

11%

13%

Annual Report 2011

41

The below bar chart displays the net accounts receivable as a percentage of gross production per country for the year 2011:

Lebanon

0

11

22

33

44

55

6656

41

30

14

53

40

18

8

35

UAE Oman Kuwait Bahrain Qatar Jordan Syria Total

2011

Lebanon

AccountReceivableLBP’ 000

Provision for Doubtful Accounts

LBP’000

PDA to AR(%)

Net AccountReceivableLBP’ 000

Kuwait

UAE

Bahrain

Oman

QatarJordanSyriaTOTAL

23,747,354 32,514,929 9,441,294 1,786,034 4,681,961 8,986,664 5,442,107 2,045,255

88,645,598

1,917,766 2,952,831

794,776 85,690 541,505 715,519 800,547 146,530

7,955,164

21,829,588 29,562,098

8,646,518 1,700,344 4,140,456 8,271,145 4,641,560 1,898,725 80,690,434

8985

128

1579

42

The below bar chart displays the provision for doubtful accounts as a percentage of accounts receivable per country for the year 2011:

Lebanon UAE Oman Kuwait Bahrain Qatar Jordan Syria Total

9

3-3 GENERAL AND ADMINISTRATIVE EXPENSES

General and Administrative expenses increased by LBP 4.7 billion or 14%, from LBP 33.3 in year 2010 to LBP 38.0 in year 2011,as: • Salaries and related charges before allocation to life department increased by LBP 2.8 billion or 15%.• General operating expenses before allocation to life department increased by LBP 1.7 billion or 13%.• Depreciation expenses before allocation to life department increased by LBP 0.2 billion or 22%.

Life division’s share of General departments’ general & administrative expenses summed up to LBP 2.1 billion at December 31, 2011, compared to LBP 1.8 billion same period last year.

2

0

5

7

10

12

14

17

8

5

12

15

9

788

Annual Report 2011

43

3.4 HUMAN RESOURCES AND ADMINISTRATION DIVISION

The Human Resources Division strives to provide the highest level of service, and reflects this commitment through focus-ing on our mission to support ARABIA's, vision of being the leading "customer centric" Arab Insurer, through professional HR practices.

Our goals (supporting that mission) continue to include: • Working collaboratively with other divisions, departments and branches • Recruiting and retaining staff that are best qualified for ARABIA’s positions • Reviewing current, and developing new, human resource-related policies and procedures • Conducting training for all employees to ensure all staff possess the necessary tools to perform the job • Providing excellent service by treating each employee with respect, and recognizing that each concern or question deserves attention • Providing excellent HR support that aims at managing the compensation, benefits and logistics in order to meet the demands for an efficient and performing staff

The Workforce profile in 2011:• 533 employees (including Life Sales) on 31/12/2011 for AIC• 438 employees without Life Sales • 95 Life Sales agents• 78% of the employees have a University level education

Recruitment in 2011:• 1678 CVs were received through ARABIA website• 85% was the acceptance rate of Job Offers at the Head Office• 10 internal recruitments• 72 external recruitments

Training in 2011:• 38% of employees went through training• 17% of the training was performed abroad• 24% of the training was performed in-house• 59% of the training was local• 4,156 total training hours

44

3-5 OPERATIONS DIVISION

On the operational side, and in order to efficiently & effectively implement the new software in all branches, it was decided to form a task force to handle all incidents arising out of the new system live run. The task force was headed by the Operations’ Manager and composed of members from other divisions. The main role of the task force was the proper handling of all complaints, errors, incidents and queries received from branches during the first few months of the live run, in order to ensure that they are conveyed to the concerned party (ies) and resolved in a timely manner. In case any issue was not resolved, it was referred to the IT Steering Committee. Four months after the creation of the IT Task Force, all ARABIA branches were ready to abandon the old system and start relying solely on the new Oracle system as of May 1st, 2011.

We finalized the establishment of a Customer Relationship Management (CRM) department in Lebanon. The main function of the said department is to maintain and service our client base, and serve them in a better and more efficient way, as well as to up sell and cross sell to existing good customers. Two new employees were recruited, and the first step was to create a complete data base for all direct customers. The installation of an MS – CRM software and share point at ARABIA is complete, and training is taking place at Head Office so that it will be utilized by the CRM department for complaints and Prospect Management, sales, marketing and renewals. It should be ready and fully operational by November 2012. This will be replicated in other branches.

To complement our sales objectives, we started promoting the opening of Agencies in Lebanon, as we witnessed the establishment of 6 new agencies in various areas, as well as the commencement of a fully fledged agency in Dubai (Gateway International Assurance). We continued working on the follow up of all agreed upon Internal Audit reports recommendations relating to branches, focused more on the collection of recoveries, and enhancing accounts receivable management and follow up in coordination with branches and Finance Division at Head Office. The division enhanced its follow up to monitor the branches' performance in areas of production versus budget, sales growth and the recruitment of sales representatives, as well as evaluate their performance and monitor the expenditure of branches to insure timely follow up by making sure that necessary action is taken by all branches.

A decision was taken to launch the loss prevention department in Lebanon which will be responsible for carrying out loss prevention inspection visits and issuing surveys for new business, in coordination with Head Office, and follows up on appointed loss adjustors in coordination with concerned branch Managers.A Business Development Manager was also appointed whose main function is to build sales teams in several branches and coordinate the efforts of registered reputable brokers, in addition to promoting independent agencies.

Annual Report 2011

45

46

During 2011, the Research unit continued providing the Management with relevant information and statistics particular to the insurance industry.

In addition to its dedication to “insure a greener planet”, and in light of the challenges we are facing concerning the Global Warming calamity, ARABIA decided to plant trees on the Roof Top of the Head Office building in Beirut, in an attempt to make ARABIA House a Green zone, setting the example to all surrounding buildings and organizations. ARABIA is also proud to mention that ARABIA House (Head Office building), and all its branch offices, became a smoke free Zone.

The year 2011 witnessed the maintenance of the traditional sponsorship of Baalbeck International Festival, the support of Children Cancer Center (St Jude), Sesobel (handicapped and autist children), Al Younbouh (for elderly), YASA (Youth Association for Social Awareness- road and traffic safety), La Chaine des Amis (taking care of elderly in need), Fondation Resonnance-Lebanon (To provide music teaching and concerts in retirement homes, hospitals, prisons), and Oum El Nour (fighting drug addictions).ARABIA’s Annual Report continued to be saved on reusable USB Flash memory, in another eco-friendly attempt to help save the environment.

Annual Report 2011

4 Financial Indicators (Group excluding AIC Life)

Analysis of EarningsDescription

2011 2010

Gross loss ratio 69% 60% (Gross outstanding claims + Gross paid claims – Gross recoveries) / Gross earned premiums1

Net loss ratio 60% 63% (Net outstanding claims + Net paid claims – Net recoveries) / Net earned premiums2

G&A ratio 22% 21%(Allocated general & administrative expenses to technical departments+ Unallocated general & administrative expenses to technical departments) / Net written premiums3

Acquisition ratio 12% 12% (Deferred commission expenses – Earned commissions from reinsurers) / Net earned premiums2

Expense ratio 34% 33% G&A ratio + Acquisition ratio

Net Combined ratio 94% 96% Net loss ratio + Expense ratio

Overall operating ratio 90% 89% Net Combined ratio – (Investment income / Net written premiums3 )

Return on average equity 5% 4% Net income after tax / Average shareholder's equity

Return on average assets 2% 2% Net income after tax / Average total assets

Earnings per share (in LBP) 352 328 Net income after tax attributable to parent company shareholders / Number of shares outstanding

Analysis of Assets & LiabilitiesLiquidity ratio 145% 149% Current assets5 / Current liabilities6

Debt ratio 66% 65% Total liabilities / Total assets

Analysis of Underwriting ExposureSolvency ratio 105% 114% Shareholders / equity / Net written premiums3

Retention ratio 69% 69% Net written premium3 / Gross written premium4

Technical reserves ratio 65% 65% Net written premium3 / Total technical reserves7

Premium Growth 7% 15% % Change in gross written premium4

47

1Gross Earned Premiums = Technical Premiums + Other Technical Income + Total Fees + Gross Change in Unearned premiums.2Net Earned Premiums (net of re-insurance) = Technical Premiums + Other Technical Income – Reinsurance share of Technical Premiums + Total Fees + Net Change in Unearned Premiums.3Net Written Premiums (net of re-insurance) = Technical Premiums + Other Technical Income – Reinsurance share of Technical Premiums + Total Fees.4Gross Written Premium= Technical Premiums + Other Technical Income + Total Fees.5Current Assets = Cash & Banks + Investments securities + Insurance Receivables+ Due from Reinsurance + Reinsurance Assets + Deferred Acquisition Costs + Other Assets.6Current liabilities = Total Liabilities – Provisions (contingencies, end of service indemnities).7Total Technical Reserves = Outstanding Claims + IBNR + Unearned Premium Reserve + Unearned Commission from R/I + Provision48

Annual Report 2011

Annual Report 2011

B – LIFE DIVISION

1 LIFE ASSURANCE OPERATIONS

During the year 2011, Total Gross Written Premiums continued their growth and reached LBP 26 billion (USD 17.3 million) with a good increase of 10% over the year 2010. Our efforts are still directed towards constant development of our sales force (Direct Consultants, Units, Agencies and Branches). The biggest share of our First Year Individual Life Written premiums was produced by Falcons Agency (Abu Dhabi and Al Ain), with a combined production of LBP 4.8 billion (USD 3.2 million) in First Year Written Premiums, with an increase 25% in 2011 over 2010. Our top selling Unit-Linked product “ARABIA Lifestyle” continued to gain more market share this year with a premium growth of 13%, from LBP 17.8 billion (USD 11.8 million) in 2010 to LBP 20.1 billion (USD 13.4 million) in 2011. This product witnessed a growth of 24% in the First Year Written Premium from USD 3.58 million in 2010 to USD 4.44 million in 2011 and a growth of 12% in the Renewal Unit – Linked Premium from USD 7.75 million in 2010 to USD 8.66 million in 2011.

Life Sales:

During 2011, we continued growing and reinforcing our existing captive Life Sales Force, and establishing new agencies across the Arab countries. - A new Agency has been established in Dubai in September 2011, led by the new Gulf Sales Manager, and the Sharjah Life Unit has been transformed into an Agency in September 2011. - A new Sales Manager for the Gulf was recruited and started in August 2011, and a Deputy Sales Manager will be recruited by October 2012. - Recruitment of new Life Sales Agents is ongoing, with an average of one major recruitment campaign every quarter.

Life Products:

- Term Life Insurance: we reduced our rates to a competitive level. - Enhanced Commission structure. - Standalone Personal Accident product has been designed, and will be sold starting November 2012.

50

$3.58

$7.75

$10.00

$9.00

$8.00

$7.00

$6.00

$5.00

$4.00

$3.00

$2.00

$1.00

$00.00

$4.44

$8.66

2011

2011

$15.7

$17.3$17.5

$17.0

$16.5

$16.0

$15.5

$15.0

$14.52010

2010

Unit- Linked premium in million of U$

Gross Written Premium in million of U$

First year unit-linked

Renewal unit-linked

Annual Report 2011

51

Geographical distribution of Life Written Premiums in 2011

* Excluding sister companies52

20111st Year Premiums

2011Renewal Premiums

2011Total Premiums

2010Total Premiums

Lebanon

LBP'000 LBP'000LBP'000 LBP'000% %% %

Kuwait

UAE

BahrainOman

Other*

TOTAL

1,734,8888,730,133

655,428

136,866175,901413,512

11,846,728

2,555,9609,277,940

666,515

101,458349,224

1,129,380

14,080,478

4,929,55214,978,0471,321,330

551,786441,413

1,461,443

23,683,570

4,316,33418,048,7491,323,896

238,523536,622

1,603,044

26,067,167

17%69%5%

1%2%6%

100%

21%63%6%

2%2%6%

100%

15%74%6%

1%1%3%

100%

18%66%5%

1%2%8%

100%

5%

69%

17%

1%2%

6%

Lebanon UAE Oman KuwaitBahrain Other

3.34 3.443.58 3.86 4.19 5.096.16

9.5912.06

17.39

23.6826.07

3.56

18.06

Life production historical chart (Total Written Premiums)

Total Production in LBP Billion19

97

2000

0

10

30

50

20

40

6019

98

2001

1999

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

7.92

2 INVESTMENT OPERATIONS (LIFE) INVESTMENT PORTFOLIO HIGHLIGHTS

Invested assets of the Life division (excluding property & equipment) decreased by LBP 4.2 billion (-5.4%), from LBP 77.9 billion in 2010 to LBP 73.7 billion in 2011. This decrease was mainly due to payments to cover the dues to General Departments.The investment portfolio of the Life division recorded a gain of LBP 2.2 billion in 2011 versus a gain of LBP 3.3 billion in 2010. This decline was mainly due to the drop in free cash term deposits during 2011 (down by LBP 4.3 billion), decline in the fair value of the underlying funds related to ARABIA Lifestyle unit linked products, causing a loss of LBP 360 million in 2011 versus a gain of LBP 477 million in 2010 (noting that this loss is offset by relevant gains in mathematical reserves), and finally the shift from high yield fixed income investments (preferred shares & perpetuities) into lower yielding investment grade bonds during 2011.

Annual Report 2011

53

Assets LBP'000

Assets LBP'000

Income LBP'000

Income LBP'000

2011

2010

Cash & BanksInvestment Securities

Gain/(Loss) from securities Held at FVTPLExchange Gain/(Loss)

TOTAL

Cash & BanksInvestment Securities

Gain/(Loss) from securities Held at FVTPLExchange Gain/(Loss)

TOTAL

17,174,89456,531,973

73,706,867

21,435,27856,472,381

77,907,659

1,973,941551,233

(362,078)20,083

2,183,179

729,3721,873,960

477,645 190,918

3,271,895

54

always give your customersomething extra !

CONSOLIDATED FINANCIAL STATEMENTS AND AUDITOR’S REPORT

Annual Report 2011

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED FINANCIAL STATEMENTS

AND INDEPENDENT AUDITOR'S REPORT

YEAR ENDED DECEMBER 31, 2011

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT

YEAR ENDED DECEMBER 31, 2011

TABLE OF CONTENTS

Page

Independent Auditor's Report 1-2

Consolidated Financial Statements:

Consolidated Statement of Financial Position 3-4

Consolidated Income Statement 5

Consolidated Statement of Comprehensive Income 6

Consolidated Statement of Changes in Equity 7

Consolidated Statement of Cash Flows 8

Life Division, Consolidated Statement of Assets and Liabilities -- Appendix I 9

Life Division, Consolidated Income Statement -- Appendix II 10

Life Division, Consolidated Statement of Cash Flows -- Appendix III 11

Notes to the Consolidated Financial Statements 12-81

2

3

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE GENERAL INSURANCE DEPARTMENTS

December 31,

ASSETS Notes 2011 2010

LBP’000 LBP’000

Cash and banks 6 152,956,569 172,131,430

Investment securities 8 121,176,116 123,556,403

Insurance receivables 9 80,690,434 76,085,455

Due from reinsurers 10 28,707,127 18,150,807

Reinsurance assets 20 81,583,162 69,253,656

Deferred acquisition costs 11 16,510,986 14,060,790

Other assets 12 5,118,210 6,157,595

Property and equipment 13 22,548,561 16,160,766

Intangible assets 14 726,046 1,041,745

Investment property 15 27,913 105,933

Due from Life division 16 - 4,065,949

Total Assets 510,045,124 500,770,529

Assets of the Life Division -- Appendix I 92,429,197 90,247,054

Combined Assets of General Insurance and Life Division 602,474,321 591,017,583

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

4

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

FOR THE GENERAL INSURANCE DEPARTMENTS

(Continued)

December 31,

LIABILITIES Notes 2011 2010

LBP’000 LBP’000

Due to banks 17 4,840,016 6,659,137

Insurance payables 28,299,576 27,254,845

Payables to insurance and reinsurance companies 21,686,714 16,202,024

Due to related company 23 7,515,657 22,304,388

Income tax payable 18 3,541,130 4,400,937

Accrued expenses and other liabilities 19 8,792,754 8,227,629

Provision for outstanding claims 20 135,516,091 130,043,110

Provision for unearned premiums 20 110,146,098 99,072,312

Unearned commission from reinsurers 3,003,618 3,342,872

Provision for employees' end-of-service indemnity 5,272,898 4,608,749

Provision for contingencies 22 2,601,635 2,602,344

Deferred tax liability 1,708,552 2,192,317

Due to Life division 16 4,881,780 -

Total Liabilities 337,806,519 326,910,664

EQUITY

Share capital 24 51,000,000 51,000,000

Treasury shares 24 ( 9,304,316) ( 8,546,320)

Surplus on sale of treasury shares 24 78,541 78,541

Legal reserve 25 17,000,000 17,000,000

General reserve 19,613,572 19,613,572

Asset revaluation reserve 26 6,887,300 6,887,300

Foreign currency translation reserve ( 2,832,070) 374,383

Cumulative change in fair value of investment securities 27 19,289,332 14,630,603

Retained earnings 34,439,543 33,873,315

Proposed dividends 28 7,650,000 7,650,000

Equity attributable to owners of the Parent Company 143,821,902 142,561,394

Non-controlling interests 29 28,416,703 31,298,471

Total Equity 172,238,605 173,859,865

Total Liabilities and Equity 510,045,124 500,770,529

Liabilities of the Life Division – Appendix I 77,757,222 79,357,113

Net Assets of the Life Division – Appendix I 14,671,975 10,889,941

Total Liabilities and Net Assets of the Life Division - Appendix I 92,429,197 90,247,054

Combined Liabilities and Equity of General Insurance and Life Division 602,474,321 591,017,583

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

5

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED INCOME STATEMENT FOR THE

GENERAL INSURANCE DEPARTMENTS

Year Ended

December 31,

Notes 2011 2010

LBP’000 LBP’000

Net income/(loss) of General Insurance Departments:

Marine 3,583,812 3,953,070

Motor 10,778,337 6,654,972

Property 2,094,028 1,249,448

General accidents 1,911,102 2,581,951

Workmen's compensation 1,094,614 1,470,865

Medical 477,186 ( 339,247)

Reinsurance inwards 265,488 ( 369,868)

Net income of General Insurance Departments

(net of allocated general and administrative expenses) 30 20,204,567 15,201,191

Provision for credit losses 9 ( 649,594) ( 1,949,998)

Net income of General Insurance Departments

(after provision for credit losses and allocated

general and administrative expenses) 19,554,973 13,251,193

Income/(Loss) from Investments:

Interest income on bank deposits 6 5,730,143 5,885,016

Interests and dividend income from investment securities 3,037,555 3,841,128

Net (loss)/gain on investment securities at FVTPL ( 1,700,328) 509,173

Net (loss)/gain on disposal of investment securities ( 537,565) 2,160,689

Allowance for impairment of available-for-sale investments 8 - ( 582,374)

Net foreign exchange gains / (losses) 478,081 ( 1,272,125)

Other income 459,801 276,164

Net loss from building ( 47,188) ( 60,043)

Net income from investments 7,420,499 10,757,628

Total income from general insurance departments

and investments 26,975,472 24,008,821

General and administrative expenses unallocated

to general insurance departments 31 ( 15,466,363) ( 12,873,228)

Income before tax 11,509,109 11,135,593

Income tax expense 18 ( 2,428,187) ( 2,892,990)

Profit for the year 9,080,922 8,242,603

Attributable to:

Owners of the Parent Company 7,182,546 6,700,904

Non-controlling interests 29 1,898,376 1,541,699

9,080,922 8,242,603

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

6

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE GENERAL INSURANCE DEPARTMENTS

Year Ended

December 31,

2011 2010

LBP’000 LBP’000

Profit for the year 9,080,922 8,242,603

Other comprehensive income:

Net change in fair value of investment securities 4,054,160 ( 22,810,876)

Realized gain on sale of financial assets at FVTOCI

recycled to retained earnings 910,122 -

Exchange differences arising on translating

foreign subsidiaries ( 6,404,834) ( 952,937)

Other changes to retained earnings - ( 66,052)

Total other comprehensive income for the year (loss) ( 1,440,552) ( 23,829,865)

Total comprehensive income/(loss) for the year 7,640,370 ( 15,587,262)

Attributable to:

Owners of the Parent Company 9,706,396 ( 15,186,544)

Non-controlling interests ( 2,066,026) ( 400,718)

7,640,370 ( 15,587,262)

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

7

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE GENERAL INSURANCE DEPARTMENTS

Surplus on Foreign Cumulative

Sale of Asset Currency Change in Attributable to

Share Treasury Treasury Legal General Revaluation Translation Fair Value of Retained Proposed Owners of Non-controlling Total

Capital Shares Shares Reserve Reserve Reserve Reserve Investments Earnings Dividends the Parent Interests Equity

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Balance at December 31, 2009 51,000,000 ( 6,873,199) 78,541 17,000,000 19,613,572 6,887,300 878,984 35,931,930 34,382,995 7,650,000 166,550,123 30,645,271 197,195,394

Total comprehensive income for the year - - - - - - ( 504,601) (21,301,327) 6,619,384 - ( 15,186,544) (400,718) ( 15,587,262)

Effect of acquisition of additional non-controlling

interests in subsidiary - ( 924,242) - - - - - - 467,664 - ( 456,578) 391,405 ( 65,173)

Effect of disposal of shares in subsidiary - - - - - - - - 139,321 - 139,321 1,088,357 1,227,678

Distribution of dividends - Note 28 - - - - - - - - 508,784 ( 7,650,000) ( 7,141,216) ( 425,844) ( 7,567,060)

Board of Directors’ and

committees’ remunerations - - - - - - - - ( 594,833) - ( 594,833) - ( 594,833)

Proposed dividends - Note 28 - - - - - - - - ( 7,650,000) 7,650,000 - - -

Buy-back of ordinary shares - Note 24 - ( 748,879) - - - - - - - - ( 748,879) - (748,879)

Balance at December 31, 2010 51,000,000 ( 8,546,320) 78,541 17,000,000 19,613,572 6,887,300 374,383 14,630,603 33,873,315 7,650,000 142,561,394 31,298,471 173,859,865

Effect of early adoption of IFRS9 - - - - - - - ( 384,891) 366,483 - ( 18,408) 172,159 153,751

Balance at December 31, 2010 ( as restated) 51,000,000 ( 8,546,320) 78,541 17,000,000 19,613,572 6,887,300 374,383 14,245,712 34,239,798 7,650,000 142,542,986 31,470,630 174,013,616

Total comprehensive income for the year - - - - - - ( 3,206,453) 5,043,620 7,869,229 - 9,706,396 ( 2,066,026) 7,640,370

Acquisition of additional shares in subsidiary - ( 115,216) - - - - - - 55,570 - (59,646) 38,073 ( 21,573)

Distribution of dividends - Note 28 - - - - - - - - 539,946 ( 7,650,000) ( 7,110,054) ( 1,025,974) ( 8,136,028)

Board of Directors’ and committees’ remunerations - - - - - - - - ( 615,000) - ( 615,000) - ( 615,000)

Proposed dividends - Note 28 - - - - - - - - ( 7,650,000) 7,650,000 - - -

Buy-back of ordinary shares - Note 24 - ( 642,780) - - - - - - - - ( 642,780) - ( 642,780)

Balance at December 31, 2011 51,000,000 ( 9,304,316) 78,541 17,000,000 19,613,572 6,887,300 ( 2,832,070) 19,289,332 34,439,543 7,650,000 143,821,902 28,416,703 172,238,605

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS

8

ARABIA INSURANCE COMPANY S.A.L.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE GENERAL INSURANCE DEPARTMENTS

Year Ended December 31,

Notes 2011 2010

LBP’000 LBP’000

Cash Flows from operating activities: Profit for the year 9,080,922 8,242,603 Adjustments for: Interest income on bank deposits ( 5,730,143) ( 5,885,016) Depreciation of property and equipment 13 1,043,548 1,196,225 Amortization of intangible assets 14 393,217 220,468 Provision for credit losses 9 649,594 1,949,998 Gain on sale of investment properties 15 ( 193,668) - Net change in foreign currency translation reserve ( 5,738,511) ( 952,937) Allowance for impairment of available-for-sale financial assets 8 - 582,374 Net change in fair value of held-for-trading securities 8 1,624,384 ( 316,819) Net change in held-for-trading derivative liabilities 19 272,284 107,829 Net change in deferred acquisition costs 11 ( 2,450,196) ( 4,246,338) Change in reinsurance assets ( 12,329,506) ( 15,640,025) Change in provision for unearned premiums 11,073,786 15,882,565 Change in provision for outstanding claims 5,472,981 25,097,172 Change in unearned commission from reinsurers ( 339,254) 475,240 2,829,438 26,713,339 Increase in insurance receivables ( 5,254,573) ( 15,583,512) Increase in due from reinsurers ( 10,556,320) ( 7,091,380) Decrease in other assets 1,039,385 774,325 Increase in insurance payables 1,044,731 4,898,579 Increase/(decrease) in payables to insurance and reinsurance companies 5,484,690 ( 1,004,824) (Decrease)/increase in taxes payable ( 859,807) 445,351 Increase in accrued expenses and other liabilities 292,841 2,179,183 Increase in provision for employees’ end-of-service indemnity 664,149 488,184 Settlement of board of directors' and committees' remunerations ( 615,000) ( 594,833) Net cash (used in)/generated by operating activities ( 5,930,466) 11,224,412

Cash flows from investing activities: Interest received from bank deposits 6,356,236 4,821,940 Decrease/(increase) in investment securities 5,218,013 ( 13,991,918) Decrease/(increase) in bank term deposits 21,067,907 ( 8,001,000) Increase in property and equipment 13 ( 8,098,375) ( 3,053,824) (Increase)/decrease in intangible assets 14 ( 77,518) 53,990 Proceeds from sale of investment properties 271,688 - Acquisition of additional shares in subsidiary ( 77,143) ( 65,173) Net cash generated by/(used in) by investing activities 24,660,808 ( 20,235,985)

Cash flows from financing activities: (Decrease)/increase in due to banks ( 1,819,121) 2,066,047 Decrease in due from/to life division 8,947,729 6,822,035 (Decrease)/increase in due to related company ( 14,788,731) 6,071,745 Buy-back of treasury shares ( 642,780) ( 748,879) Other changes to retained earnings 55,570 57,801 Dividends paid to owners of the Parent Company ( 7,109,677) ( 7,141,216) Dividends paid to non-controlling interests ( 1,025,974) ( 425,844) Additional non-controlling interests arising on the disposal of shares in subsidiary - 1,088,357 Other changes to non-controlling interests 171,781 15,468 Net cash (used in)/generated by financing activities ( 16,211,203) 7,805,514 Net increase/(decrease) in cash and cash equivalents 2,519,139 ( 1,206,059) Cash and cash equivalents - Beginning of year 44,168,721 45,374,780 Cash and cash equivalents - End of year 6 46,687,860 44,168,721

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

9

ARABIA INSURANCE COMPANY S.A.L.

LIFE DIVISION

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

(APPENDIX I)

December 31,

ASSETS Notes 2011 2010

LBP’000 LBP’000

Cash at banks 6 18,682,394 22,942,778

Financial assets at fair value through profit

or loss - Unit-Linked 7 39,645,280 36,839,915

Investment securities 8 16,886,693 19,632,466

Insurance and other receivables 9 7,180,433 6,364,902

Reinsurance assets 21 2,259,689 2,387,831

Reinsurance receivables 10 2,196,528 1,380,825

Prepaid expenses and other assets 340,193 328,496

Furniture and equipment 13 277,515 291,149

Intangible assets 14 78,692 78,692

Due from general insurance departments 16 4,881,780 -

Total assets 92,429,197 90,247,054

LIABILITIES

Due to banks 17 1,507,500 1,507,500

Insurance payable 4,481,208 5,577,545

Accrued expenses and other credit balances 19 3,085,217 3,011,000

Income tax payable 18 207,981 468,859

Deferred tax liability - 48,703

Life insurance contract liabilities 21 68,178,006 64,515,062

Due to general insurance departments 16 - 4,065,949

Provision for employees’ end-of-service indemnity 297,310 162,495

Total liabilities 77,757,222 79,357,113

NET ASSETS

Reserve for asset revaluation surplus 285,723 285,723

Cumulative change in fair value of investments 27 1,431,043 953,052

Other restricted reserve 160,160 147,839

Retained earnings 12,568,149 9,398,905

Net assets attributable to owners of the life division 14,445,075 10,785,519

Non-controlling interests 29 226,900 104,422

Net assets 14,671,975 10,889,941

Total liabilities and net assets 92,429,197 90,247,054

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

10

ARABIA INSURANCE COMPANY S.A.L.

LIFE DIVISION

CONSOLIDATED INCOME STATEMENT (APPENDIX II)

Year Ended

December 31,

Notes 2011 2010

LBP’000 LBP’000

Income:

Written premiums 28,805,063 52,344,733

Deposit components of premiums 21 ( 8,074,399) ( 32,832,243)

Insurance premiums 20,730,664 19,512,490

Reinsurers’ share of insurance premiums ( 5,772,871) ( 5,310,104)

Net insurance premiums 14,957,793 14,202,386

Fee and commission income from reinsurers 953,338 981,679

Net insurance income 15,911,131 15,184,065

Income from investment securities 551,233 1,873,960

Interest received from loans on policies 18,088 24,741

Interest received from deposits with banks 1,973,941 729,372

Net change in fair value of financial assets at FVTPL 7&8 ( 362,078) 444,006

Write back of impairment on available-for-sale financial assets - 33,639

Total income 18,092,315 18,289,783

Expenses:

Claims paid ( 4,777,523) ( 2,132,691)

Reinsurers' share of claims paid 2,860,627 1,125,866

Change in insurance contract liabilities 21 710,752 ( 3,061,478)

Reinsurers' share of change in insurance contract liabilities ( 128,085) 945,694

Distribution of profits to policyholders 21 ( 1,156,937) -

Fees, commissions and other acquisition expenses ( 4,884,253) ( 5,015,528)

Other operating and administrative expenses 31 ( 4,959,528) ( 4,323,325)

Contribution to head quarters’ overheads 31 ( 2,120,000) ( 1,800,000)

Net foreign exchange losses ( 20,083) ( 190,918)

Income tax expense ( 172,444) ( 407,241)

Total expenses ( 14,647,474) ( 14,859,621)

Profit for the year 3,444,841 3,430,162

Attributable to:

Owners of the life division 3,322,363 3,399,996

Non-controlling interests 29 122,478 30,166

3,444,841 3,430,162

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

11

ARABIA INSURANCE COMPANY S.A.L.

LIFE DIVISION

CONSOLIDATED STATEMENT OF CASH FLOWS

(APPENDIX III)

Year Ended

December 31,

Notes 2011 2010

LBP’000 LBP’000

Cash flows from operating activities:

Profit for the year 3,444,841 3,430,162

Income tax expense 172,444 407,241

Depreciation 31 64,299 60,871

Net change in fair value of financial assets at FVTPL 7 362,078 ( 444,006)

Amortization of premiums and discounts 8 7,280 -

Write back of impairment of financial assets - ( 33,639)

Net change in reinsurance assets 128,142 ( 945,876)

Net change in insurance contract liabilities 21 ( 710,752) 3,061,478

3,468,332 5,536,231

Increase in financial assets designated at FVTPL ( 2,942,415) ( 29,656,561)

Increase in insurance and other receivables ( 815,531) ( 1,592,069)

Increase in reinsurance receivables ( 815,703) ( 637,816)

Increase in prepaid expenses and other assets ( 11,697) ( 10,292)

(Decrease)/increase in insurance and other payables ( 1,096,337) 1,941,433

Decrease in accrued expenses and other credit balances 74,217 903,950

Income tax paid ( 433,322) ( 24,689)

Increase in life insurance contract liabilities 4,373,696 30,250,239

(Increase)/decrease in provision for employees' end of service indemnity 134,815 ( 4,525)

Other movement to retained earnings 79 ( 8,325)

Net cash generated by operating activities 1,936,134 6,697,576

Cash flows from investing activities:

Decrease/(increase) in investment securities 2,801,876 ( 2,772,018)

Decrease in term deposits at banks 64,726 9,097,550

Purchase of furniture and equipment ( 50,665) ( 41,643)

Increase in projects in progress - ( 78,692)

Net cash generated by investing activities 2,815,937 6,205,197

Cash flows from financing activities:

Net change in balance due from/to general insurance departments ( 8,947,729) ( 6,820,463)

Net cash used in financing activities ( 8,947,729) ( 6,820,463)

Net (decrease)/increase in cash and cash equivalents ( 4,195,658) 6,082,310

Cash and cash equivalents - Beginning of year 12,087,021 6,004,711

Cash and cash equivalents - End of year 6 7,891,363 12,087,021

THE ACCOMPANYING NOTES FORM AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL

STATEMENTS

12

ARABIA INSURANCE COMPANY S.A.L.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

1. GENERAL INFORMATION

Arabia Insurance Company S.A.L. (the “Parent Company”) was incorporated in 1944 and is subject to

Lebanese laws governing joint-stock companies and insurance companies. The consolidated financial

statements of the Company as at December 31, 2011 comprise Arabia Insurance Company S.A.L. and its

subsidiaries (the “Group”) described under note 3(C).

The main objective of the Group is to carry out direct insurance and reinsurance operations in addition to

short and long term placements and investments. The operations network of the Group is spread over the

following areas:

Nº.

Country of Branches

1. Lebanon - Headquarters 5

2. United Arab Emirates (branch) 4

3. Sultanate of Oman (branch) 2

4. Bahrain (branch) 1

5. Kuwait (branch) 1

6. Qatar (branch) 1

7. Jordan (subsidiary) 2

8. Syria (subsidiary) 6

22

13

2. ADOPTION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs)

2.1 Early adopted Standard during the current period

In the current year the Group has applied IFRS 9 Financial Instruments (as issued in November 2009

and revised in October 2010) and the related consequential amendments in advance of their effective

dates. The date of initial application is of January 1, 2011. Changes in accounting policies resulting

from the adoption of IFRS 9 have been applied on a retrospective basis without restatement of prior

periods as permitted by the Standard.

Financial assets

IFRS 9 introduces new classification and measurement requirements for financial assets that

are within the scope of IAS 39 Financial Instruments: Recognition and Measurement. As a

general rule, IFRS 9 requires all financial assets related to debt securities to be classified

and subsequently measured at either amortized cost or fair value on the basis of the entity’s

business model for managing the financial assets and the contractual cash flow

characteristics of the financial assets. However, equity securities and derivatives should all

be measured at fair value.

As required by IFRS 9, debt instruments are measured at amortized cost only if the asset is

held within a business model whose objective is to hold assets in order to collect contractual

cash flows and the contractual terms of the financial asset give rise on specified dates to

cash flows that are solely payments of principal and interest on the principal amount

outstanding. If either of the two criteria is not met, the debt instruments are classified as at

fair value through profit or loss (FVTPL).

However, the Group may choose at initial recognition to designate a debt instrument that meets the

amortized cost criteria as at FVTPL if doing so eliminates or significantly reduces an accounting

mismatch.

Debt instruments that are subsequently measured at amortized cost are subject to impairment.

Investments in equity instruments are classified and measured as at FVTPL except when the equity

investment is not held for trading and is designated by the Group as at fair value through other

comprehensive income (FVTOCI). If the equity investment is designated as at FVTOCI, all gains and

losses, except for dividend income that is generally recognized in profit or loss in accordance with IAS

18 Revenue, are recognized in other comprehensive income and are not subsequently reclassified to profit

or loss.

For debt instruments not designated at fair value through profit or loss under the fair value

option, reclassification is required between fair value through profit or loss and amortized

cost, or vice versa, if the Group’s business model objective for its financial assets changes

so that its previous measurement basis no longer applies.

14

IFRS 9 requires that derivatives embedded in contracts with a host that is a financial asset

within the scope of the standard are not separated. Instead the hybrid financial instrument is

assessed in its entirety as to whether it should be measured at amortized cost or fair value.

As at January 1, 2011, the directors have reviewed and assessed the Group’s existing financial assets.

The impact resulting from the initial application of IFRS 9 on the Group’s financial assets is detailed

under Note 5. Differences between the carrying amounts of financial assets and financial liabilities

from the adoption of IFRS 9 are recognized in opening retained earnings.

Financial liabilities

IFRS 9 also contains requirements for the classification and measurement of financial liabilities. One

major change in the classification and measurement of financial liabilities relates to the accounting for

changes in the fair value of a financial liability (designated as at fair value through profit or loss)

attributable to changes in the credit risk of that liability.

For financial liabilities that are designated as at fair value through profit or loss, the amount of change

in the fair value of the financial liability that is attributable to changes in the credit risk of that liability

is presented in other comprehensive income, unless the recognition of the effects of changes in the

liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch

in profit or loss. Changes in the fair value attributable to a financial liability’s credit risk are not

subsequently reclassified to profit or loss. Previously, under IAS 39, the entire amount of the change in

the fair value of the financial liability designated as at fair value through profit or loss was presented in

profit or loss.

15

2.2 Standards and Interpretations effective for the current period

The following new and revised standards and interpretations have been applied in the current

year with no material impact on the disclosures and amounts reported for the current and prior

years, but may affect the accounting for future transactions or arrangements:

Amendments to IAS 24 Related Party Disclosures (as revised in 2009) modify the definition of a related

party and simplify disclosures for government-related entities. The Parent Company and its subsidiary are

not government-related entities and the application of the revised definition of related party set out in IAS

24 (as revised in 2009) in the current year has not resulted in the identification of related parties that were

not identified as related parties under the previous Standard.

Amendments to IAS 32 Classification of Rights Issues address the classification of certain rights issues

denominated in a foreign currency as either equity instruments or as financial liabilities. The application of

the amendments has had no effect on the amounts reported in the current and prior years because the Group

has not issued instruments of this nature.

Amendments to IFRIC 14 - Prepayments of a Minimum Funding Requirement. The amendments correct an

unintended consequence of IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding

Requirements and their Interaction. The application of the amendments has had no effect on the Group’s

financial statements.

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments provides guidance regarding the

accounting for the extinguishment of a financial liability by the issue of equity instruments. In particular

equity instruments issued under such arrangements are measured at their fair value, and any difference

between the carrying amount of the financial liability extinguished and the fair value of equity instruments

issued are recognized in profit or loss. The application of IFRIC 19 has had no effect on the amounts

reported in the current and prior years because the Group has not entered into any transactions of this

nature.

Improvements to IFRSs issued in 2010 – Amendments to: IFRS 1; IFRS 3 (2008); IFRS 7; IAS 1; IAS 27

(2008); IAS34; IFRIC 13. The application of these improvements to IFRSs issued in 2010 has not had any

material effect on amounts reported in the consolidated financial statements.

16

2.3 Standards and Interpretations in issue but not yet effective

The Group has not applied the following new standards, amendments and interpretations that have been

issued but not yet effective: Effective for

annual periods

beginning on or after

----------------------------------------------------

Amendments to IFRS 7 Disclosures – Transfers of Financial

Assets increase the disclosure requirements for transactions

involving transfers of financial assets. These amendments are

intended to provide greater transparency around risk exposures

of transactions when a financial asset is transferred but the

transferor retains some level of continuing exposure in the

asset. The amendments also require disclosures where transfers

of financial assets are not evenly distributed throughout the

period. Currently, the Group has not entered into such

transactions.

July 1, 2011

IFRS 10 Consolidated Financial Statements* replaces the parts

of IAS 27 Consolidated and Separate Financial Statements that

deal with consolidated financial statements, and SIC 12

Consolidation – Special Purpose Entities. IFRS 10 uses control

as the single basis for consolidation, irrespective of the nature

of the investee and includes a new definition of control. IFRS

10 requires retrospective application subject to certain

transitional provisions providing an alternative treatment in

certain circumstances. IAS 27 Consolidated and Separate

Financial Statements* and IAS 28 Investments in Associates

and Joint Ventures* have been amended for the issuance of

IFRS 10.

IFRS 11 Joint Arrangements* replaces IAS 31 Interests in Joint

Ventures and SIC-13 Jointly Controlled Entities – Non

monetary Contributions by Venturers. IFRS 11 establishes two

types of joint arrangements: Joint operations and joint ventures.

The two types of joint arrangements are distinguished by the

rights and obligations of those parties to the joint arrangement.

In addition, joint ventures under IFRS 11 are required to be

accounted for using the equity method of accounting, whereas

jointly controlled entities under IAS 31 can be accounted for

using the equity method of accounting or proportionate. IAS 28

Investments in Associates and Joint Ventures has been amended

for the issuance of IFRS 11.

January 1, 2013

January 1, 2013

17

IFRS 12 Disclosure of Interests in Other Entities* is a disclosure

standard and is applicable to entities that have interests in subsidiaries,

joint arrangements, associates and/or unconsolidated structured

entities. In general, the disclosure requirements in IFRS 12 are more

extensive than those in the current standards.

January 1, 2013

IFRS 13 Fair Value Measurement defines fair value, establishes a

single framework for measuring fair value, and requires disclosures

about fair value measurement. The scope of IFRS 13 is broad and

applies to both financial and non-financial items for which other IFRSs

require or permit fair value measurement and disclosures about fair

value measurements, except in specified circumstances. In general, the

disclosure requirements in IFRS 13 are more extensive than those

required in the current standards.

Amendments to IAS 1 – Presentation of Other Comprehensive Income.

The amendments retain the option to present profit or loss and other

comprehensive income in either a single statement or in two separate

statements. However, items of other comprehensive income are

required to be grouped into those that will and will not subsequently be

reclassified to profit or loss with tax on items of other comprehensive

income required to be allocated on the same basis.

Amendments to IAS 12 Income Taxes provide an exception to the

general principles of IAS 12 for investment property measured using

the fair value model in IAS 40 Investment Property by the introduction

of a rebuttable presumption that the carrying amount of the investment

property will be recovered entirely through sale.

January 1, 2013

July 1, 2012

January 1, 2012

Amendments to IAS 19 Employee Benefits eliminate the “corridor

approach” and therefore require an entity to recognize changes in

defined benefit plan obligations and plan assets when they occur.

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

Amendments to IFRS 7 Financial Instruments: Disclosures enhancing

disclosures about offsetting of financial assets and liabilities.

Amendments to IAS 32 Financial Instruments: Presentation relating to

application guidance on the offsetting of financial assets and financial

liabilities.

January 1, 2013

January 1, 2013

January 1, 2013

January 1, 2013

18

* In May 2011, a package of five Standards on consolidation, joint arrangements, associates and

disclosures was issued, including IFRS 10, IFRS 11, IFRS 12, IAS 27 (as revised in 2011) and IAS 28

(as revised in 2011). These five standards are effective for annual periods beginning on or after 1

January 2013. Earlier application is permitted provided that all of these five standards are applied early

at the same time.

The directors anticipate that the adoption of the above Standards and Interpretation will have no material

impact on the consolidated financial statements of the Group in the period of initial application, except

for IFRS 13 which may affect the amounts reported in the financial statements and result in more

extensive disclosures in the financial statements.

3. SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance:

The consolidated financial statements have been prepared in accordance with International Financial

Reporting Standards (IFRSs).

Basis of Preparation

The consolidated financial statements have been prepared on the historical cost basis except for the

following measured at fair value:

- Financial instruments designated at fair value through profit or loss.

- Investments in equities.

- Other financial assets not held in a business model whose objective is to hold assets to collect

contractual cash flows or whose contractual terms do not give rise solely to payments of

principal and interest (effective January 1, 2011).

- Available-for-sale financial assets (applicable prior to January 1, 2011).

- Derivative financial instruments measured at fair value.

Assets and liabilities are grouped according to their nature and are presented in an approximate order that

reflects their relative liquidity.

The principal accounting policies applied are set out below:

A. Basis of Consolidation:

The consolidated financial statements of Arabia Insurance Company S.A.L. incorporate the financial

statements of the Parent Company and enterprises controlled by the Parent Company (its subsidiaries).

Control is achieved when, among other things, the Parent Company has the power to govern the financial

and operating policies of an entity so as to obtain benefits from its activities.

19

The consolidated subsidiaries consist of:

Legal Percentage

Location of Ownership

Name of Company of Company 2011 2010 Activities

% %

Arabia S.A.L. (Holding) Lebanon 100 100 Investment vehicle

Arabia Insurance International B.S.C. Bahrain 100 100 Service Company (Offshore)

UPI (Services) Limited Cyprus 100 100 Service Company (Offshore)

General Arabia Insurance Company ltd. Jordan 51.44 51.44 Direct insurance operations

Arabia Insurance Company – Syria Syria 50.06 50.06 Direct insurance operations

Al-Mashriq Financial

Investments Co. S.A.L. Lebanon 87.94 87.13 Investment Company

Arabia Insurance Brokers S.A.R.L. Lebanon 100 100 Insurance brokerage – Dormant

Lawrence S.A.L (Holding) Lebanon 100 100 Holding Company

Income and expenses of subsidiaries acquired or disposed of during the year are included in the

consolidated income statement from the effective date of acquisition and up to the effective date of

disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the

Parent Company and to the non-controlling interests even if this results in the non-controlling interests

having a deficit balance.

Where necessary, adjustments are made to the financial statements of the subsidiaries to bring their

accounting policies into line with those used by other entities of the Group.

All intra-group transactions, balances, income and expenses (except for foreign currency transaction

gains or loss) are eliminated on consolidation. Unrealized losses are eliminated in the same way as

unrealized gains, but only to the extent that there is no evidence of impairment.

Changes in the Group's ownership interests in subsidiaries that do not result in the Group losing control

over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group's

interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in

the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted

and the fair value of the consideration paid or received is recognized directly in equity and attributed to

owners of the Parent Company.

Upon the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non-

controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit

arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the

previous subsidiary, then such interest is measured at fair value at the date that control is lost

20

B. Business Combinations:

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred

in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date

fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners

of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree.

Acquisition-related costs other than those associated with the issue of debt or equity securities are

generally recognized in profit or loss as incurred.

The consideration transferred does not include amounts related to the settlement of pre-existing

relationships. Such amounts are generally recognized in profit or loss.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-

controlling interests in the acquiree, and the fair value of the acquirer's previously held equity interest in

the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and

the liabilities assumed. When the excess is negative, a bargain purchase gain is recognized immediately

in profit or loss.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate

share of the entity's net assets in the event of liquidation may be initially measured either at fair value or

at the non-controlling interests' proportionate share of the recognized amounts of the acquiree's

identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

Other types of non-controlling interests are measured at fair value or, when applicable, on the basis

specified in another IFRS.

Any contingent consideration payable is recognized at fair value at the acquisition date. If the contingent

consideration is classified as equity, it is not remeasured and settlement is accounted for within equity.

Otherwise, subsequent changes to the fair value of the contingent consideration are recognized in profit

or loss.

C. Foreign Currencies:

The consolidated financial statements are presented in Lebanese Pound which is the reporting currency of

the Parent Company, whereas the primary currency of the economic environment in which the Parent

Company operates (functional currency) is the U.S. Dollar.

In preparing the financial statements of each individual group entity, transactions in currencies other than

the entity's functional currency (foreign currencies) are recognized at the rates of exchange prevailing at

the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign

currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value

that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair

value was determined. Non-monetary items that are measured in terms of historical cost in a foreign

currency are not retranslated.

21

Exchange differences on monetary items are recognized in profit or loss in the period in which they arise

except for exchange differences on transactions entered into in order to hedge certain foreign currency

risks, and except for exchange differences on monetary items receivable from or payable to a foreign

operation for which settlement is neither planned nor likely to occur in the foreseeable future, which are

recognized in other comprehensive income, and presented in the translation reserve in equity. These are

recognized in profit or loss on disposal of the net investment.

For the purposes of presenting consolidated financial statements, the assets and liabilities of the Group's

foreign operations are translated into Lebanese Pound using exchange rates prevailing at the end of each

reporting period. Income and expense items are translated at the average exchange rates for the period,

unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the

dates of the transactions are used. Exchange differences arising, if any, are recognized in other

comprehensive income and accumulated in equity (attributed to non-controlling interests as appropriate).

Such exchange differences are recognized in profit or loss in the period in which the foreign operation is

disposed of.

In addition, in relation to a partial disposal of a subsidiary that does not result in the Group losing control

over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-

controlling interests and are not recognized in profit or loss.

D. Recognition and Derecognition of Financial Assets and Liabilities:

Financial assets and liabilities are initially recognized on the trade date at which the Group becomes a

party to the contractual provisions of the instrument.

Financial assets and liabilities are initially measured at fair value. Transaction costs that are directly

attributable to the acquisition or issue of financial assets and financial liabilities (other than financial

assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair

value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs

directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit

or loss are recognized immediately in profit or loss.

The Group derecognizes a financial asset only when the contractual rights to the cash flows from the

asset expire, or when it transfers the financial asset and substantially all the risks and rewards of

ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the

risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its

retained interest in the asset and an associated liability for amounts it may have to pay. If the Group

retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group

continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds

received.

On derecognition of a financial asset measured at amortized cost, the difference between the asset’s

carrying amount and the sum of the consideration received and receivable is recognized in profit or loss.

22

Effective January 1, 2011, upon derecognition of a financial asset that is classified as fair value through

other comprehensive income, the cumulative gain or loss previously accumulated in the investments

revaluation reserve is not reclassified to profit or loss, but is reclassified to retained earnings.

The Group derecognizes financial liabilities when, and only when, the Group’s obligations are discharged,

cancelled or they expire. The difference between the carrying amount of the financial liability derecognized

and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is

recognized in profit or loss

E. Classification of Financial Assets:

Policy Applicable effective January 1, 2011 (IFRS 9):

All recognized financial assets are measured in their entirety at either amortized cost or fair value,

depending on their classification.

Debt Instruments:

Non-derivative debt instruments that meet the following two conditions are subsequently measured at

amortized cost less impairment loss (except for debt investments that are designated as at fair value through

profit or loss on initial recognition):

They are held within a business model whose objective is to hold the financial assets in order to

collect the contractual cash flows, rather than to sell the instrument prior to its contractual maturity

to realize its fair value changes, and

The contractual terms of the financial asset give rise on specified dates to cash flows that are solely

payments of principal and interest on the principal amount outstanding.

Debt instruments which do not meet both of these conditions are measured at fair value through profit or

loss (“FVTPL”). In addition, debt instruments that meet the amortized cost criteria but are designated as at

FVTPL are measured at FVTPL.

Even if a debt instrument meets the two amortized cost criteria above, it may be designated as at FVTPL

upon initial recognition if such designation eliminates or significantly reduces a measurement or

recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing

the gains and losses on them on different bases.

Equity Instruments:

Investments in equity instruments are classified as at FVTPL, unless the Group designates an investment

that is not held for trading as at fair value through other comprehensive income (“FVTOCI”) on initial

recognition (see below).

23

Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any gains

or losses arising on re-measurement recognized in profit or loss.

On initial recognition, the Group can make an irrevocable election (on an instrument-by-instrument basis)

to designate investments in equity instruments as at fair value through other comprehensive income

(“FVTOCI”). Investments in equity instruments at FVTOCI are measured at fair value. Gains and losses

on such equity instruments are recognized in other comprehensive income, accumulated in equity and are

never reclassified to profit or loss. Only dividend income is recognized in profit or loss unless the

dividend clearly represents a recovery of part of the cost of the investment, in which case it is recognized

in other comprehensive income. Cumulative gains and losses recognized in other comprehensive income

are transferred to retained earnings on disposal of an investment.

Designation at FVTOCI is not permitted if the equity investment is held for trading.

A financial asset is held for trading if:

it has been acquired principally for the purpose of selling it in the near term; or

on initial recognition it is part of a portfolio of identified financial instruments that the Group

manages together and has evidence of a recent actual pattern of short-term profit-taking; or

it is a derivative that is not designated and effective as a hedging instrument or a financial

guarantee.

Reclassification:

Financial assets are reclassified between FVTPL and amortized cost or vice versa, if and only if, the

Group’s business model objective for its financial assets changes so its previous model assessment would

no longer apply. When reclassification is appropriate, it is done prospectively from the reclassification

date.

Reclassification is not allowed where:

the 'other comprehensive income' option has been exercised for a financial asset, or

the fair value option has been exercised in any circumstance for a financial instrument.

Policy Applicable prior to January 1, 2011 (IAS 39):

Subsequent to initial recognition, investment securities are accounted for depending on their classification

as either: held-to-maturity, loans and receivables, available-for-sale, or fair value through profit or loss.

Held-to-Maturity Investment Securities:

Held-to-maturity investments are non-derivative assets with fixed or determinable payments and fixed

maturity that the Group has the positive intent and ability to hold to maturity, and which are not designated

at fair value through profit or loss or available-for-sale.

Held-to-maturity investments are carried at amortized cost.

24

Loans and Receivables Investment Securities:

Loans and receivables investment securities are non-derivative assets with fixed or determinable payments

and fixed maturity that the Group has the ability to hold to maturity.

Loans and receivables investment securities are carried at amortized cost.

Available-for-Sale Investment Securities:

Available-for-sale investments are non-derivative investments that are not designated as another category of

financial assets. Unquoted equity securities whose fair value cannot be readily measured are carried at cost.

All other available-for-sale investments are carried at fair value and unrealized gains or losses are included

in other comprehensive income.

The change in fair value on available-for-sale debt securities reclassified to held-to-maturity is segregated

from the change in fair value of available-for-sale debt securities under equity and is amortized over the

remaining term to maturity of the debt security as a yield adjustment.

Designation at Fair Value through Profit and Loss:

The Group designates financial assets and liabilities at fair value through profit or loss when either:

The assets or liabilities are managed, evaluated and reported internally on a fair value basis; or

The designation eliminates or significantly reduces an accounting mismatch which would

otherwise arise; or

The asset or liability contains an embedded derivative that significantly modifies the cash flows

that would otherwise be required under the contract.

F. Financial Liabilities and Equity Instruments:

Classification as debt or equity:

Debt and equity instruments issued by a group entity are classified as either financial liabilities or as

equity in accordance with the substance of the contractual arrangements and the definitions of a financial

liability and an equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after

deducting all of its liabilities. Equity instruments issued by the Group are recognized at the proceeds

received, net of direct issue costs.

Repurchase of the Parent Company’s own equity instruments is recognized and deducted directly in equity.

No gain or loss is recognized in profit or loss on the purchase, sale, issue, or cancellation of the Parent

Company’s own equity instruments.

25

The component parts of compound instruments (convertible notes) issued by the Bank are classified

separately as financial liabilities and equity in accordance with the substance of the contractual

arrangements and the definitions of a financial liability and an equity instrument. A conversion option

that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed

number of the Company’s own equity instruments is an equity instrument.

Financial Liabilities:

Financial Liabilities that are not held-for-trading and are not designated as at FVTPL are subsequently

measured at amortized cost.

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is

designated as at FVTPL.

A financial liability other than a financial liability held for trading may be designated as at FVTPL upon

initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency

that would otherwise arise; or

the financial liability forms part of a group of financial assets or financial liabilities or both, which

is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s

documented risk management or investment strategy, and information about the grouping is

provided internally on that basis; or

it forms part of a contract containing one or more embedded derivatives, and the entire combined

contract is designated as at FVTPL in accordance with IFRS 9.

G. Offsetting:

Financial assets and liabilities are set-off and the net amount is presented in the consolidated statement of

financial position when, and only when, the Group has a legal right to set-off the amounts or intends either

to settle on a net basis or to realize the asset and settle the liability simultaneously.

H. Fair Value Measurement of Financial Instruments:

Fair value is the amount agreed to exchange an asset or to settle a liability between a willing buyer and a

willing seller in an arm’s length transaction.

When published price quotations exist, the Group measures the fair value of a financial instrument that is

traded in an active market using quoted prices for that instrument. A financial instrument is regarded as

quoted in an active market if quoted prices are readily and regularly available and those prices represent

actual and regularly occurring market transactions on an arm’s length basis.

26

If the market for a financial instrument is not active, the Group establishes fair value by using valuation

techniques. Valuation techniques include observable market data about the market conditions and other

factors that are likely to affect the instrument’s fair value. The fair value of a financial instrument is based

on one or more factors such as the time value of money and the credit risk of the instrument, adjusted for

any other factors such as liquidity risk.

I. Impairment of Financial Assets:

Effective January 1, 2011 financial assets carried at amortized cost; and prior to January 1, 2011 financial

assets other than those carried at fair value through profit and loss, are assessed for indicators of impairment

at the reporting date. Financial assets are impaired where there is objective evidence that, as a result of one

or more events that occurred after the initial recognition of the asset, a loss event has occurred which has an

impact on the estimated future cash flows of the financial asset.

Objective evidence that an impairment loss related to financial assets has been incurred can include

information about the debtors’ or issuers’ liquidity, solvency and business and financial risk exposures and

levels of and trends in delinquencies for similar financial assets, taking into account the fair value of

collaterals and guarantees.

The Group considers evidence of impairment for assets measured at amortized cost at both specific asset

and collective level.

Impairment losses on assets carried at amortized cost are measured as the difference between the carrying

amount of the financial assets and the corresponding estimated recoverable amounts. Losses are recognized

in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases, the previously

recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the

financial asset at the date the impairment is reversed does not exceed what the amortized cost would have

been, had the impairment not been recognized.

For investments in equity securities, a significant or prolonged decline in fair value below cost is objective

evidence of impairment.

Prior to January 1, 2011: For available-for-sale investment securities, the cumulative losses previously

recorded in other comprehensive income and accumulated in equity were recognized in profit or loss in case

the impairment losses are substantiated by a prolonged decline in fair value of the investment securities.

Any increase in the fair value of available-for-sale equity securities, subsequent to an impairment loss, was

not recognized in profit or loss. Any increase in the fair value of available-for-sale debt securities,

subsequent to an impairment loss, was recognized in profit or loss.

27

J. Derivative Financial Instruments:

Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are

subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is

recognized in profit or loss immediately unless the derivative is designated and effective as a hedging

instrument, in which event the timing of the recognition in profit or loss depends on the nature of the

hedge relationship.

Embedded Derivatives

Derivatives embedded in other financial instruments or other host contracts with embedded

derivatives are treated as separate derivatives when their risks and characteristics are not closely

related to those of the host contracts and the host contract:

is not measured at fair value with changes in fair value recognized in profit or loss.

is not an asset within the scope of IFRS 9 (Policy effective January 1, 2011)

K. Property and Equipment:

Property and equipment except for buildings acquired prior to 1993 are stated at historical cost, less

accumulated depreciation and impairment loss, if any. Buildings acquired prior to 1993 are stated at their

revalued historical amounts, based on market prices prevailing at the end of 1993 less accumulated

depreciation and impairment loss, if any. Resulting revaluation surplus is reflected under “Equity”.

Depreciation of property and equipment, other than land and advance payments on capital expenditures is

calculated systematically using the straight-line method over the estimated useful lives of the related assets

as follows:

Buildings 40 years

Furniture and Equipment 3 to 10 years

Properties in the course of construction for production, supply or administrative purposes are carried at

cost, less any recognized impairment loss. Cost includes professional fees and, for qualifying assets,

borrowing costs capitalized in accordance with the Group’s accounting policy. Such properties are

classified to the appropriate categories of property, plant and equipment when completed and ready for

intended use. Depreciation of these assets, on the same basis as other property assets, commences when

the assets are ready for their intended use.

L. Intangible Assets:

Intangible assets consisting of computer software are amortized over a period of five years and are

subject to impairment testing. Subsequent expenditure on software assets is capitalized only when it

increases the future economic benefits embodied in the specific asset to which it relates. All other

expenditure is expensed as incurred.

28

M. Impairment of Tangible and Intangible Assets:

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to

determine whether there is any indication that those assets have suffered an impairment loss. If any such

indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the

impairment loss (if any).

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in

use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that

reflects current market assessments of the time value of money and the risks specific to the asset for

which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount

of the asset is reduced to its recoverable amount. An impairment loss is recognized immediately in profit

or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is

treated as a revaluation decrease.

Where an impairment loss subsequently reverses, the carrying amount of the asset

(cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the

increased carrying amount does not exceed the carrying amount that would have been determined had no

impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an

impairment loss is recognized immediately in profit or loss, unless the relevant asset is carried at a

revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

N. Provision for Employees' End-of-Service Indemnities:

Obligations for contributions to defined employees’ benefits are recognized as an expense on a current

basis.

The Group provides for the employees’ end-of-service indemnities in accordance with local laws and

regulations governing these indemnities in the countries where the Group operates.

Employees' End-of-Service Indemnities: (Under the Lebanese Jurisdiction)

The provision for staff termination indemnities is based on the liability that would arise if the

employment of all the staff were voluntarily terminated at the reporting date. This provision is calculated

in accordance with the directives of the Lebanese Social Security Fund and Labor laws based on the

number of years of service multiplied by the last monthly basic salary paid plus the monthly average of

the last 12 months’ additional benefits paid and less contributions paid to the Lebanese Social Security

National Fund and interest accrued by the Fund.

29

O. Provisions:

Provision is recognized if, as a result of a past event, the Group has a present legal or constructive

obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be

required to settle the obligation. Provisions are determined by discounting the expected future cash flows

at a pre-tax rate that reflects current market assessments of the time value of money and, where

appropriate, the risks specific to the liability.

P. Insurance contracts:

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risks

from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain

future event (the insured event) adversely affects the policyholder. Such contracts may also transfer

financial risk.

The insurance contracts are classified in the following categories depending on the nature of the risk

insured:

- Non-life insurance contracts:

These contracts are marine, motor, property, general accidents, workmen’s compensation and medical

insurance contracts.

Provision for Outstanding Claims

The provision for outstanding claims is made for all claims reported to the Group and still unpaid at the

reporting date including the actual cost of claims incurred but not reported (IBNR).

Unearned Premiums

Unearned premiums represent the part of written premiums, including accessories and other fees, that is

estimated to be earned in subsequent periods. Unearned premiums are calculated using the prorata

temporis method except for the marine department which is computed on the basis of 25% of written

premiums. The change in the provision is recorded in the income statement to recognize revenue over

the period of the risk.

Premium Deficiency Reserve

Premium deficiency reserve is computed on the basis of a percentage of losses exceeding earned

premiums.

30

- Life Insurance Contracts:

The life insurance contracts are classified in the following categories

- Traditional products:

This category consists of term life (individual or group) and classic combined assurances products

(various traditional endowment plans).

- Universal Life Insurance Contracts with discretionary participation features:

These insurance contracts contain discretionary participation features (DPF) which entitle the

contract holder to receive, as a supplement to the standard guaranteed benefits, additional bonuses:

Whose amount or timing is contractually at the discretion of the insurer; and

That are based on realized and/or unrealized investment returns on a specified pool of assets

held by the issuer.

- Contracts on behalf of life insured where the insured bear the investment risk with significant

insurance risk (Unit Linked):

These contracts transfer the financial risk to the policyholder and at the same time contain certain

significant insurance risk.

Unbundling of deposit components:

Some life insurance contracts contain both an insurance component and a deposit component. The

Group has measured the deposit component separately and presented the life insurance contracts by

applying the principle of unbundling the insurance components from the deposit components which

are recognized in the financial statements as follows:

Insurance Components:

Insurance components are reflected separately under income together with the elements of the

insurance income related to loading and charges and premiums in the technical pipeline, which are

recognized as income on accrual basis over the benefiting period.

Deposit Components:

Savings and/or deposit components of premiums are recognized as liabilities related to insurance

contracts. These liabilities, including unit-linked products, are increased or decreased by the credit

interest, either positive or negative change in the unit prices of the corresponding underlying

investment portfolio, policy administration and fund management fees, mortality and surrender

charges, withdrawals, and other factors impacting the value of the deposit component of the

insurance contracts.

31

Mathematical provision for life insurance contracts:

Provisions for traditional products are calculated as the difference between the actuarial present

value of the branch’s future liabilities and the actuarial present value of the policyholders’ future

premiums based on the tables of mortality and the actuarial interest rates as per the original tariffs.

In case losses arise from liability adequacy tests, an additional provision is raised.

The provisions for universal/unit-linked life insurance policies are calculated using the retrospective

method (i.e. based on the savings account value).

At each reporting date, an actuarial valuation of the life portfolio is carried out by a professional

independent actuary and a technical assessment is performed in respect of unearned revenues.

Moreover, outstanding liabilities of the accumulation of deposit components and profits related are

also based on an actuarial technical assessment. Prevailing laws require that such actuarial valuation

be carried out annually.

Provision for outstanding claims

The provision for outstanding claims is made for all claims reported to the Group and still unpaid at

the reporting date. Claims are recognized in the income statement when incurred based on

estimated benefits.

Q. Revenue and Expense Recognition:

Insurance premiums and other insurance revenues are recognized as income when the insurance policies

are issued.

Interest income and expense are recognized on an accrual basis, taking into account of the principal

outstanding and the applicable interest rate.

Rental income from property which is leased under operating leases is recognized on a straight line basis

over the term of the relevant lease.

Fee and commission insurance income consists primarily of reinsurance and profit commission,

policyholder administration fees and other contract fees. Reinsurance commissions receivable are deferred

in the same way as acquisition cost. All other fee and commission income are recognized as the services are

provided.

Dividend income is recognized when the right to receive payment is established.

32

R. Income Tax:

Income tax expense represents the sum of the tax currently payable and deferred tax. Income tax is

recognized in the income statement except to the extent that it relates to items recognized directly in other

comprehensive income, in which case it is recognized in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using rates enacted at the

reporting date. Income tax payable is reflected in the consolidated statement of financial position net of

taxes previously settled in the form of withholding tax.

Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the

financial statements and the corresponding tax base used in the computation of taxable profit, and are

accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized

for all taxable temporary differences and deferred tax assets are recognized to the extent that it is

probable that taxable profits will be available against which deductible temporary differences can be

utilized.

S. Liability Adequacy Test:

Liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related

deferred acquisition costs. Any deficiency is immediately charged to profit or loss for the year initially by

writing-off the deferred acquisition costs and by subsequently establishing a provision for losses arising

from liability adequacy tests.

T. Reinsurance Contracts:

Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on

one or more contracts issued by the Group and that meet the classification requirements for insurance

contracts are classified as reinsurance contracts. Insurance contracts entered into by the Group under

which the contract holder is another insurer are included with insurance contracts.

The benefits to which the Group is entitled under its reinsurance contracts are recognized as receivables

from reinsurance companies under reinsurance assets in the statement of financial position.

Reinsurance share of premiums and claims is computed on the basis of effective outwards. The

reinsurers’ portion towards the above outstanding claims, claims incurred but not reported and unearned

premiums is classified as reinsurance assets in the statement of financial position.

The Group assesses its reinsurance assets for impairment on a regular basis. If there is objective evidence

that the reinsurance asset is impaired, the Group reduces the carrying amount of the reinsurance assets to

its recoverable amount and recognizes that impairment loss in the profit or loss for the year.

33

U. Insurance Receivables and Payables:

Receivables and payables arising under insurance contracts are recognised when due and measured at

amortised cost. A provision for impairment is established when there is objective evidence that, as a

result of one or more events that occurred after the initial recognition, the estimated future cash flows

have been impacted.

V. Deferred Acquisition Costs:

Deferred acquisition cost represents the deferred portion of the commission paid to brokers and sponsors.

Deferred acquisition costs are amortized systematically over the life of the contracts and tested for

impairment at each reporting date. Any amount not recoverable is expensed. They are derecognized when

the related contracts are settled or disposed of.

W. Treasury Shares:

Treasury shares are carried at cost and presented in the consolidated statement of financial position as a

deduction from Equity. Gains resulting from sale of treasury share are also presented in equity under

“Surplus on sale of treasury shares”.

Z. Distribution of Dividends:

The appropriation of proposed dividends from retained earnings is reflected separately in the statement of

changes in equity based on the Board’s recommendation, and reversed to liability in the year it is

approved by the General Assembly of Shareholders.

W. Consolidated Assets, Liabilities, and Net Assets of the Life Division:

Consolidated assets, liabilities, and net assets of the Life Division, comprising the life division of Arabia

Insurance Company S.A.L. and the life division of General Arabia Insurance Company ltd. – Amman, are

presented in a separate statement for the Life Division (Appendix I, II, III) and included as a line item in

the consolidated financial statements.

Z. Cash and Cash Equivalents:

Cash and cash equivalents comprise unrestricted cash on hand and demand deposits and other short term

deposits with original maturity period not exceeding three months.

AA. Investment Property:

Investment property is carried at cost less accumulated depreciation and impairment loss, if any.

34

4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group’s accounting policies, which are described in note 3, the management are

required to make judgements, estimates and assumptions about the carrying amounts of assets and

liabilities that are not readily apparent from other sources. The estimates and associated assumptions are

based on historical experience and other factors that are considered to be relevant. Actual results may

differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognised in the period in which the estimate is revised if the revision affects only that

period or in the period of the revision and future periods if the revision affects both current and future

periods.

Critical Accounting Judgments:

A. Critical accounting judgments in applying the Group’s accounting policies:

Classification of Financial Assets (Applicable from January 1, 2011):

Business Model:

The business model test requires the Group to assess whether its business objective for financial assets

is to collect the contractual cash flows of the assets rather than realize their fair value change from sale

before their contractual maturity. The Group considers at which level of its business activities such

assessment should be made. Generally, a business model can be evidenced by the way business is

managed and the information provided to management. However the Group’s business model can be

to hold financial assets to collect contractual cash flows even when there are some sales of financial

assets. While IFRS 9 provides some situations where such sales may or may not be consistent with the

objective of holding assets to collect contractual cash flows, the assessment requires the use of

judgment based on facts and circumstances.

In determining whether its business model for managing financial assets is to hold assets in order to

collect contractual cash flows the Group considers:

The frequency and volume of sales;

The reasons for any sales;

How management evaluates the performance of the portfolio;

The objectives for the portfolio.

35

Characteristics of the Financial Asset:

Once the Group determines that its business model is to hold the assets to collect the contractual cash

flows, it exercises judgment to assess the contractual cash flows characteristics of a financial asset. In

making this judgment, the Group considers the contractual terms of the acquired asset to determine

that they give rise on specific dates, to cash flows that solely represent principal and principal

settlement and accordingly may qualify for amortized cost accounting.

Features considered by the Group that would be consistent with amortized cost measurement include:

Fixed and / or floating interest rate;

Caps, floors, collars;

Prepayment options.

Features considered by the Group that would be inconsistent with amortized cost measurement

include:

Leverage (i.e. options, forwards and swaps);

Conversion options;

Inverse floaters;

Variable rate coupons that reset periodically;

Triggers that result in a significant reduction of principal, interest or both.

Key Sources of Estimation Uncertainty:

The following are the key assumptions concerning the future, and other key sources of estimation

uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the

carrying amounts of assets and liabilities within the next financial year.

Impairment of insurance receivables:

The recoverable amount of insurance receivables is estimated when there is indication of incomplete

collectibility of these receivables. The determination of impairment requires management to assess the

solvency and financial liquidity of policyholders and reinsurers. Moreover, percentages of collections are

reviewed based on the historical information of the Group and the detailed studies conducted during the

year, in addition to the opinion of the legal management of the Group. The difference between the

recoverable amounts and the book value is recognized as an expense in the income statement. The

difference between the actual amounts collected in future periods and those previously estimated is

recognized in the income statement at the date of collection.

36

The ultimate liability arising from claims made under insurance contracts:

The estimate of ultimate liability arising from the claims made under insurance contracts is the Group’s

most critical accounting estimate. There are sources of uncertainty that need to be considered in the

estimate of the liability that the Group will eventually pay for such claims. Estimates have to be made

both for expected ultimate cost of claims reported at the reporting date and for the expected ultimate cost

of claims incurred but not reported (“IBNR”) at the reporting date. Liabilities for unpaid reported claims

are estimated using the input of assessments for individual cases reported to the Group and the

management estimates based on past claims settlement trends for the claims incurred but not reported.

Claim liabilities are also tested for adequacy as of the reporting date and the related provisions are

adjusted accordingly.

Determining Fair Values:

The determination of fair value for financial assets for which there is no observable market price requires

the use of valuation techniques. For financial instruments that trade infrequently and have little price

transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity,

concentration, uncertainly of market factors, pricing assumptions and other risks affecting the specific

instrument.

Where available, management has used market indicators in its mark to model approach for the valuation

of the Lebanese government debt securities at fair value. The IFRS fair value hierarchy allocates the

highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities, and the

lowest priority to unobservable inputs. The fair value hierarchy used in the determination of fair value

consists of three levels of input data for determining the fair value of an asset or liability.

Level 1 - quoted prices for identical items in active, liquid and visible markets such as stock exchanges,

Level 2 - observable information for similar items in active or inactive markets,

Level 3 -unobservable inputs used in situations where markets either do not exist or are illiquid.

Unobservable inputs are used to measure fair value to the extent that observable inputs are not available,

thereby allowing for situations in which there is little, if any, market activity for the asset or liability at

the measurement date. However, the fair value measurement objective should remain the same; that is, an

exit price from the perspective of a market participant that holds the asset or owes the liability.

Unobservable inputs are developed based on the best information available in the circumstances, which

may include the reporting entity's own data.

Impairment of Available-for-Sale Equity Investments (Prior to January 1, 2011):

The Group determines that available-for-sale equity investments are impaired when there has been a

significant or prolonged decline in the fair value below its cost. This determination requires judgment.

In making this judgment the Group, among other factors, evaluates the normal volatility in share price.

37

5. CLASSIFICATION OF FINANCIAL ASSETS ON THE DATE OF INITIAL APPLICATION OF IFRS 9

As discussed in Note 2 (2.1) the Group has early adopted IFRS 9 Financial Instruments. Below is a

summary of the transitional classification and measurement adjustments to Group’s investments

securities on the date of initial application of IFRS 9. All other financial assets were classified as loans

and receivables under IAS 39 and have been classified at amortized cost under IFRS 9:

General Insurance Departments:

Carrying Carrying

amount under amount under

Classification/ IAS 39 at IFRS 9 at

Previous classification Designation December 31, January 1,

under IAS 39 under IFRS 9 2010 2011

LBP'000 LBP'000

Fixed income debt securities Available-for-sale At FVTPL 5,603,817 5,603,817

Fixed income debt securities Available-for-sale At amortized cost 3,222,973 3,184,490

Fixed income debt securities Held-to-maturity At amortized cost 6,162,887 6,162,887

Fixed income debt securities Held-to-maturity At FVTPL 1,221,743 1,221,743

Fixed income debt securities Available-for-sale At FVTOCI 3,991,770 3,991,770

Equity securities Available-for-sale At FVTPL 6,238,359 6,238,359

Equity securities Available-for-sale At FVTOCI 86,086,950 86,086,950

Funds Available-for-sale At FVTPL 9,540,284 9,540,284

Funds Available-for-sale At FVTOCI 549,500 549,500

Commodities At FVTPL At FVTPL 316,819 316,819

122,935,102 122,896,619

Life Division:

Carrying Carrying

amount under amount under

Classification/ IAS 39 at IFRS 9 at

Previous classification Designation December 31, January 1,

under IAS 39 under IFRS 9 2010 2011

LBP'000 LBP'000

Fixed income debt securities Held-to-maturity At amortized cost 7,728,636 7,728,636

Fixed income debt securities Available-for-sale At amortized cost 3,797,280 4,036,179

Fixed income debt securities Available-for-sale At FVTPL 772,979 772,979

Equity securities Available-for-sale At FVTPL 475,345 475,345

Equity securities Available-for-sale At FVTOCI 6,480,088 6,480,088

19,254,328 19,493,227

The impact of the early adoption of IFRS 9 on the opening retained earnings and the cumulative change

in fair value attributable to the owners of the Parent Company as at January 1, 2011 was as follows:

38

General Insurance Departments:

Cumulative

Change

Retained in fair value

Earnings (under Equity)

LBP’000 LBP’000

Reported balances - December 31, 2010 33,873,315 14,630,603

Allocation to retained earnings of portion of change in

fair value related to portfolio classified as at fair value

through profit or loss 366,483 ( 366,483)

Offset of change in fair value related to portfolio classified

as at amortized cost - ( 18,408)

Reported balances - January 1, 2011 34,239,798 14,245,712

The impact of the early adoption of IFRS 9 on the opening retained earnings and the cumulative change

in fair value attributable to the non-controlling interests as at January 1, 2011 was LBP172million for the

available-for-sale securities classified at FVTPL and LBP20million for those securities classified at

amortized cost.

Life Division:

Cumulative

Change

Retained in fair value

Earnings (under Equity)

LBP’000 LBP’000

Reported balances - December 31, 2010 9,398,905 850,655

Allocation to retained earnings of portion of change in fair

value related to portfolio classified as at fair value through

profit or loss ( 140,877) 140,877

Offset of change in fair value related to portfolio classified

as at amortized cost - 238,899

Reported balances - January 1, 2011 9,258,028 1,230,431

39

6. CASH AND BANKS

This caption consists of the following:

December 31, 2011

General

Insurance Life

Departments Division Total

LBP’000 LBP’000 LBP’000

Cash on hand 942,754 11,057 953,811

Checks for collection 50,519 - 50,519

Demand deposits 23,136,471 4,019,076 27,155,547

Term deposits (original maturity less than 3 months) 22,558,116 3,861,230 26,419,346

Cash and cash equivalents 46,687,860 7,891,363 54,579,223

Term deposits 34,190,898 1,284,204 35,475,102

Deposits pledged in guarantee of insurance business 70,748,612 9,455,200 80,203,812

151,627,370 18,630,767 170,258,137

Accrued interest receivable 1,329,199 51,627 1,380,826

152,956,569 18,682,394 171,638,963

December 31, 2010

General

Insurance Life

Departments Division Total

LBP’000 LBP’000 LBP’000

Cash on hand 1,524,479 15,139 1,539,618

Checks for collection 3,613 - 3,613

Demand deposits 42,640,629 6,159,542 48,800,171

Term deposits (original maturity less than 3 months) - 5,912,340 5,912,340

Cash and cash equivalents 44,168,721 12,087,021 56,255,742

Term deposits 70,883,430 1,847,488 72,730,918

Deposits pledged in guarantee of

insurance business 55,123,987 8,934,083 64,058,070

170,176,138 22,868,592 193,044,730

Accrued interest receivable 1,955,292 74,186 2,029,478

172,131,430 22,942,778 195,074,208

40

Cash and banks of the general insurance departments and life division are composed of the following

currencies:

General

Insurance Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Lebanese Pound 10,738,660 9,202,172 856,810 825,326

U.S Dollar 10,708,751 21,764,070 3,500,529 5,559,237

Omani Riyal 37,435,330 33,335,671 4,291,628 3,754,598

U.A.E Dirham 15,404,185 16,005,330 5,168,100 5,396,870

Euro 1,128,166 2,708,963 17,408 1,048,626

Kuwaiti Dinar 3,492,162 3,692,765 315,186 684,485

Bahraini Dinar 14,477,436 14,257,473 2,558,984 3,223,008

Syrian Pound 43,318,916 52,127,200 - -

Jordanian Dinar 11,267,478 10,986,588 1,718,786 2,125,534

Qatar Riyal 3,124,991 4,689,747 125,617 228,656

Other currencies 531,295 1,406,159 77,719 22,252

151,627,370 170,176,138 18,630,767 22,868,592

Most of the deposits in Kuwaiti Dinar, UAE Dirham, Bahraini Dinar, Omani Riyal, and Jordanian Dinar

shown above are pledged in favor of the authorities in the countries concerned, in guarantee of the

insurance business for the general insurance departments and the life division.

Term deposits and deposits pledged in guarantee of insurance business mature within one year. Interests

earned on the deposits of the general insurance departments and the life division amounting to

LBP5.7billion and LBP2billion respectively for 2011 (LBP5.9billion and LBP729million, respectively

for 2010) are reflected in the accompanying consolidated income statement.

7. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (UNIT-LINKED)

This caption consists of the following unit-linked investments:

December 31,

2011 2010

LBP’000 LBP’000

Funds 14,668,390 11,239,695

Term deposits with local bank 24,976,890 25,600,220

39,645,280 36,839,915

41

The movement of these unit-linked investments during 2011 was as follows:

Bank Term

Funds Deposits Total

LBP’000 LBP’000 LBP’000

Balance at January 1, 2011 11,239,695 25,600,220 36,839,915

Additions 16,085,670 - 16,085,670

Sales ( 12,526,697) - ( 12,526,697)

Surrenders - ( 623,330) ( 623,330)

Change in fair value ( 129,770) - ( 129,770)

Effect of foreign currency fluctuations ( 508) - ( 508)

Balance at December 31, 2011 14,668,390 24,976,890 39,645,280

Funds are denominated in U.S. Dollar and directly linked to life insurance contracts. The net change in

fair value of these funds was a loss of LBP130million during 2011 (gain of LBP444million during 2010)

and was reflected in the consolidated income statement of the life division.

Term deposits represent the underlying assets of the “Smart 3 years saving plan” insurance product that

was introduced in 2010. These term deposits are deposited with a local bank, denominated in U.S. Dollar,

carry interest at the rate of 6% per annum and have an original maturity of 3 years.

8. INVESTMENT SECURITIES

This caption consists of the following:

General

Insurance Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

(a) Trading assets at FVTPL 16,636,188 316,819 1,001,266 -

(b) Financial assets at amortized cost 9,737,940 - 13,077,754 -

(c) Financial assets at FVTOCI 94,640,099 - 2,639,999 -

(d) Available-for-sale financial assets - 115,233,653 - 11,525,689

(e) Held-to-maturity investments - 7,384,630 - 7,728,639

121,014,227 122,935,102 16,719,019 19,254,328

Accrued interest receivable 161,889 621,301 167,674 378,138

121,176,116 123,556,403 16,886,693 19,632,466

42

The movement of investment securities during 2011 was as follows:

General Insurance Departments

At At Fair Value

Fair Value At through other Available

Through Amortized Comprehensive for- Held-to

Profit or loss Cost Income Sale Maturity Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Balance at January 1, 2011 316,819 - - 115,233,653 7,384,630 122,935,102

Reclassification upon the

early adoption of IFRS9 22,604,203 9,385,860 90,628,220 (115,233,653) ( 7,384,630) -

Additions 11,822,010 1,186,728 5,730,886 - - 18,739,624

Sales / redemptions ( 16,028,152) ( 778,476) ( 6,014,892) - - ( 22,821,520)

Amortization of premiums

and discounts - ( 2,457) - - - ( 2,457)

Net change in fair value ( 2,028,058) - 4,314,279 - - 2,286,221

Effect of foreign currency

fluctuations ( 50,634) ( 53,715) ( 18,394) - - ( 122,743)

16,636,188 9,737,940 94,640,099 - - 121,014,227

Accrued interest receivable 18,318 141,874 1,697 - - 161,889

Balance at December 31, 2011 16,654,506 9,879,814 94,641,796 - - 121,176,116

Life Division

Fair Value At through other Available

Through Amortized Comprehensive for- Held-to

Profit or loss Cost Income Sale Maturity Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Balance at January 1, 2011 - - - 11,525,689 7,728,639 19,254,328

Reclassification upon early

adoption of IFRS9 1,248,324 11,525,916 6,480,088 ( 11,525,689) ( 7,728,639) -

Additions - 1,477,712 - - - 1,477,712

Sales / redemptions - ( 112,363) ( 3,945,988) - - ( 4,058,351)

Amortization of premiums

and discounts - ( 7,280) - - - ( 7,280)

Net change in fair value ( 232,308) - 98,215 - - ( 134,093)

Offset of change in fair value

related to portfolio classified

as at amortized cost upon early

adoption of IFRS9 - 238,899 - - - 238,899

Effect of foreign currency

fluctuations ( 14,750) ( 45,130) 7,684 - - ( 52,196)

1,001,266 13,077,754 2,639,999 - - 16,719,019

Accrued interest receivable 20,121 147,553 - - - 167,674

Balance at December 31, 2011 1,021,387 13,225,307 2,639,999 - - 16,886,693

43

Investment securities as of December 31, 2011 for the general insurance departments and the life division

are distributed by country of origin as follows:

General Insurance Departments

December 31, 2011

At Fair value

At Fair At Through Other

Value through Amortized Comprehensive

Profit or Loss Cost Income

LBP’000 LBP’000 LBP’000

United States of America 1,761,123 974,917 132,313

Europe 9,655,185 3,541,701 873,858

Africa - 497,799 53,327

Asia/Middle East 5,219,880 4,451,807 93,580,601

Australia - 271,716 -

16,636,188 9,737,940 94,640,099

Life Division

December 31, 2011

At Fair value

At Fair At Through Other

Value through Amortized Comprehensive

Profit or Loss Cost Income

LBP’000 LBP’000 LBP’000

United States of America 325,303 2,626,550 -

Europe 575,405 2,708,350 -

Asia/Middle East 100,558 7,742,854 2,639,999

1,001,266 13,077,754 2,639,999

44

(a) Trading assets at FVTPL

General Insurance Departments

December 31, 2011

Average

Fair Unrealized Interest

Currency Value Gain/(Loss) Rate

LBP’000 LBP’000 %

- Foreign corporate bonds - quoted:

U.S. Dollar 1,674,489 ( 133,536) 8.09

Euro 265,480 ( 142,097) 5.78

1,939,969 ( 275,633)

- Equity securities - unquoted:

U.S. Dollar 753,750 -

753,750 -

- Equity securities - quoted:

U.S. Dollar 1,135,429 ( 350,931)

Euro 3,561,446 ( 317,980)

Jordanian Dinar 222,113 ( 32,106)

UAE Dirham 125,788 ( 31,170)

Syrian Pound 445,869 -

Swiss Franc 30,464 ( 12,144)

Danish Krone 3,900 ( 55,565)

5,525,009 ( 799,896)

- Funds – quoted:

U.S. Dollar 6,105,677 ( 356,611)

Euro 1,513,690 ( 103,461)

7,619,367 ( 460,072)

- Funds - unquoted:

U.S. Dollar 250,700 ( 734)

Jordanian Dinar 268,155 ( 32,086)

UAE Dirham 230,064 ( 49,445)

Saudi Riyal 49,174 ( 6,518)

798,093 ( 88,783)

16,636,188 ( 1,624,384)

- Accrued interest receivable 18,318 -

16,654,506 ( 1,624,384)

Trading assets at FVTPL amounted to LBP317million as of December 31, 2010 and represented quoted

equity securities denominated in U.S. Dollar. The change in fair value of these securities was a gain of

LBP2million during 2010.

45

Life Division

December 31, 2011

Average

Fair Unrealized Interest

Currency Value Gain/(Loss) Rate

LBP’000 LBP’000 %

- Foreign bonds – quoted:

U.S. Dollar 275,400 ( 93,456) 6.94

Euro 191,200 ( 101,806) 9.46

466,600 ( 195,262)

- Equity securities – quoted:

U.S. Dollar 280,998 ( 20,502)

Jordanian Dinar 100,558 -

Euro 153,110 ( 16,544)

534,666 ( 37,046)

1,001,266 ( 232,308)

- Accrued interest receivable 20,121 -

1,021,387 ( 232,308)

(b) Financial assets at Amortized cost

General Insurance Departments December 31, 2011

Average

Amortized Fair Interest

Currency Cost Value Rate

LBP’000 LBP’000 %

- Lebanese corporate bonds - unquoted:

U.S. Dollar 527,625 527,625 5.86

527,625 527,625

- Foreign government bonds - quoted:

Jordanian Dinar 211,972 211,972 5.49

211,972 211,972

- Foreign corporate bonds - quoted:

U.S. Dollar 5,325,470 5,433,071 6.61

Euro 2,047,218 2,015,754 5.39

Jordanian Dinar 1,545,444 1,545,444 8.08

Swiss Franc 80,211 79,943 4.50

8,998,343 9,074,212

9,737,940 9,813,809

- Accrued interest receivable 141,874 141,874

9,879,814 9,955,683

46

Life Division

December 31, 2011

Average

Amortized Fair Interest

Currency Cost Value Rate

LBP’000 LBP’000 %

- Lebanese government bonds - quoted U.S. Dollar 1,319,796 921,165 7.97

- Lebanese corporate bonds - unquoted U.S. Dollar 752,921 782,115 7.50

2,072,717 1,703,280

- Foreign bonds - quoted:

U.S. Dollar 9,507,553 9,957,009 5.28

Jordanian Dinar 425,246 425,246 6.75

Euro 1,072,238 1,067,664 6.25

11,005,037 11,449,919

13,077,754 13,153,199

- Accrued interest receivable 147,553 147,553

13,225,307 13,300,752

Financial assets at amortized cost related to the general insurance and the life division are segregated over

remaining period to maturity as follows:

General Life

Insurance Department Division

December 31, 2011 December 31, 2011

Average Average

Amortized Interest Amortized Interest

Cost Rate Cost Rate

LBP’000 % LBP’000 %

Up to 1 year 692,142 6.87 1,549,431 6.65

1 to 3 years 3,399,613 1.67 1,314,034 7.44

3 to 5 years 2,084,154 2.04 1,900,041 7.27

More than 5 years 3,562,031 0.76 8,314,248 5.09

9,737,940 13,077,754

47

(c) Financial Assets at FVTOCI

General Insurance Departments

December 31, 2011

Cumulative Average

Fair Change in Interest

Currency Value Fair Value Rate

LBP’000 LBP’000 %

- Foreign corporate bonds - unquoted:

U.S. Dollar 150,750 - 10.00

Omani Riyal 3,991,822 ( 61,328) 6.25

4,142,572 ( 61,328)

- Equity securities - quoted:

U.S. Dollar 3,362,492 ( 588,372)

Euro 199,509 ( 450,854)

Saudi Riyal 57,493,725 17,313,184

Swiss Franc 106,126 ( 89,565)

Jordanian Dinar 22,536,971 362,529

Omani Riyal 13,177 ( 2,008)

83,712,000 16,544,914

- Equity securities - unquoted:

U.S. Dollar 306,023 -

Lebanese Pound 5,744,213 4,395,751

Jordanian Dinar 132,464 -

Tunisian Dinar 53,327 44,891

6,236,027 4,440,642

- Funds – quoted:

Euro 549,500 ( 13,776)

549,500 ( 13,776)

94,640,099 20,910,452

- Accrued interest receivable 1,697 -

94,641,796 20,910,452

Bonds relating to Sultanate of Oman with a fair value amounting to OR1,020,000 (LBP3.99billion) as at

December 31, 2011 and 2010 are pledged in favour of the Ministry of Trade and Industry (Oman) in

accordance with local insurance law of 1979. These bonds cannot be traded without the approval of the

said Ministry.

48

Life Division

December 31, 2011

Cumulative

Fair Change in

Currency Value Fair Value

LBP’000 LBP’000

- Equity securities - quoted U.S. Dollar 108,917 33,542

Jordanian Dinar 418,806 100,535

527,723 134,077

- Equity securities - unquoted Lebanese Pound 1,637,413 1,274,353

U.S. Dollar 474,863 22,613

2,112,276 1,296,966

2,639,999 1,431,043

(d) AVAILABLE-FOR-SALE FINANCIAL ASSETS

General Insurance Departments

December 31, 2010

Cost/ Cumulative Average

Amortized Allowance for Fair Change in Interest

Description Currency Cost Impairment Value Fair value Rate

LBP’000 LBP’000 LBP’000 LBP’000 %

Fixed Income Debt Securities:

Lebanese banks U.S. Dollar 377,160 - 383,101 5,941 6.54

Foreign preferred shares

and/or bonds:

U.S. Dollar 7,564,545 ( 1,481,354) 6,113,670 30,479 6.62

Euro 2,962,108 ( 1,733,691) 1,084,865 ( 143,552) 5.92

Omani Riyal 4,045,878 - 3,991,770 ( 54,108) 6.25

Swiss Franc 160,546 - 153,421 ( 7,125) 7.64

Jordanian Dinar 2,453,110 - 2,453,110 - 7.95

17,563,347 ( 3,215,045) 14,179,937 ( 168,365)

Equity Securities:

Lebanese Pound 1,348,459 - 5,268,413 3,919,954

U.S. Dollar 7,228,858 ( 1,724,725) 5,347,273 ( 156,860)

Euro 2,553,946 ( 1,087,492) 1,252,351 ( 214,103)

Swiss Franc 153,690 ( 60,113) 72,086 ( 21,491)

Jordanian Dinar 26,964,345 ( 2,431,106) 28,776,281 4,243,042

Tunisian Dinar 8,437 - 55,201 46,764

UAE Dirham 1,543,393 ( 912,645) 436,462 ( 194,286)

Saudi Riyal 41,081,972 ( 32,766) 50,307,331 9,258,125

Omani Riyal 24,482 - 14,717 ( 9,765)

80,907,582 ( 6,248,847) 91,530,115 16,871,380

Funds:

U.S. Dollar 7,485,313 ( 595,711) 7,516,222 626,620

Euro 2,250,514 ( 271,819) 1,951,688 ( 27,007)

Saudi Riyal 151,307 ( 81,360) 55,691 ( 14,256)

9,887,134 ( 948,890) 9,523,601 585,357

108,358,063 ( 10,412,782) 115,233,653 17,288,372

Accrued interest receivable - - 610,046 -

108,358,063 ( 10,412,782) 115,843,699 17,288,372

49

Life Division

December 31, 2010

Cost/ Cumulative Average

Amortized Allowance for Fair Change in Interest

Description Currency Cost Impairment Value Fair value Rate

LBP’000 LBP’000 LBP’000 LBP’000 %

Fixed income debt securities:

Lebanese banks U.S. Dollar 753,750 - 789,176 35,426 7.91

Foreign preferred shares

and/or bonds:

U.S. Dollar 8,234,295 ( 584,727) 7,442,531 ( 207,037) 5.84

Euro 1,690,317 ( 962,992) 611,763 ( 115,562) 4.17

Sterling Pound 297,360 ( 297,360) - - 9.38

10,975,722 ( 1,845,079) 8,843, 470 ( 287,173)

Equity securities:

Lebanese Pound 363,061 - 1,407,556 1,044,495

U.S. Dollar 75,375 - 140,424 65,049

Hong Kong Dollar 35,273 - 38,092 2,819

Saudi Riyal 151,291 ( 86,517) 70,264 5,490

Jordanian Dinar 792,809 - 995,741 202,932

1,417,809 ( 86,517) 2,652,077 1,320,785

Funds:

U.S. Dollar 51,314 - 30,142 ( 21,172)

12,444,845 ( 1,931,596) 11,525,689 1,012,440

Accrued interest receivable - - 237,357 -

12,444,845 ( 1,931,596) 11,763,046 1,012,440

Fixed income debt securities as of December 31, 2010 are distributed by country of origin as follows –

Figures represent the fair value at year end:

December 31, 2010

General

Insurance Life

Country Department Division

LBP’000 LBP’000

Europe 2,591,698 2,359,228

United States of America 1,950,650 2,247,796

South America - 75,236

Asia/Middle East 9,245,124 4,161,210

Other 392,465 -

14,179,937 8,843,470

50

Fixed income debt securities mature as follows - Figures represent the fair value at year end:

December 31, 2010

General

Insurance Life

Remaining period to maturity Departments Division

LBP’000 LBP’000

Less than 1 year 208,809 297,967

1 year to 3 years 1,589,646 381,139

3 years to 5 years 7,189,169 617,005

More than 5 years 5,192,313 7,547,359

14,179,937 8,843,470

The movement of the allowance for impairment of available-for-sale financial assets was as follows:

General

Insurance Life

Departments Division

LBP’000 LBP’000

Balance at January 1, 2010 12,189,863 3,983,755

Charge for the year 619,844 4,208

Write-backs ( 37,470) ( 37,847)

Eliminated upon disposal ( 2,359,455) ( 2,018,520)

Balance at December 31, 2010 10,412,782 1,931,596

51

(e) HELD-TO-MATURITY INVESTMENTS

General Insurance Departments

December 31, 2010

Average

Nominal Amortized Fair Interest

Description Currency Value Cost Value Rate

LBP’000 LBP’000 LBP’000 %

Lebanese government bonds US Dollar 508,028 508,028 509,337 6.96

Foreign bonds US Dollar 5,427,000 4,779,104 4,921,662 7.16

Foreign bonds Euro 2,097,312 2,097,498 2,162,604 5.40

8,032,340 7,384,630 7,593,603

Accrued interest receivable - 11,255 -

8,032,340 7,395,885 7,593,603

Life Division

December 31, 2010

Average

Nominal Amortized Fair Interest

Description Currency Value Cost Value Rate

LBP’000 LBP’000 LBP’000 %

Lebanese government bonds US Dollar 2,359,238 1,755,969 1,835,954 8.52

Foreign bonds US Dollar 5,351,625 5,275,168 5,452,406 5.93

Foreign bonds Euro 998,720 697,502 756,590 5.90

8,709,583 7,728,639 8,044,950

Accrued interest receivable - 140,781 -

8,709,583 7,869,420 8,044,950

The movement of the held-to-maturity investments during 2010 was as follows:

General

Insurance Life

Departments Division

LBP’000 LBP’000

Balance at January 1,2010 6,539,190 7,289,685

Purchases 1,558,238 1,475,798

Redemption ( 739,690) ( 965,451)

Amortization of premiums and discounts 26,892 13,102

Effect of foreign currency fluctuations - ( 84,495)

Balance at December 31,2010 7,384,630 7,728,639

52

Held-to-maturity investments are segregated over the remaining period to maturity as follows:

December 31, 2010

General

Insurance Life

Remaining period to maturity Departments Division

LBP’000 LBP’000

1 year to 3 years 1,236,419 1,388,173

3 years to 5 years 3,159,848 1,846,671

More than 5 years 2,988,363 4,493,795

7,384,630 7,728,639

Held-to-maturity investments are distributed by country of origin as follows:

December 31, 2010

General

Insurance Life

Departments Division

LBP’000 LBP’000

United States of America 1,140,968 1,793,020

South America - 220,008

Europe 3,538,427 3,010,646

Africa 564,651 -

Asia/Middle East 1,940,190 2,704,965

Australia 200,394 -

7,384,630 7,728,639

53

9. INSURANCE RECEIVABLES

General Insurance Departments:

The general insurance department balances of insurance receivables and premiums are distributed

geographically as shown below:

Insurance Receivables Premiums

December 31, Year Ended December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Lebanon (Branches and Headquarters) 23,747,354 12,665,683 38,647,603 32,866,612

United Arab Emirates 32,514,929 43,098,881 71,742,271 79,483,300

Sultanate of Oman 9,441,294 8,290,607 29,282,684 27,270,253

State of Kuwait 1,786,034 1,420,514 12,362,734 5,651,748

State of Qatar 8,986,664 8,724,567 20,668,830 17,866,367

Kingdom of Bahrain 4,681,961 3,690,346 7,792,868 7,585,148

Kingdom of Jordan 5,442,107 5,082,734 26,098,110 21,201,327

Syria 2,045,255 1,000,759 25,136,858 25,477,317

88,645,598 83,974,091 231,731,958 217,402,072

Less: Provision for credit losses ( 7,955,164) ( 7,888,636) - -

80,690,434 76,085,455 231,731,958 217,402,072

Written premiums for the year 2011 include premiums to cover extended warranty on vehicles for the

amount of LBP12.8billion which were fully reinsured (LBP6.5billion in 2010).

The movement in the provision for credit losses consists of the following:

2011 2010

LBP’000 LBP’000

Balance at January 1 7,888,636 6,101,853

Additions 1,129,694 1,949,998

Write-backs ( 480,100) -

Write-offs ( 50,465) ( 163,215)

Reclassification ( 500,104) -

Effect of foreign currency fluctuations ( 32,497) -

Balance at December 31 7,955,164 7,888,636

54

Life Division:

Insurance and other receivables of the life division consist of the following:

December 31,

2011 2010

LBP’000 LBP’000

Accrued premium receivable 6,500,048 5,517,623

Loans on policies 212,345 327,729

Due from brokers and agents 468,040 519,550

7,180,433 6,364,902

10. DUE FROM REINSURERS

This caption consists of the following:

General Insurance

Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Reinsurers' current accounts - Outward 25,690,351 14,979,971 2,196,528 1,380,825

Reinsurers' current accounts - Inward 3,016,776 3,170,836 - -

28,707,127 18,150,807 2,196,528 1,380,825

11. DEFERRED ACQUISION COSTS

The movement of deferred acquisition costs during 2011 and 2010 was as follows:

2011 2010

LBP’000 LBP’000

Balance at January 1 14,060,790 9,814,452

Net change for the year 2,450,196 4,246,338

Balance at December 31 16,510,986 14,060,790

55

12. OTHER ASSETS

This caption consists of the following:

December 31,

2011 2010

LBP’000 LBP’000

Receivable from employees 156,713 88,841

Refundable deposits 43,959 42,717

Prepayments 1,007,431 1,040,321

Accrued rents receivables 429,764 201,146

Deferred tax assets 571,518 479,701

Sundry debtors 2,908,825 4,304,869

5,118,210 6,157,595

13. PROPERTY AND EQUIPMENT

This caption consists of the following:

General

Insurance Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Property:

Land - Ain Al-Mreisseh 2,792,352 2,792,352 - -

Building – Ain Al-Mreisseh 3,345,957 3,345,957 - -

Less: Accumulated depreciation ( 1,287,344) ( 1,203,695) - -

Net building after depreciation 2,058,613 2,142,262 - -

Total land and building - Ain Al-Mreisseh 4,850,965 4,934,614 - -

Subsidiary branch offices – Syria 8,671,077 4,395,653 - -

Subsidiary land and building – Jordan 5,855,172 3,971,013 - -

Tripoli office (at cost) 273,804 273,804 - -

Chtoura office (at cost) 87,441 87,441 - -

Saida office (at cost) 248,285 248,285 - -

15,135,779 8,976,196 - -

Less: Accumulated depreciation ( 276,258) ( 168,274) - -

Net office and subsidiary land and building 14,859,521 8,807,922 - -

Total Property 19,710,486 13,742,536 - -

Furniture and Equipment (at cost) 9,826,967 9,034,304 769,388 718,644

Less: Accumulated depreciation ( 6,988,892) ( 6,616,074) ( 491,873) ( 427,495)

Furniture and Equipment (net) 2,838,075 2,418,230 277,515 291,149

Total property and equipment 22,548,561 16,160,766 277,515 291,149

56

The movement of property and equipment during 2011 and 2010 was as follows:

Furniture Buildings

and under

Lands Buildings Equipment Construction Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Cost:

Balance, January 1, 2010 4,136,752 8,337,589 8,442,836 424,440 21,341,617

Additions - 13,551 732,922 2,202,173 2,948,646

Disposal - - ( 141,454) - ( 141,454)

Balance, December 31, 2010 4,136,752 8,351,140 9,034,304 2,626,613 24,148,809

Additions - 2,443 1,251,885 6,844,047 8,098,375

Disposal - - ( 193,205) - ( 193,205)

Effect of foreign currency fluctuations - ( 686,906) ( 266,017) - ( 952,923)

Balance, December 31, 2011 4,136,752 7,666,677 9,826,967 9,470,660 31,101,056

Accumulated Amortization:

Balance, January 1, 2010 - ( 1,273,082) ( 5,900,176) - ( 7,173,258)

Additions - ( 98,887) ( 792,870) - ( 891,757)

Disposal - - 76,972 - 76,972

Balance, December 31, 2010 - ( 1,371,969) ( 6,616,074) - ( 7,988,043)

Additions - ( 191,634) ( 851,914) - ( 1,043,548)

Disposal - - 188,135 - 188,135

Currency translation adjustments - - 290,961 - 290,961

Balance, December 31, 2011 - ( 1,563,603) ( 6,988,892) - ( 8,552,495)

Net Book Value:

Balance, December 31, 2011 4,136,752 6,103,074 2,838,075 9,470,660 22,548,561

Balance, December 31, 2010 4,136,752 6,979,171 2,418,230 2,626,613 16,160,766

Additions to buildings under construction relate to the new headquarters that are being built by the Group

for its subsidiaries in Jordan and Syria.

The depreciation expense of the building in Ain-Al Mreisseh amounting to LBP84million for the years

ended December 31, 2011 and 2010 respectively is booked under “net loss from building” in the

consolidated income statement.

During 1994, the carrying amount of Ain Al-Mreisseh property was adjusted on the basis of net realizable

value and the new value was accounted for in the light of the requirements of the Law Nº. 282 of

December 30, 1993 (See Note 26 below).

Further to the above, the Group holds title of ownership in a property in Libya, registered in the Libyan

Agency of Property’s Registry in the name of Arabia Insurance Company S.A.L. This property was

nationalized in 1970. In February 1975 the Libyan Revolution Command Council appointed a committee

for the purpose of appraising the nationalized land in order to determine the value of the compensation.

However, the value of such compensation has not yet been determined.

57

14. INTANGIBLE ASSETS Computer Software

General

Insurance Life

Departments Division

LBP’000 LBP’000

Cost:

Balance at January 1, 2010 1,692,379 211,050

Additions 84,350 78,692

Transfers ( 126,172) -

Balance at December 31, 2010 1,650,557 289,742

Additions 125,407 -

Currency translation adjustments ( 108,619) -

Balance at December 31, 2011 1,667,345 289,742

Accumulated Amortization:

Balance at January 1, 2010 ( 388,344) ( 211,050)

Amortization expense ( 220,468) -

Balance at December 31, 2010 ( 608,812) ( 211,050)

Amortization expense ( 393,217) -

Currency translation adjustments 60,730 -

Balance at December 31, 2011 ( 941,299) ( 211,050)

Net Book Value:

Balance at December 31, 2011 726,046 78,692

Balance at December 31, 2010 1,041,745 78,692

15. INVESTMENT PROPERTY

This caption stated at LBP28million and LBP106million as of December 31, 2011 and 2010 respectively,

represents the cost of plots of land in Jordan, owned by General Arabia Insurance Company, a subsidiary.

During 2011, the said subsidiary disposed of some of these plots that resulted in a gain on sale of

LBP193million recognized under other income in the accompanying consolidated income statements.

16. DUE FROM/TO LIFE DIVISION

The Group keeps separate books of accounts for its life division, independent from the books of the

general insurance departments and the accounting relationship between the two divisions is represented

by an inter-company current account, the balance of which as of December 31, 2011 amounted to

LBP4.9billion in favor of the life division (LBP4.1billion in favor of the general insurance departments

as of December 31, 2010).

58

17. DUE TO BANKS

Due to banks in the general insurance departments and the life division amounting to LBP4.8billion and

LBP1.5billion, respectively as of December 31, 2011 (LBP6.7billion and LBP1.5billion, respectively in

2010) represent loans denominated in U.S. Dollar, subject to interest at the average interest rate of 1.71%

and 1.83%, respectively per annum and mature in 2013.

18. INCOME TAX PAYABLE

The tax returns for Lebanese operations since 2009 are still subject to examination and final assessment

by the tax authorities. During 2011, the tax returns related to the Lebanese operations for the years 2005

to 2008 were subject to examination and tax assessment by the tax authorities which resulted in

additional tax liability in the amount of LBP215million that was recognized and settled in 2011.

The Group’s accounts and tax returns in the other locations where the Group operates remain subject to

examination and acceptance by the related tax authorities where applicable. The extent of the tax

contingency depends on the outcome of such tax examination. Management does not expect additional

material tax claims as a result of this examination.

Deferred tax liability is attributable to the change in fair value of financial asset at FVTOCI/ Available-

for-sale.

19. ACCRUED EXPENSES AND OTHER LIABILITIES

This caption consists of the following:

General Insurance

Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Accrued expenses 752,157 611,488 75,983 94,215

Accrued commission payable 214,167 - 1,122,801 1,209,621

Premiums received in advance - - 1,632,824 1,594,983

Balances outstanding between

Head Office and branches 411,078 1,776,616 - -

Shareholders' dividends payable 1,036,006 914,378 - -

Municipal duties and other taxes 1,936,381 1,914,819 169,500 52,046

Social Security National Fund 222,518 296,268 - -

Trading derivative liability 452,135 179,851 - -

Other credit balances 3,768,312 2,534,209 84,109 60,135

8,792,754 8,227,629 3,085,217 3,011,000

59

20. INSURANCE CONTRACT LIABILITIES – GENERAL INSURANCE DEPARTMENTS

20(a). Provision for outstanding claims

Gross Reinsurer’s Share Net

December 31, December 31, December 31,

2011 2010 2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Marine 3,354,386 3,708,548 ( 2,045,428) ( 2,182,224) 1,308,958 1,526,324

Motor 68,201,437 76,483,072 ( 2,957,919) ( 2,879,668) 65,243,518 73,603,404

Property 38,355,393 24,069,884 (35,328,606) ( 21,587,503) 3,026,787 2,482,381

General accidents 17,433,613 19,410,333 (13,246,631) ( 15,876,174) 4,186,982 3,534,159

Workmen’s compensation 4,314,382 3,901,860 ( 486,691) ( 689,480) 3,827,691 3,212,380

Medical 3,796,880 2,092,538 ( 2,540,919) ( 1,434,627) 1,255,961 657,911

Reinsurance inwards 60,000 376,875 - - 60,000 376,875

135,516,091 130,043,110 (56,606,194) ( 44,649,676) 78,909,897 85,393,434

The balance of outstanding claims relating to the motor department as at December 31, 2011 includes an

amount of LBP8billion (LBP7billion in 2010) representing provision set up by the Group in order to

cover claims incurred but not reported (IBNR). These provisions were estimated by the Group based on

the actual cost of these claims reported in the period subsequent to the date of the statement of financial

position.

20(b). Provision for unearned premiums

Gross Reinsurer’s Share Net

December 31, December 31, December 31,

2011 2010 2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Marine 2,876,669 3,229,225 ( 1,879,470) ( 2,249,916) 997,199 979,309

Motor 76,350,367 62,772,141 ( 3,689,456) ( 144,686) 72,660,911 62,627,455

Property 7,765,955 9,681,692 ( 6,369,987) ( 8,013,241) 1,395,968 1,668,451

General accidents 8,798,317 9,246,446 ( 6,280,519) ( 7,396,186) 2,517,798 1,850,260

Workmen's compensation 2,700,670 2,902,622 - ( 158,316) 2,700,670 2,744,306

Medical 11,639,120 11,088,357 ( 6,757,536) ( 6,641,635) 4,881,584 4,446,722

Reinsurance inwards 15,000 151,829 - - 15,000 151,829

Total 110,146,098 99,072,312 (24,976,968) ( 24,603,981) 85,169,130 74,468,332

60

21. LIFE INSURANCE CONTRACT LIABILITIES

Gross Reinsurers’ Share Net

December 31, December 31, December 31,

2011 2010 2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Liabilities relating to the

deposit components of life

insurance contracts 62,074,333 57,167,787 - - 62,074,333 57,167,787

Provision for outstanding claims 1,819,724 2,204,877 ( 906,913) ( 1,127,036) 912,811 1,077,841

Provision for unexpired risks 4,283,949 5,142,398 ( 1,352,776) ( 1,260,795) 2,931,173 3,881,603

68,178,006 64,515,062 ( 2,259,689) ( 2,387,831) 65,918,317 62,127,231

The movement in the gross life insurance contract liabilities is summarized below:

Smart Universal/

3 Years Traditional Unit-

Saving Plan Products Linked Total

LBP’000 LBP’000 LBP’000 LBP’000

Balance at January 1, 2010 - 8,928,090 22,275,255 31,203,345

Premiums received 25,557,811 2,158,742 5,115,690 32,832,243

Change in technical reserve 309,463 562,884 2,189,131 3,061,478

Liabilities paid on surrenders - ( 714,211) ( 1,395,046) ( 2,109,257)

Liabilities paid on maturities - ( 316,794) - ( 316,794)

Distribution of profits on matured and

surrendered policies to policyholders - ( 173,708) - ( 173,708)

Effect of foreign currency fluctuations - 17,755 - 17,755

Balance at December 31, 2010 25,867,274 10,462,758 28,185,030 64,515,062

Premiums received - 134,429 7,939,970 8,074,399

Change in technical reserve ( 113,132) ( 114,194) ( 483,426) ( 710,752)

Liabilities paid on surrenders ( 627,497) ( 517,319) ( 2,024,143) ( 3,168,959)

Liabilities paid on maturities - ( 324,645) - ( 324,645)

Distribution of profits on matured and

surrendered policies to policyholders - ( 162,985) - ( 162,985)

Write-off of loan on policy against

insurance liabilities - ( 52,402) - ( 52,402)

Effect of foreign currency fluctuations - 8,288 - 8,288

Balance at December 31, 2011 25,126,645 9,433,930 33,617,431 68,178,006

The life insurance contract liabilities include LBP14.6billion as of December 31, 2011 (LBP11billion in

2010) relating to unit-linked contracts where the Group matches the liabilities to policyholders with the

related assets in a way to eliminate price, currency, credit, or interest risk for these contracts. The change

in insurance liabilities during 2011 includes negative change in the unit prices of LBP130million

(positive change in the unit prices of LBP444million in 2010) that relates to unit-linked products. (See

note 7)

61

Smart 3 years saving plan is a 3 year single premium structured product with a guaranteed dividend of

4.4% per annum that was introduced in 2010. Related premiums received are maintained in a term

deposit account with a local bank carrying an interest at the rate of 6% per annum and having an original

maturity of 3 years (refer to note 7). Related profits distributed to policyholders amounted to

LBP1.16billion during 2011 (nil in 2010) and recognized in the consolidated income statement of the life

division.

22. PROVISION FOR CONTINGENCIES

The movement in provision for contingencies during 2011 and 2010 was as follows:

2011 2010

LBP’000 LBP’000

Balance at January 1 2,602,344 2,602,344

Effect of foreign currency fluctuations ( 709) -

Balance at December 31 2,601,635 2,602,344

This provision is intended to cover loss contingencies that may occur in view of the circumstances, which

prevail in the areas where the Group operates.

23. BALANCE DUE TO RELATED COMPANY

This caption stated at LBP7.5billion as of December 31, 2011 (LBP22.3billion in 2010) represents a non

interest bearing payable accounts due to Arabia Insurance Cooperative Company (AICC), an insurance

company established in the Kingdom of Saudi Arabia, in which the Group owns 19.8% of voting power.

24. SHARE CAPITAL

The share capital amounting to LBP51billion as of December 31, 2011 and 2010, is composed of

20,400,000 nominal ordinary shares of par value LBP2,500 each, fully paid as follows:

Number of shares Balance

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000

Issued shares 20,400,000 20,400,000 51,000,000 51,000,000

Less: treasury shares ( 1,492,172) ( 1,409,634) ( 9,304,316) ( 8,546,320)

Outstanding shares 18,907,828 18,990,366 41,695,684 42,453,680

62

The movement of the share capital during 2011 and 2010 was as follows:

Surplus on

Sale of

Number of Share Treasury Treasury

Shares Capital Shares Shares

LBP’000 LBP’000 LBP’000

Balance as at December 31, 2009 19,169,747 51,000,000 ( 6,873,199) 78,541

Buy-back of ordinary shares ( 80,495) - ( 748,879) -

Buy-back of ordinary shares as a result

of acquisition of additional

non-controlling interests in a subsidiary ( 98,886) - ( 924,242) -

Balance as at December 31, 2010 18,990,366 51,000,000 ( 8,546,320) 78,541

Buy-back of ordinary shares ( 70,211) - ( 642,780) -

Buy-back of ordinary shares as a result

of acquisition of additional

non-controlling interests in a subsidiary ( 12,327) - ( 115,216) -

Balance as at December 31, 2011 18,907,828 51,000,000 ( 9,304,316) 78,541

25. LEGAL RESERVE

In accordance with the local laws and regulations, the Company is required to allocate 10% of its annual

net profit to a legal reserve up to one-third of its capital. This reserve is not available for distribution.

26. ASSET REVALUATION RESERVE

During 1994, the real estate and the investments were adjusted on the basis of the net realizable value and

the new values were accounted for in accordance with the requirements of the Law Nº. 282 of December

30, 1993. Part of this reserve was distributed to shareholders in prior years and the remaining balance has

been reflected in other comprehensive income under equity.

27. CUMULATIVE CHANGE IN FAIR VALUE OF INVESTMENTS

This caption consists of the following:

General Insurance

Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Cumulative change in fair value of financial

assets at FVTOCI/available-for-sale 19,289,332 14,690,485 1,431,043 1,012,440

Unamortized cumulative change in

fair value of held-to-maturity investments - ( 59,882) - ( 59,388)

19,289,332 14,630,603 1,431,043 953,052

63

The cumulative change in fair value of financial assets at FVTOCI/available-for-sale consists of the

following:

General Insurance

Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Debt and equity securities 20,924,228 16,703,015 1,431,043 1,033,612

Funds ( 13,776) 585,357 - ( 21,172)

20,910,452 17,288,372 1,431,043 1,012,440

Deferred tax liability ( 719,149) ( 1,032,387) - -

20,191,303 16,255,985 1,431,043 1,012,440

Non-controlling interests-note 29 ( 901,971) ( 1,565,500) - -

19,289,332 14,690,485 1,431,043 1,012,440

64

The movement of the cumulative change in fair value of financial assets at FVTOCI/available-for-sale securities during 2011 and 2010 is as follows:

General Insurance Departments

Non-Controlling

Group’s Share interests’ Share Total

2011 2010 2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Balance at January 1 14,690,485 36,036,737 3,197,259 4,706,808 17,887,744 40,743,545

Net change in fair value for the year 4,892,903 ( 20,409,802) ( 663,529) ( 687,383) 4,229,374 ( 21,097,185)

Realized gain recycled to income upon disposal - ( 913,658) - - - ( 913,658)

Realized gain recycled to retained earnings upon disposal ( 30,167) - - - ( 30,167) -

Allocation to retained earnings of portion of change in fair

value related to portfolio classified as at fair value through

profit or loss upon early adoption of IFRS9 ( 538,643) - - - ( 538,643) -

Offset of change in fair value related to portfolio classified

as at amortized cost upon early adoption of IFRS9 ( 38,484) - - - ( 38,484) -

Eliminated as a result of the acquisition of additional

shares in a subsidiary - Al Mashriq - - ( 102,491) ( 822,166) ( 102,491) ( 822,166)

Change in deferred tax 313,238 ( 22,792) - - 313,238 ( 22,792)

Balance at December 31 19,289,332 14,690,485 2,431,239 3,197,259 21,720,571 17,887,744

65

Life Division

December 31,

2011 2010

LBP’000 LBP’000

Balance at January 1 1,012,440 819,077

Unamortized cumulative change in

fair value of held-to-maturity securities ( 59,388) -

Allocation to retained earnings of portion of change in

fair value related to portfolio classified as at fair value

through profit or loss upon early adoption of IFRS9 140,877 -

Offset of change in fair value related to portfolio

classified as at amortized cost upon early adoption of IFRS9 238,899 -

Realized (gain)/loss recycled to income upon disposal - ( 34,906)

Net unrealized gain for the year 98,215 228,269

Balance at December 31 1,431,043 1,012,440

28. DISTRIBUTED / PROPOSED DIVIDENDS

The Board of Directors proposed in its meeting held on May 25, 2012 the allocation of year 2011 profits

through the distribution of dividends (LBP7.65billion) representing 15% of capital as well as the

remunerations to the Board of Directors, Investment Committee and Audit Committee of LBP 486million

subject to the approval of the General Assembly of the Shareholders which will be held on July 25, 2012

to approve the Group’s consolidated financial statements for 2011.

In its meeting held on June 24, 2011, the General Assembly of Shareholders approved the distribution of

dividends in the amount of LBP7.65billion and remunerations to the Board of Directors, Investment

Committee, and Audit Committee of LBP615million.

Dividends distributed by the Group are subject to a 5% withholding tax.

66

29. NON-CONTROLLING INTERESTS

General Insurance

Departments Life Division

December 31, December 31,

2011 2010 2011 2010

LBP’000 LBP’000 LBP’000 LBP’000

Capital 25,199,719 25,210,063 - -

Arabia Insurance Company shares

owned by non-controlling shareholders

at fair value ( 1,719,137) ( 1,834,350) - -

Cumulative change in fair value of

available-for-sale financial assets

related to Arabia Insurance Company 1,529,268 1,631,759 - -

Cumulative change in fair value of

available-for-sale financial assets – Non

related– note 28 901,971 1,565,500 - -

Foreign currency translation reserve ( 2,646,872) 551,509 - -

Reserves and retained earnings 3,253,378 2,632,291 104,422 74,256

Profit for the year 1,898,376 1,541,699 122,478 30,166

28,416,703 31,298,471 226,900 104,422

67

30. CONSOLIDATED STATEMENT OF INCOME AND EXPENSES OF THE GENERAL INSURANCE DEPARTMENTS

For The Year Ended December 31, 2011

General Workmen’s Reinsurance

Marine Motor Property Accidents Compensation Medical Inwards Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Income:

Premiums 13,868,397 148,049,008 20,201,027 24,507,319 5,916,402 18,863,628 326,177 231,731,958

Reinsurers’ share ( 10,071,622) ( 15,903,324) ( 16,542,174) ( 19,636,623) ( 108,579) ( 10,670,215) - ( 72,932,537)

Group's share 3,796,775 132,145,684 3,658,853 4,870,696 5,807,823 8,193,413 326,177 158,799,421

Policy fees 149,794 2,014,411 176,614 114,087 58,008 104,782 - 2,617,696

Other fees 91,766 1,133,560 4,430 11,383 5,449 807,427 - 2,054,015

Total fees 241,560 3,147,971 181,044 125,470 63,457 912,209 - 4,671,711

Net unearned premiums at beginning of year-note 20 979,309 62,627,455 1,668,451 1,850,260 2,744,306 4,446,722 151,829 74,468,332

Net unearned premiums at end of year –note 20 ( 997,199) ( 72,660,911) ( 1,395,968) ( 2,517,798) ( 2,700,670) ( 4,881,584) ( 15,000) ( 85,169,130)

Effect of foreign currency fluctuations ( 21,718) ( 1,187,715) ( 31,296) ( 22,827) 1 ( 77,531) 108 ( 1,340,978)

Net change in unearned premiums ( 39,608) ( 11,221,171) 241,187 ( 690,365) 43,637 ( 512,393) 136,937 ( 12,041,776)

Commissions from reinsurers 2,388,742 202,393 4,977,981 3,334,197 1,585 381,029 - 11,285,927

Other income 94,304 - 867 371,983 - - - 467,154

Total income 6,481,773 124,274,877 9,059,932 8,011,981 5,916,502 8,974,258 463,114 163,182,437

Expenses:

Outstanding claims at beginning of year – note 20 ( 3,708,548) ( 76,483,072) ( 24,069,884) ( 19,410,333) ( 3,901,860) ( 2,092,538) ( 376,875) ( 130,043,110)

Reinsurers’ share – note 20 2,182,224 2,879,668 21,587,503 15,876,174 689,480 1,434,627 - 44,649,676

Effect of foreign currency fluctuations 24,741 980,312 3,895 26,505 1 42,472 - 1,077,926

Group's share ( 1,501,583) ( 72,623,092) ( 2,478,486) ( 3,507,654) ( 3,212,379) ( 615,439) ( 376,875) ( 84,315,508)

Outstanding claims at end of year – note 20 3,354,386 68,201,437 38,355,393 17,433,613 4,314,382 3,796,880 60,000 135,516,091

Reinsurers’ share-note 20 ( 2,045,428) ( 2,957,919) ( 35,328,606) ( 13,246,631) ( 486,691) ( 2,540,919) - ( 56,606,194)

Effect of foreign currency fluctuations ( 6,358) 638,127 5,624 ( 6,121) - 6,568 - 637,840

Group's share 1,302,600 65,881,645 3,032,411 4,180,861 3,827,691 1,262,529 60,000 79,547,737

Net change in outstanding claims ( 198,983) ( 6,741,447) 553,925 673,207 615,312 647,090 ( 316,875) ( 4,767,771)

Claims paid net of recoveries 2,448,262 89,065,033 32,242,283 6,042,269 2,830,982 14,627,986 404,064 147,660,879

Reinsurers' share ( 1,633,554) ( 4,470,333) ( 29,952,426) ( 4,679,741) ( 212,943) ( 11,017,799) - ( 51,966,796)

Group's share 814,708 84,594,700 2,289,857 1,362,528 2,618,039 3,610,187 404,064 95,694,083

Commissions paid 864,967 22,816,686 2,055,021 1,379,357 913,997 1,651,248 104,303 29,785,579

Direct other expenses 36,865 855,536 85,118 22,566 44,253 791,220 - 1,835,558

Departments’ share of general expenses-note 31 1,380,404 11,971,065 1,981,983 2,663,221 630,287 1,797,327 6,134 20,430,421

Total expenses 2,897,961 113,496,540 6,965,904 6,100,879 4,821,888 8,497,072 197,626 142,977,870

Net income of insurance departments 3,583,812 10,778,337 2,094,028 1,911,102 1,094,614 477,186 265,488 20,204,567

68

For The Year Ended December 31, 2010

General Workmen’s Reinsurance

Marine Motor Property Accidents Compensation Medical Inwards Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

Income:

Premiums 12,966,298 131,195,927 21,404,466 22,419,047 6,204,929 21,906,796 1,304,609 217,402,072

Reinsurers’ share ( 9,155,559) ( 8,882,762) ( 17,977,652) ( 18,008,436) ( 351,051) ( 14,486,252) - ( 68,861,712)

Group's share 3,810,739 122,313,165 3,426,814 4,410,611 5,853,878 7,420,544 1,304,609 148,540,360

Policy fees 136,516 2,185,314 153,958 97,811 50,745 108,338 - 2,732,682

Other fees 136,362 5,245 88,224 1,842 - 745,126 - 976,799

Total fees 272,878 2,190,559 242,182 99,653 50,745 853,464 - 3,709,481

Net unearned premiums at beginning of year 1,107,204 53,122,067 1,415,699 1,754,904 2,139,543 1,384,800 209,808 61,134,025

Effect of foreign currency fluctuations ( 5,046) ( 115,944) ( 1,641) ( 3,291) - ( 8,299) 107 ( 134,114)

Net unearned premiums at end of year ( 979,308) ( 62,627,455) ( 1,668,451) ( 1,850,260) ( 2,744,305) ( 4,446,722) (151,829) ( 74,468,330)

Change in net unearned premiums 122,850 ( 9,621,332) ( 254,393) ( 98,647) ( 604,762) ( 3,070,221) 58,086 ( 13,468,419)

Commissions from reinsurers 2,376,484 62,149 4,340,889 3,378,125 40,621 824,576 - 11,022,844

Other income 397,225 ( 373,612) ( 14,190) 234,935 - - 42,434 286,792

Total income 6,980,176 114,570,929 7,741,302 8,024,677 5,340,482 6,028,363 1,405,129 150,091,058

Expenses:

Outstanding claims at beginning of year ( 3,307,857) ( 66,748,026) ( 12,012,652) ( 17,685,429) ( 3,704,953) ( 1,034,771) ( 452,250) ( 104,945,938)

Reinsurers’ share 1,759,202 2,617,460 10,789,834 14,786,420 750,911 854,083 - 31,557,910

Effect of foreign currency fluctuations 2,913 57,521 ( 25,379) 32,231 - 1,890 - 69,176

Group's share ( 1,545,742) ( 64,073,045) ( 1,248,197) ( 2,866,778) ( 2,954,042) ( 178,798) ( 452,250) ( 73,318,852)

Outstanding claims at end of year 3,708,548 76,483,072 24,069,884 19,410,333 3,901,860 2,092,538 376,875 130,043,110

Reinsurers’ share ( 2,182,224) ( 2,879,668) ( 21,587,503) ( 15,876,174) ( 689,480) ( 1,434,627) - ( 44,649,676)

Group's share 1,526,324 73,603,404 2,482,381 3,534,159 3,212,380 657,911 376,875 85,393,434

Net change in outstanding claims ( 19,418) 9,530,359 1,234,184 667,381 258,338 479,113 ( 75,375) 12,074,582

Claims paid net of recoveries 1,485,321 69,577,261 8,447,404 3,907,000 2,326,535 11,230,053 1,385,517 98,359,091

Reinsurers' share ( 549,437) ( 3,469,755) ( 7,383,621) ( 2,929,154) ( 64,199) ( 8,370,057) - ( 22,766,223)

Group's share 935,884 66,107,506 1,063,783 977,846 2,262,336 2,859,996 1,385,517 75,592,868

Commissions paid 822,080 21,582,233 1,873,232 1,360,227 700,414 1,558,157 375,817 28,272,160

Direct other expenses 27,000 123,652 48,622 1,150 584 65,529 63,038 329,575

Departments’ share of general expenses – note 31 1,261,560 10,572,207 2,272,033 2,436,122 647,945 1,404,815 26,000 18,620,682

Total expenses 3,027,106 107,915,957 6,491,854 5,442,726 3,869,617 6,367,610 1,774,997 134,889,867

Net income / (loss) of insurance departments 3,953,070 6,654,972 1,249,448 2,581,951 1,470,865 ( 339,247) ( 369,868) 15,201,191

69

31. GENERAL AND ADMINISTRATIVE EXPENSES

a) General Insurance Departments:

Total general and administrative expenses of general insurance departments amounting to

LBP38.1billion and LBP33.3billion for the years ended December 31, 2011 and 2010, respectively are

allocated as follows:

2011 2010

LBP’000 LBP’000

Allocated to general insurance departments – note 30 20,430,421 18,620,682

Life division share 2,120,000 1,800,000

Unallocated share of the head office 15,466,363 12,873,228

38,016,784 33,293,910

Total general and administrative expenses in 2011 and 2010 consist of the following:

2011 2010

LBP’000 LBP’000

Salaries and related charges 22,124,157 19,325,610

General operating expenses 14,539,511 12,856,075

Depreciation and amortization expense 1,353,116 1,112,225

38,016,784 33,293,910

The expenses allocated to the general insurance departments are made on the basis of the ratio of the

net premiums of each department to the total net premiums.

Depreciation expense of Ain Al Mreisseh building in the amount of LBP84million in 2011 and 2010

was recognized under “net loss from building” in the consolidated income statement.

(b) Life Division:

Total general and administrative expenses of the life division are distributed as follows:

2011 2010

LBP’000 LBP’000

Salaries and related charges 3,151,031 2,584,752

General operating expenses 1,744,198 1,677,702

Depreciation of furniture and equipment 64,299 60,871

4,959,528 4,323,325

70

32. FAIR VALUE OF FINANCIAL INSTRUMENTS

Except for the investment securities at amortized cost under note 8, management considers that the

carrying amounts of financial assets and financial liabilities recognized at amortized cost in the

consolidated financial statements approximate their fair values.

The following table provides an analysis of financial instruments that are measured subsequent to

initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value

is observable:

General Insurance Departments

December 31, 2011

Level 1 Level 3 Total

LBP’000 LBP’000 LBP’000

Financial assets at fair value through profit of loss:

Quoted securities 15,084,345 - 15,084,345

Unquoted securities - 1,551,843 1,551,843

15,084,345 1,551,843 16,636,188

Financial assets at fair value through

other comprehensive income:

Quoted securities 84,261,500 - 84,261,500

Unquoted securities - 10,378,599 10,378,599

84,261,500 10,378,599 94,640,099

99,345,845 11,930,442 111,276,287

Life Division

December 31, 2011

Level 1 Level 2 Level 3 Total

LBP’000 LBP’000 LBP’000 LBP’000

Financial assets at fair value through

profit of loss:

Quoted securities 1,001,266 - - 1,001,266

Funds – Unit-linked 14,668,390 - - 14,668,390

Bank term deposits – Unit-linked - 24,976,890 - 24,976,890

15,669,656 24,976,890 - 40,646,546

Financial assets at fair value through

other comprehensive income:

Quoted securities 1,002,586 - - 1,002,586

Unquoted securities - - 1,637,413 1,637,413

1,002,586 - 1,637,413 2,639,999

16,672,242 24,976,890 1,637,413 43,286,545

71

General Insurance Departments

December 31, 2010

Level 1 Level 3 Total

LBP’000 LBP’000 LBP’000

Financial assets at fair value through profit of loss:

Quoted securities 316,819 - 316,819

316,819 - 316,819

Available-for-sale financial assets:

Quoted securities 108,097,338 - 108,097,338

Unquoted securities - 7,136,315 7,136,315

108,097,338 7,136,315 115,233,653

108,414,157 7,136,315 115,550,472

Life Division

December 31, 2010

Level 1 Level 2 Level 3 Total

LBP’000 LBP’000 LBP’000 LBP’000

Financial assets at fair value through

profit or loss:

Funds – Unit-linked 11,239,695 - - 11,239,695

Bank term deposits – Unit-linked - 25,600,220 - 25,600,220

11,239,695 25,600,220 - 36,839,915

Available-for-sale financial assets:

Quoted securities 10,118,134 - - 10,118,134

Unquoted securities - - 1,407,555 1,407,555

10,118,134 - 1,407,555 11,525,689

21,357,829 25,600,220 1,407,555 48,365,604

72

33. INSURANCE AND FINANCIAL RISK MANAGEMENT

(A) Insurance Risk for General Departments:

The risk under any one insurance contract is the possibility that the insured event occurs and the

uncertainty of the amount of the resulting claim. By the nature of an insurance contract, this risk is

random and therefore unpredictable.

The principal risk that the Group faces under its insurance contracts is that the actual claims and

benefit payments exceed the carrying amount of the insurance liabilities, in addition to probability of

underpricing of risks, imposing inadequate terms or selecting low quality or uninsurable risks. Thus

the frequency or severity of claims and benefits become greater than estimated. Insurance events are

random and the actual number and amount of claims and benefits will vary from year to year from the

estimate established.

Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative

variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to

be affected across the board by a change in any subset of the portfolio. The Group has developed its

insurance underwriting strategy to diversify the type of insurance risks accepted and within each of

these categories to achieve a sufficiently large population of risks to reduce the variability of the

expected outcome.

The Group manages risks through its underwriting strategy, adequate reinsurance arrangements and

proactive claims handling. The underwriting strategy attempts to ensure that the underwritten risks are

well diversified in terms of type and amount of risk, industry and geography. Underwriting limits are

in place to enforce appropriate risk selection criteria.

(B) Life Insurance Risk

In the life insurance business a distinction is drawn between three types of underwriting risk: -

longevity, death and disability. The Group conducts an annual review and analysis of its customers

portfolios with regard to mortality, cancellation and reactivation. To manage disability risk and

improve risk performance, individual evaluations are used along the portfolio analyses for disability

risk to allow a better assessment of the exposure structure. The information gained is used in setting

appropriate prices and rates as well as ensuring that reserves are sufficient for future insurance

obligations to be met at all times. It also forms the basis for determining the risk capital that will be

required to offset unexpected deviations in the actuarial reserves.

73

(C) Reinsurance Risk

In common with other insurance companies, in order to minimize financial exposure arising from large

insurance claims, the Group, in the normal course of business, enters into arrangements with other

parties for reinsurance purposes.

To minimize its exposure to significant losses from reinsurer insolvencies, the Group evaluates the

financial condition of its reinsurers and monitors concentrations of credit risk arising from similar

geographic regions, activities or economic characteristics of the reinsurers.

The Group enters into reinsurance treaties that provide for the required capacities that fit its risk

profiles at competitive costs, while optimizing its retention levels through yearly as if exercises, taking

into consideration financial resources such as equity capital and free reserves, portfolio size and liquid

assets. Its retention levels fit the empirical rules and general benchmarks, and, most importantly,

ensure that the Group's solvency ratio remains high.

Reinsurance ceded contracts do not relieve the Group from its obligations to policyholders. The

Group remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does

not meet the obligations assumed under the reinsurance agreements.

(D) Sensitivity of underwriting profit and losses

The Group does not foresee any significant reduction in the profit contributed by the insurance

operations to the total profit of the Group due to the following reasons:

The Group has an overall retained premiums level of 69% (68% in 2010) of the gross written

premiums, and is mainly contributed by one class of business (i.e., Motor line) wherein the retention

level is 89% (93% in 2010). However, in this class the risk is adequately covered by excess of loss

reinsurance programs to guard against major financial impact.

The gross written premiums of the Motor lines increased by around 13% in 2011 compared to 2010,

and the corresponding retained premiums increased by 8% for the same period.

The Group's reinsurance commission earnings increased by around 2% in 2011 compared to 2010.

These earnings remain a comfortable source of technical revenues.

The Group's policy is balancing its insurance portfolio through increasing its non-motor lines which

have higher returns on premiums than motor, and which have a lower retained premiums level than

motor, due to the fact that they are reinsured by treaties that keep their retained exposure at a safe level

to protect the results from random fluctuations, while at the same time improving the profitability of

its motor lines through a combination of underwriting measures and excess of loss treaties that would

protect the motor lines from peak losses. Hence, the Group is comfortable to maintain acceptable net

loss ratios and does not foresee any serious financial impact in the insurance net profit.

74

(E) Dealing with the accumulation of insurance risk

Concentration or accumulation of insurance risk is dealt with by the Group depending on the

concerned line of business:

(a) Marine Cargo, and for known accumulation of policies/declarations on one vessel, an

arrangement is usually made with reinsurers to reinsure the said vessel exceptionally on a

"per bottom basis" (as opposed to the normal arrangement of a "per policy basis").

(b) For Property business (Fire and Burglary):

1. In respect of small accumulation of insured risks, the group limits retained exposure by

not taking 1 retention for every risk when there are 2 or more insured adjacent risks,

whereby is reduced.

2. In respect of large accumulated or catastrophic exposures under Property, especially

from natural hazards such as earthquake, our Property reinsurers cover the group for

their shares of same.

3. In respect of accumulation of the retentions under our Property business, this is covered

by a per event non-proportional treaty.

(c) Motor business is covered by per occurrence excess of loss treaties that also cover

involvement of more than one vehicle in one accident.

(d) For the Liability adequacy test, the Group has built up over the years reserves for

contingencies which would serve as well to offset any large event affected by a concentration

of insured risks, either in the same line of insurance or across the different lines of insurance

covered by the Group.

(F) Market Risk

Market risk is the risk that arises from fluctuations in the value of, or income from, assets or in interest

or foreign exchange rates, including the risks arising from the mismatching of assets and liabilities.

Life insurers are also exposed to market risks on the liabilities side of their statement of financial

positions, especially interest rate risks stemming from the sale of long-term insurance policies with

interest guarantees. Because the clients often take on long-term commitments, in addition to the

guarantees they expect to profit from up trends on the financial markets in the form of bonuses.

Options embedded in the insurance policies afford clients the necessary flexibility for long-term

agreement. These three elements; guarantee, bonuses and options, essentially determine the financial

risk of classical, life insurance and policies. The Group seeks to reduce market risks by ensuring a

high level of diversification both in its investment portfolio and direct investments, hence, most of the

branch assets are invested in bank deposits with low market risk involved.

75

Interest Rate Risk

The Group's interest rate risk arises from the possibility that changes in market interest rates will affect

the value of interest earning assets and interest bearing liabilities. The financial assets of the Group are

subject to fixed and floating interest rates and thus there is significant risk on the Group. Most of

financial liabilities of the Group are non interest bearing.

Currency Risk:

Currency risk arises from the possibility that changes in foreign exchange rates will affect the value of

financial assets and liabilities stated in foreign currencies, whereby, the Group does not hedge its

currency exposure by means of hedging instruments.

76

Monetary assets and monetary liabilities of the general insurance departments are distributed between Lebanese pound and other major foreign

currencies as follow:

December 31, 2011

Lebanese U.S. Syrian Arab Currencies Other

Pound Dollar Pound Linked to USD Currencies Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

MONETARY ASSETS

Cash and banks 7,517,968 14,184,627 44,178,785 85,067,782 2,007,407 152,956,569

Investment securities 5,744,213 19,690,033 445,869 89,000,371 6,295,630 121,176,116

Insurance receivables ( 1,719,609) 23,726,809 1,898,725 56,776,477 8,032 80,690,434

Due from reinsurers 386,403 15,615,086 31,014 12,602,932 71,692 28,707,127

Reinsurance assets 48,178,378 - 3,480,673 29,924,111 - 81,583,162

Deferred acquisition costs 6,623,248 - - 9,887,738 - 16,510,986

Other assets 281,066 664,371 2,449,508 1,723,265 - 5,118,210

67,011,667 73,880,926 52,484,574 284,982,676 8,382,761 486,742,604

MONETARY LIABILITIES

Due to banks - 4,582,588 - - 257,428 4,840,016

Insurance payables 9,021 2,120,938 282,986 25,885,676 955 28,299,576

Payables to insurance and reinsurance companies 1,542,261 8,920,195 4,597,210 6,626,197 851 21,686,714

Due to related company - 1,164,260 - 6,236,204 115,193 7,515,657

Income tax payable 1,572,901 - 1,082,568 885,661 - 3,541,130

Accrued expenses and other liabilities ( 6,418,875) 1,102,314 790,423 12,866,757 452,135 8,792,754

Provision for outstanding claims 11,998,699 - 10,801,829 112,715,563 - 135,516,091

Provision for unearned premiums 25,568,840 - 9,329,427 75,247,831 - 110,146,098

Unearned commission from reinsurers 3,003,618 - - - - 3,003,618

Provision for employees' end-of-service indemnity 1,315,866 - - 3,957,032 - 5,272,898

Provision for contingencies 1,176,930 - - 1,424,705 - 2,601,635

Deferred tax liability 1,665,541 - - 43,011 - 1,708,552

Due to life division 4,881,780 - - - - 4,881,780

46,316,582 17,890,295 26,884,443 245,888,637 826,562 337,806,519

20,695,085 55,990,631 25,600,131 39,094,039 7,556,199 148,936,085

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December 31, 2010

Lebanese U.S. Syrian Arab Currencies Other

Pound Dollar Pound Linked to USD Currencies Total

LBP’000 LBP’000 LBP’000 LBP’000 LBP’000 LBP’000

MONETARY ASSETS

Cash and banks 9,202,172 23,719,362 53,645,151 81,449,623 4,115,122 172,131,430

Investments securities 5,268,403 25,783,157 - 86,094,116 6,410,727 123,556,403

Insurance receivables - 70,814,284 961,243 4,309,928 - 76,085,455

Reinsurance assets - 68,806,213 4,238,569 14,359,681 - 87,404,463

Deferred acquisition costs - 3,975,764 - 10,085,026 - 14,060,790

Other assets 2,966,619 1,788 2,517,847 671,341 - 6,157,595

Due from Life division 4,065,949 - - - - 4,065,949

21,503,143 193,100,568 61,362,810 196,969,715 10,525,849 483,462,085

MONETARY LIABILITIES

Due to banks - - - - 6,659,137 6,659,137

Insurance payable - 2,269,605 272,350 24,712,890 - 27,254,845

Payables to insurance and reinsurance companies - 9,793,115 4,828,442 1,514,212 66,255 16,202,024

Due to related company - 22,304,388 - - - 22,304,388

Income tax payable 3,328,505 - 977,609 94,823 - 4,400,937

Accrued expenses and other liabilities 6,763,905 61,550 839,056 418,283 144,835 8,227,629

Provision for outstanding claims - 10,132,729 9,088,156 110,822,225 - 130,043,110

Provision for unearned premiums - 17,534,709 11,085,258 70,452,345 - 99,072,312

Unearned commission from reinsurers 903,096 - - 2,439,776 - 3,342,872

Provision for employees’ end-of-service indemnity 1,525,003 - - 3,083,746 - 4,608,749

Provision for contingencies 1,176,930 - - 1,425,414 - 2,602,344

Deferred tax liability 2,192,317 - - - - 2,192,317

15,889,756 62,096,096 27,090,871 214,963,714 6,870,227 326,910,664

5,613,387 131,004,472 34,271,939 ( 17,993,999) 3,655,622 156,551,421

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(G) Liquidity risk

Liquidity risk is the risk that cash may not be available to pay obligations when due to a reasonable

cost.

The credit risk on liquid funds is limited because the counter-parties are banks with high credit ratings

assigned by international credit rating agencies. All the fixed deposits mature within different periods

not exceeding one year from the reporting date.

In addition, the Group's reinsurance contracts comprise, in addition to quarterly settlements of

balances, cash loss provisions that warrant the immediate settlement of the reinsurers of their shares of

a claim when same reach a certain amount.

(H) Credit Risk:

Credit risk concerns the possibility that debtors may no longer be able to meet their obligations.

Responsibility for monitoring credit risks lies with the individual companies, which follow stringent

Group-wide guidelines with regard to minimum borrower ratings and the diversification of credit risks

across all areas in which the Group is exposed to such risks, in particular the investment and

reinsurance segments.

The Group's principal financial assets that are subject to credit risks are bank balances, insurance and

other receivables, reinsurance receivables and investment portfolio.

The Group's credit risk is primarily attributable to its insurance receivables. The amounts presented in

the statement of financial position are net of allowances for doubtful receivables. An allowance for

impairment is made where there is an identified loss event which, based on previous experience, is

evidence of a reduction in the recoverability of the cash flows.

The Group has no significant concentration of credit risk, with exposure spread over a large number of

counterparties and customers.

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34. CAPITAL MANAGEMENT

The Group manages its capital to ensure the Group’s ability to continue as a going concern, while

maximizing the return through the optimization of the liabilities and equity balance.

The Group manages the capital structure and makes the necessary revisions, in light of changes in the

economics of the business and the market conditions, and the risk characteristics of operations and

underlying assets. The Group’s overall strategy remains unchanged from prior year.

The capital structure of the Group consists of liabilities (excluding provision for contingencies and

offset by cash and cash equivalents) and equity of the Group.

The Group monitors the capital risk on the basis of the ratio of net liabilities to equity. The ratio as at

December 31, 2011 and 2010 was as follows:

December 31,

2011 2010

LBP’000 LBP’000

Liabilities (excluding provision for contingencies) 335,315,897 324,308,320

Less: Cash and cash equivalents ( 46,687,860) ( 44,168,721)

Net liabilities 288,628,037 280,139,599

Total equity 172,238,605 173,859,865

Gearing Ratio 1.68 1.61

35. CONTINGENT LIABILITIES

The Group is contingently liable as at December 31, 2011 and 2010 in respect of guarantees

aggregating LBP74billion and LBP75billion respectively, issued in accordance with legal

requirements as security to policies issued (all branches and life branch). The majority of these

guarantees are covered by pledged funds deposited by the Group with the banks issuing these

guarantees.

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36. NON CASH TRANSACTIONS

The following non cash transactions relating to investing and financing activities were excluded from

the statement of cash flows of the general insurance and the life division for 2011 and 2010:

General Insurance Departments:

The net change in fair value of financial assets at fair value through other comprehensive income

(available-for-sale financial assets) amounted to LBP4.9billion during 2011 (LBP22.8billion in 2010)

of which fair value loss of LBP766million during 2011 (LBP1.5billion in 2010) related to non-

controlling interests against investment securities.

Life Division:

The net change in fair value of financial assets at fair value through other comprehensive income

(available-for-sale financial assets) amounted to LBP337million during 2011 (LBP153million in 2010)

against investment securities.

37. OTHER RESTRICTED RESERVE – LIFE DIVISION

In accordance with Article 10(bis) (c) amended by Capital Market Authority decision No. 19/2007 of

the Oman Insurance Companies executive regulation, 1% of the annual life premiums, if reporting

profits, is transferred to a contingency reserve, until such reserve becomes equal to RO 1,000,000. This

contingency reserve shall be allocated to meet any underwriting loss that might occur in the life

assurance division in any one year.

38. PARTICIPATION IN SYNDICATES AND INSURANCE POOLS

The group participates in the Arab War Risk Insurance Syndicate (AWRIS), an insurance syndicate

registered in Bahrain, specializing in War Risk Insurance and composed of group of insurance

companies that share profits proportionally in accordance with each company’s ceded premiums’ share

to the total premiums of the syndicate.

The Group’s share of AWRIS distributed profits for 2011 and 2010 amounted to USD90,023 and

USD151,405 respectively.

The Group also participates in the accumulated “Syndicate” and “Contingency” reserves of “AWRIS”,

noting that this participation in reserves is only due to the Group upon its withdrawal from the

Syndicate or upon the liquidation of the Syndicate, after recalculating the value of participation at that

date and based on certain contractual conditions. The value of the Group participation in the

“Syndicate” and “Contingency” Reserves of AWRIS was USD1,385,091 and USD2,068,412

respectively as at December 31, 2011 (USD840,854 and USD2,068,412 respectively as at December

31, 2010).

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In addition to above, the Group participates in other syndicates and insurance pools, the most

important of which are:

- The Lebanese Insurance Pool of The Orange Card

- The Lebanese Insurance Pool of Engineering Risks

- Bankers Blanket Bond Pool

The profits of these participations are recorded in the related insurance branches.

39. APPROVAL OF THE FINANCIAL STATEMENTS

The consolidated financial statements for the year ended December 31, 2011 were approved by the

Board of Directors on June 22, 2012.

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