THE HERITAGE INSURANCE COMPANY KENYA LIMITED Annual …

THE HERITAGE INSURANCE COMPANY KENYA LIMITED

Annual Report & Financial Statements

2017A member of

Insurance CompanyHeritage

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01CORPORATE INFORMATION 2 Corporate Information 7 Directors’ Report 8 Chairman’s statement21 Corporate Governance Report24 Statement of Directors’ Responsibilities26 Independent Auditors’ Report

02FINANCIAL STATEMENTS31 Statement of Profit or Loss32 Statement of other comprehensive income33 Statement of financial position35 Statement of changes in equity37 Statement of cash flows39 Accounting policies53 Notes to the financial statements

DIRECTORS

P.N. Gethi Kenyan ChairmanG.M. Kioi Kenyan Managing DirectorG.R. May British Non-ExecutiveM.L. du Toit South African Non-ExecutiveS. Sejpal (Ms) British Non-Executive (Resigned 20/11/2017)S.C. Wenman South African Non-ExecutiveC.W. Mwangi (Ms) Kenyan Non-Executive (Resigned 14/06/2017)Rachel Mbai Kenyan Non-Executive (Appointed 30/08/2017)Catherine Mitchem British Non-Executive (Appointed 17/11/2017)

SECRETARY

C. Kioni (Ms)P. O. Box 30390 - 00100Nairobi

SENIOR MANAGEMENT

G. M. Kioi Managing DirectorA. P. Ngunjiri Director (Medical)B. N. Hiuhu (Mrs) Director (Underwriting & Claims)L. Magambo General Manager (Finance)B. Irungu Senior Manager (Claims)I. K Kamau Senior Manager (IT)D. Mathenge Senior Manager (Finance)J. Maluki (Ms) Senior Manager (Medical)B. Maina Senior Manager (Underwriting)S. Chege Head of Retail Business

AUDITORS

KPMG KenyaCertified Public Accountants8th Floor, ABC TowersWaiyaki WayP. O. Box 40612 - 00100Nairobi

REGISTERED HEAD OFFICE

Liberty HouseMamlaka RoadP.O. Box 30390 - 00100Nairobi

PRINCIPAL BANKERS

Stanbic Bank LimitedStanbic CentreChiromo RoadP. O. Box 72833 - 00200Nairobi

Commercial Bank of Africa LimitedCBA Building Mara/ Ragati RoadP.O. Box 30437 - 00100Nairobi

CORPORATE INFORMATION0

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MOMBASA Social Security HouseP.O. Box 84886 - 00100MOMBASA

ELDORET Imperial CourtP.O. Box 6120 - 30100ELDORET

NYALI Nyali CentreLinks RoadP.O. Box 84886 - 80100MOMBASA

MACHAKOS Town Plaza2nd FloorP.O. Box 211 - 90100MACHAKOS

KISII Royal Towers2nd Floor,Hospital RoadP. O. Box 3066 - 40200KISII

KISUMU Tuffoam Mall1st FloorJomo Kenyatta HighwayP.O. Box 1062 - 40100KISUMU

NAIVASHA CfC Heritage HouseMoi RoadP.O. Box 1319 - 20117NAIVASHA

NAIROBI Liberty HouseP.O. Box 30390 - 00100NAIROBI

NANYUKI Silver PlazaP.O. Box 1615 - 10400NANYUKI

NAKURU Polo CentreP.O. Box 4362 - 20100NAKURU

MERU NakumattMwitu Centre BuildingP.O. Box 1911 - 60200MERU

THIKA Zuri CentreKenyatta HighwayP.O. 7048 - 001000THIKA

KITENGELA Capital CentreP.O. Box 30390 - 00100NAIROBI

NAIROBI (CITY CENTRE) Lonrho HouseMezzanine 2, Standard StreetP.O. Box 30390 - 00100NAIROBI

EMBUNjue Plaza3rd Floor, Embu - Meru RoadP. O. Box 2607 - 60100EMBU

The Heritage Insurance Company (T) Limited4th Floor Masaki IkonBains Avenue- Msasani Peninsula PO Box 7390, Dar es Salaam, Tanzania.

BRANCHES

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OUR VISIONWe will be the market leading wealth management company in Africa while entering growth markets which allow us to use our points of difference to make a meaningful contribution to the group.

We are a customer-focused organisation with a united, passionate and skilled workforce.

We have the foresight to respond to changing consumer needs through innovative solutions and technologically efficient processes.

OUR VALUES

• Be passionate about our work and utilise our talents to add value

• Take initiative and responsibility

• Respect and appreciate constructive criticism and the opinion of others

• Focus on set goals and deadlines

• Be proud ambassadors of our Company and Group

• Put our customers at the centre of our thinking and serve them with diligence

• Encourage teamwork, respect and trust for one another

• Take ownership of the consequences of our actions

• Perform our duties with care, integrity and honesty

• Deliver beyond expectations

• Constantly improve our skills and knowledge

• Embrace change and seek ways to do things better

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MEDICAL INSURANCE

because the greatest gift is a healthy you

MARINE INSURANCE

because your businessmatters to you

The directors submit their report together with the audited financial statements for the year ended 31 December 2017 which disclose the state of affairs of The Heritage Insurance Company Kenya Limited and its subsidiary, Heritage Insurance Company Tanzania Limited (together the ‘Group’).

1. PRINCIPAL ACTIVITIESThe Group underwrites all classes of non life insurance risks as defined by the Insurance Act except Micro Insurance.

2. COMPANY RESULTS AND DIVIDEND

Profit after tax for the year ended 31 December 2017 of Shs 459 million (2016: Shs 524 million) has been added to retained earnings.During the year, the directors paid nil (2016: 60 million) as interim dividend. The directors do not propose payment of a final dividend (2016: nil).

3. DIRECTORS

The directors who held office during the year to the date of this report are as shown on page 2.

4. RELEVANT AUDIT INFORMATION

The Directors in office at the date of this report confirm that:

• There is no relevant information of which the company’s auditor is unaware; and

• Each director has taken all the steps that they ought to have taken as a Director so as to be aware of any relevant audit information and to establish that the Company’s auditor is aware of that information.

5. EMPLOYEES

The number of persons employed by the Company at the end of the year was 179 (2016: 174). Out of the 179 members of staff employed by Heritage Kenya as at 31 December 2017, 105 are male and 74 are female.

6. AUDITORS

The auditors, KPMG Kenya, continue in office in accordance with section 719 of the Kenyan Companies Act, 2015 and subject to the approval by the Commissioner of Insurance under Section 56(4) of the Insurance Act.

7. BUSINESS OVERVIEW

The group delivered solid results in the backdrop of a difficult trading environment. The Group’s heritage is built around a philosophy of quality business rather than top line growth. This has helped the Group weather a particularly difficult year. In Kenya, the Gross Written Premium grew by 11 percent though there was a disproportionate growth in reinsurance costs due to changes in business mix.

There was also an increase in bad debts provisioning reflective of a difficult trading environment where some of our customers were unable to pay premiums on time due to credit glut.

This had a negative effect on Kenya’s core underwriting results though expenses of management remained well under controlin the year. The Heritage Insurance Company Kenya Limited sold a non-strategic company Azali Limited, a special purpose vehicle created to manage Heritage House in Naivasha. The disposal contributed a net loss of KShs 10 million to Heritage Group earnings.

Tanzania business underwent multiple and fundamental regulatory changes in the year. The changes were mainly targeted at distribution and premium payment. This resulted in business slow down and as a result,

DIRECTORS’ REPORT

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DIRECTOR’S REPORT (CONT’D)BUSINESS OVERVIEW (CONT’D)

the Gross Written premium was down on the prior year by 14%. On the flipside, the claims cost and management expenses both reduced to compensate for lower premium earnings.

In keeping with the Group’s strong Corporate Governance and risk management practices, all entities within the Group recorded improved solvency in the reporting period.

Key financial indicators of Group and Company are shown below:

THE GROUP THE COMPANY

Gross Written Premiums: up 9% up 11%

Investment Income: up 22% up 17%

Net assets: up 11% up 23%

Benefit payments: up 5% up 11%

Operating expenses up 6% flat

Profit for the year down 12% up 16%

(Loss)/ Gain on disposal of subsidiary (10m) 50m

8. APPROVAL OF FINANCIAL STATEMENTS

The financial statements set out on pages 39 to 103 were approved and authorized for issue at a meeting of Directors on 28 March 2018

By Order of the Board

Company Secretary28 March 2018

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PROFESSIONAL INDEMNITY

because your careerbrings value to your life

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CHAIRMAN’S STATEMENT DEAR SHAREHOLDERS

I am indeed very pleased to present the Heritage Insurance Company Kenya Limited Annual Report and Financial Statements for the year ended 31 December 2017.

I am particularly grateful to you, shareholders, for the level of support you continue to provide for your company as is evident from your active participation every year.

These occasions offer us a great opportunity to review

our financial performance and at the same time plan strategically ahead together.

On our part as the Board, together with the management and staff, we are always encouraged by the confidence bestowed upon us to steer the affairs of your company and remain committed to the realization of its full potential for growth in order to continue to deliver better returns.

Income Statement HIK HIT Azali Total Cons Adj. Group

2017Profit before taxation 770,982 77,449 2,912 851,343 (172,344) 679,001

Taxation (193,892) (25,493) (874) (220,259) - (220,259)

Total earnings 577,090 51,956 2,038 631,084 (172,344) 458,743

Change in earnings +16% (51%) 0% +4% (111%) (12%)

2016

Profit before taxation 705,079 155,941 2,934 863,954 (81,617) 782,337

Taxation (206,885) (50,306) (897) (258,089) - (258,089)

Total earnings 498,194 105,635 2,037 605,866 (81,617) 524,249

*Azali Limited was sold on 31 August 2017

GLOBAL BUSINESS OUTLOOK

The World Bank forecasts global economic growth to edge up to 3.1 percent in 2018 after a much stronger than expected 2017, as the recovery in investment, manufacturing, and trade continues.

Growth in advanced economies is expected to moderate slightly to 2.2 percent this year, as central banks gradually remove their post-crisis accommodation and the upturn in investment growth stabilizes.

Growth in emerging market and developing economies as a whole is projected to strengthen to 4.5 percent, as activity in commodity exporters continues to recover amid firming prices.

In oil-exporting economies, the 2014 - 16 oil price collapse has already prompted some reforms. Nevertheless, across all emerging market and developing economies (EMDEs), room for policy improvements remains. Policy initiatives to lift physical and human capital, encourage labour force participation, and improve institutions could help raise potential growth and reduce inequality.

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“The Company’s overall financial performance in 2017 showed resilience in the midst of events outside our direct control”.

P N Gethi

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CHAIRMAN’S STATEMENT (CONT’D)MACRO ECONOMIC ENVIRONMENT

World Bank 2018 report projects Kenya’s economic growth to rebound to 5.8 percent in 2018. The same report indicates the Gross Domestic Product (GDP) growth decelerated to 5.5 percent in 2017 because of drought, weak credit growth, security concerns, and a rise in oil prices.

Medium term GDP growth should rebound to 5.8 percent in 2018 and 6.1 percent in 2019 respectively, depending on the completion of ongoing infrastructure projects, the resolution of slow credit growth, and the strengthening of the global economy and tourism.

In the long term, the adoption of prudent macroeconomic policies will help safeguard Kenya’s robust economic performance, according to the World Bank. This includes the implementation of fiscal and monetary prudence and lowering the deficit down to 4.3 percent by financial year 2019/2020, as per the Medium Term Fiscal Framework. Fiscal consolidation needs to avoid compromising public investment in critical infrastructure key to unlocking the economy’s productive capacity.

On social development, Kenya met some Millennium Development Goals (MDGs) targets, including reduced child mortality, near universal primary school enrolment, and narrowed gender gaps in education. Interventions and increased spending on health and education are paying dividends. And, while the healthcare system has faced challenges, devolved health care and free maternal health care at all public health facilities will improve health care outcomes and develop a more equitable health care system.

Kenya’s youthful and growing population, dynamic private sector, highly skilled workforce, improved infrastructure, new constitution, and pivotal role in East Africa, give it the potential to be one of Africa’s great success stories. Addressing poverty, inequality, governance, and the skills gap (between market requirements and the education curriculum) will be major goals, as well as problems of climate change, low investment, and low productivity.

INSURANCE SECTOR OUTLOOK

Kenya represents one of Africa’s most well developed and best regulated insurance markets, with formidable historic growth and even better near term prospects. There are increasing regulatory capital requirements on the horizon, and there is growing scope for consolidation.

The 2018 Insurance Industry Outlook pinpoints key opportunities for growth. Foreign and local capital is likely to continue to flow into the sector, lured not only by the great domestic potential access to financial services is still modest but also by the chance to expand into the sizeable regional market. Currently, according to the Association of Kenyan

Insurers (AKI), Kenya represents 70 percent of the East African insurance market, which also includes Tanzania, Uganda, Rwanda and Burundi.

In recent years, insurance penetration and accessibility have been improving steadily. A number of major infrastructure plans have created investment opportunities in insurance. Some of the main ventures include the construction of the second runway and new terminal at Jomo KenyattaInternational Airport, the Lamu Transport Corridor project and the Standard Gauge Railway (SGR) project.The insurance penetration is about 2.9 percent of the Gross Domestic Product (GDP).

The worldwide insurance penetration is estimated at 6.5 percent of GDP. (Source IRA 2017 report)

As technology, innovation, higher customer expectations and disruptive newcomers redefine the marketplace, we remain focused on growing top line sales, bottom line profitability, addressing challenges, and competing responsibly in a dynamic industry.

INNOVATION AND TECHNOLOGYIn line with enhancing efficiency in various spheres of business operations, adoption of emerging technology trends has been a key area of focus for the company. The business has been aggressive in automating core areas of business including bank payment through a host to host system that has not only quickened payments but also reduced from a two-stage process to a one stage process.

In addition, we made it easier for customers to pay premiums by offering multiple online payment options. Customers can now pay premiums from the comfort of their homes or offices via m pesa or credit cards (Visa) by simply going to our website and selecting E Pay. Payment reference will be required for instantaneous receipting and allocating to a customer account.

The company also connected to the government’s Integrated Population Registration System (IPRS) which is registration bureau of identity cards.

This has enhanced speed of processing new business with an authenticated and accurate system. Cyber Security has been a key area of focus for the company. In the year, the business subscribed to Mimecast with a view to scan emails, thereby eliminating fraud and spam emails and filtering any viruses. The company also moved its email servers to the cloud thereby ensuring that all staff are able to access and provide timely service from any location with an internet connection.

On new product development, we introduced the Trade Credit policy that seeks to cover businesses that supply goods on credit against loss of revenue from buyers who do not honour their payment obligation.

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CHAIRMAN’S STATEMENT (CONT’D)INNOVATION AND TECHNOLOGY (CONT’D)

Going forward, the company plans to introduce a groundbreaking motor insurance policy that will revolutionize motor insurance in Kenya. Through this product, clients will now pay their premiums based on how they drive.

CORPORATE SOCIAL INVESTMENTSIn 2017, the company drove a robust Corporate Social Responsibility (CSI) programme anchored on two main pillars of Education and Health as part of the wider Liberty Group CSI

Policy. On education, the company enrolled 10 new secondary school students in form one from across the country to bring to a total of 52 students under the Heritage Scholarship Programme that sponsors tuition fee for students in secondary and tertiary institutions. Other education programmes undertaken over the period include celebration of the 2017 Nelson Mandela Day with students from Kajiado Township Primary School. In marking this occasion, the company through its staff donated funds towards a school feeding programme that saw all the students get lunch through a Heritage staff initiative dubbed Stairwell Challenge which saw each participating staff raise money towards the programme.Additionally, the company made donations towards education of needy students during the 2017 Starehe Founders Day Celebration in Nairobi. On health, the company ran a vigorous

Healthy Living Campaign that aimed at sensitizing company staff on benefits of living a healthy lifestyle. Indeed, it was through this initiative that staff raised funds towards the Kajiado Township Primary School feeding programme. Other initiatives included support to the Cerebral Palsy Society of Kenya and participation in the Association of Kenya Insurers Medical Camp in Githunguri, Kiambu County.

REGULATORY ENVIRONMENT IN KENYA The Insurance Act has undergone various revisions in the year 2017 to keep abreast with the changing environment.

The changes were majorly on harmonizing the risk-based capital provisions within the Act and creation of perpetual licenses for insurance companies.

The Insurance Regulatory Authority (IRA) also issued the following guidelines to assist in the risk-based supervision: • The Insurance (Valuation of Technical Provisions for General Business) Guidelines 2017.

• The Insurance (Investments Management) Guidelines, 2017 • The Insurance (Capital Adequacy) Guidelines, 2017

REGULATORY ENVIRONMENT

The Insurance (Amendment) Act 2016 took effect on 13 January 2017 and the Act was amended to operationalize risk-based solvency requirements that were introduced in the Finance Act, 2013.

THE STATUTE LAW (MISCELLANEOUS AMENDMENTS)

ACT, 2017

The Insurance Act was amended by changing the date when the insurance companies were expected to fully comply with the Risk-Based Capital Requirement. The date has been moved

from 30 June 2018 to 30 June 2020.

THE INSURANCE (AMENDMENT) ACT 2017 AND THE INSURANCE (AMENDMENT) REGULATIONS 2017

The Insurance Act was amended to create perpetual licenses for Insurance companies and did away with the annual application for insurance licenses.

“The company has a long-term education financial aid program where students from poor backgrounds across the counties are considered for sponsorship. The company walks with the student the entire journey from Form 1 admission until they graduate from the university and eventual job placement.”P. N. Gethi

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CHAIRMAN’S STATEMENT (CONT’D)

REGIONAL MARKET There were Regulatory Changes in Tanzania as outlined below:

A) THE MISCELLANEOUS AMENDMENTS ACT (NO. 2) OF 2017

In June 2017, the Tanzanian Parliament passed the Written Laws (Miscellaneous Amendments Act (No. 2) of 2017, which amended the Insurance Act, with respect to foreign ownership of insurance brokers, the mechanics of payment (and minimums) for insurance premiums and the requirement to obtain insurance only through Tanzanian insurers.

OWNERSHIP AND PAYMENT OF BROKERS

The changes require insurance brokers to be at least two thirds (over 66 percent) owned and controlled by Tanzanian citizens. This is a 100 percent increase from the previous local participation requirement (of one third (above 33 percent).

Further, customers will have to pay insurers all premiums directly, even when they are using brokers. Brokers will only be entitled to receive their commissions directly from the insurers (instead of taking them out of premiums from customers) and there are heavy penalties for contravening this.

MINIMUM INSURANCE PREMIUMS

The amendments enable the Commissioner of Insurance to set minimum rates of premiums payable for different classes of insurance by, publishing orders in the Government Gazette.

REQUIREMENT TO OBTAIN INSURANCE ONLY THROUGH TANZANIAN INSURERS

Insurance cover for a Tanzanian resident person or company may only be placed with a Tanzanian registered insurer. The exception to this, where classes of insurance are not available from a Tanzanian registered insurer, is now even further curtailed. The changes make it clear that all ground transport insurance, marine insurance and air cargo insurance covers for Tanzanian imports must be effected by a Tanzanian insurer.

B) CIRCULAR LETTER NO.055/2017 (CONDITIONS FOR DEALING WITH FOREIGN REINSURERS AND REINSURANCE BROKERS)

The circular issued by Commissioner of Insurance specifically seeks to address market challenges resulting

from externalisation (fronting) of insurance business outside the country through reinsurance. It particularly prohibits the externalization of risks at 100 percent, externalisation of long term insurance business in the country and also prohibits co-insurance with sister or parent companies based in other jurisdictions.

The circular also requires insurers to diversify the reinsurers used and ensure the reinsurers have a rating of B+ or better from independent reputable rating agency. Further, the insurance companies are required to retain competent reinsurance staff.

The circular came into effect on 1 January 2018.

All the above regulatory changes have a direct impact in the company and the Group conducts business.

BUSINESS PERFORMANCE IN TANZANIA

Tanzania has sustained relatively high economic growth over the last decade, averaging 6 percent to 7 percent a year.

The growth in the insurance market has been aligned to the reported growth in Gross Domestic Product. In 2018, the general insurance market is expected to grow in double digits based on the historical trend.

During the year under review, the following legislations came into effect:

• Cash before cover – This requires clients to pay their premiums directly to the insurers

• Accreditation of foreign Reinsurance. – This call for foreign reinsurers seeking to transact business in Tanzania to have an accreditation letter from Tanzania Insurance Regulatory Authority.

These changes aim to ensure that a sound business environment is realized.

In terms of financial performance, Heritage Insurance Company Tanzania Limited gross written premium decreased by 26 percent over the previous year primarily due to regulatory changes, loss of large corporate clients and other market conditions. The net earned premium decreased by 19 percent over 2016. During the year, the Company had a reasonable claims experience and recorded an overall net claims ratio of 47 percent (net claims over net earned premium) in line with the

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budget and previous year loss. Operating expenses remained marginally higher at 17 percent compared to the international benchmark of 10 percent of gross written premium.

The Company continues to focus on prudently reducing the cost base and on improving the operational cost ratios. Interest & dividend incomes at Tshs 2,089 million were 6 percent higher than the previous year due mainly to an increase in bank deposits from Tshs 19,680 million to Tshs 24,234 million.

Fair value gain on investment was Tshs 293 million compared to a loss of Tshs 587 million in 2016.

Unrealized exchange loss of TZS 22 Million and realized exchange gains of TZS 417 million has also been recorded as at the end of December 2017.

The underwriting profit decreased by 51 percent to TShs 696.8 million in 2017 from TShs 1,409 million in 2016. The profit before tax at TShs 1,677 million is 23 percent lower compared with profit before tax of TShs 4,331 million in 2016.

Besides the drop in business at the top line, the bottom line results were significantly affected by a one-off bad debt provision of a disputed claim recovery worth Tshs 1,189 million. During the year the company paid an interim dividend of Tshs 4 billion. With total Assets of Tshs 56.6 billion and a strong relationship with reputable Reinsurers, the Company remains both strong and dynamic.

The Heritage Insurance Company Tanzania strives to ensure success for the benefits of all our stakeholders by providing efficient service to its loyal clients and enhancing shareholders value.

The Company will continue to focus on its core market segment of large corporate clients alongside while making concerted efforts to develop and strengthen business relationships with Tier II, Tier III brokers and retail channel partners to broaden its client base.

The positive impact of various Government projects and the focus on industrialization will have a positive impact for the Company.

The Company is expecting to derive substantive growth from Aviation, Engineering, Marine business segments and other retail business especially motor segment.

The success of our business derives from our stakeholders: Employees, Clients, Brokers, Agents, Reinsures, Business partners, Regulators and Shareholders.

COMPANY OF CHOICE

Heritage Insurance Company Kenya Limited is an equal opportunity employer. The company provides equal employment opportunities to all employees or job applicants and does not discriminate in any way because of gender, race, colour, religion, national origin, sex, physical or mental disability, or age.

The company encourages staff development by offering both Professional and Internal training opportunities.Our objectives in appointment are to recruit the person who is most suited to the particular job based on his relevant abilities, qualifications, experience and skills for the post. Recruitment and selection decisions will always be made on the basis of merit making our company the most attractive place to work.

Heritage Insurance Company Limited is committed to ensuring the best possible environment for the employees. Safeguarding and promoting their welfare is our highest priority.

We aim to recruit staff that share and understand our commitment, and to ensure that no job applicant is treated unfairly by reason of a protected characteristic as defined under the Employment Act.

DEALING WITH FRAUD

Fraud is one of the biggest challenges facing the insurance industry. The industry estimates generally put fraud at about 10 percent of the property or casualty insurance industry’s incurred losses and loss adjustment expenses each year, although the figure can fluctuate based on the line of business, economic conditions and other factors.

Fraudulent claims are particularly prevalent in motor and medical claims. It is difficult to tell the exact magnitude of the menace.

The industry lobby body, the Association of Kenya Insurers (AKI) is developing a data sharing platform that should help industry players share information freely to assist stakeholders to understand customer trends.

CHAIRMAN’S STATEMENT (CONT’D)BUSINESS PERFORMANCE IN TANZANIA (CONT’D)

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PRODUCTS AND CHANNELS Heritage Insurance Company Kenya Limited provides short term insurance products and prides on its superb history of prompt claims payment.

This has earned us major awards for Outstanding Insurance Underwriter in Claims Settlement as nominated by members of the Association of Insurance Brokers of Kenya.

We are also rated AA by Global Rating Company (GRC), for amongst other reasons, our high claims paying ability. This is one of the highest international ratings ever given to recognize a Kenyan insurer!

As Heritage Insurance Company, we are developing systems and processes to meet the modern demands of the ever enlightened customers.

This, therefore, means investing in the expansion of our distribution channels and networks making it easier for our customers to have access to services at their own convenience.

As a result, we have gained cumulative experience in understanding our customers’ needs and preferences and have been largely successful in providing innovative solutions that meet their needs.

APPRECIATION

I would like to take this opportunity to sincerely thank the Board of Directors for their unrelenting support and guidance throughout the year.

Similarly, to our valued business partners, brokers, agents and clients who have remained with us even in the most turbulent of times, we thank you and reiterate our unbreakable promise to service. As I conclude, I wish to thank the management and staff for your dedication and commitment to serve our clients. Together, we will maintain our Brand as the trusted leader in insurance in the East African region.

Peter Gethi,ChairmanDate: 28 March 2018


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TRADE CREDIT INSURANCE

because some risksare worth taking

GROSS WRITTEN PREMIUMS

GROSSPREMIUMS

(Kshs.)

TOTAL ASSETS UNDERWRITING RESULTS

GROUP

COMPANY

Kenya

5.9 B

Tanzania

1.7 B

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.02013 2014 2015 2016 2017

6.0 6.

24.

0

5.2 5.

3

5.9

3.5

7.5 7.

6

7.6

1 0

2 0

30

40

50

60

70

80 5 .

00

10

8.0

6.0

4.0

2.0

1.0

0.02013 2014 2015 2016 2017

9.9

9.1

6.1 6.

6 7.2

8.9

4.7

9.8 10

.2

11.3

1 0

2 0

40

60 7

80 2

10 .

.

00

0.6

0.5

0.4

0.3

0.2

0.1

0.02013 2014 2015 2016 2017

0.33

0.25

0.20 0.

22

0.40

0.26

0.31

0.28

0.48

0.30

0

01

0 2

0

0 3 5 2

04

4

0 5 0

06

00

Heritage Insurance Company Kenya Limited is among the top 10 short term insurance underwriters in the industry by premium volumes. The Company has put in place some rigorous underwriting guidelines to ensure that we have continuously returned underwriting results from the operations of the Company over the years. In addition, the Company continuously evaluates its processes and procedures to ensure the operations are done in the most efficient manner, to serve the clients in the most satisfactory manner. Today we are among the best in service delivery.

FIN

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GROSS WRITTEN PREMIUMS

GROSSPREMIUMS

(Kshs.)

TOTAL ASSETS UNDERWRITING RESULTS

GROUP

COMPANY

Kenya

5.9 B

Tanzania

1.7 B

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.02013 2014 2015 2016 2017

6.0 6.

24.

0

5.2 5.

3

5.9

3.5

7.5 7.

6

7.6

1 0

2 0

30

40

50

60

70

80 5 .

00

10

8.0

6.0

4.0

2.0

1.0

0.02013 2014 2015 2016 2017

9.9

9.1

6.1 6.

6 7.2

8.9

4.7

9.8 10

.2

11.3

1 0

2 0

40

60 7

80 2

10 .

.

00

0.6

0.5

0.4

0.3

0.2

0.1

0.02013 2014 2015 2016 2017

0.33

0.25

0.20 0.

22

0.40

0.26

0.31

0.28

0.48

0.30

0

01

0 2

0

0 3 5 2

04

4

0 5 0

06

00

Heritage Insurance is an equal opportunity employer. The Company strives to attract and retain a highly skilled and competent staff who in turn serves our clients in the most professional way. Out of the 179 members of staff employed by Heritage Kenya as at 31 December 2017, 105 are male and 74 are female.

1

3

2

BOARD OF DIRECTORS

4

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1 Peter GethiChairman 4 Gayling May

Director

7 Stuart WenmanDirector

2 Godfrey KioiManaging Director 5 Mike Du Toit

Director

3 Rachel Mbai Director (Appointed 30 Aug. 2017) 6 Catherine Mitchem

Director (Appointed 17 Nov. 2017)

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5

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MANAGEMENTTEAM

1 2 3

6

1 G. Kioi

Managing Director

4 S. Chege

Head of Retail Business

2 B. N. Hiuhu (Mrs.)

Director (Underwriting & Claims)

3 A. P. Ngunjiri

Director (Medical)

4 5

7

9

8

10

7 L. Magambo

General Manager (Finance)

10 I.Kamau

Senior Manager (ICT)

8 B. Irungu

Senior Manager (Claims)

5 J. Maluki (Ms.)

Senior Manager (Medical) 9 B. Maina

Senior Manager (Underwriting)

6 D. Mathenge

Senior Manager (Finance)

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AGRICULTURAL INSURANCE

because growth and progress drive everything

1. INTRODUCTION

The Heritage Insurance Company Kenya Limited Corporate Governance Framework comprises the Board of Directors, Committees of the Board, Management and Operations Committees, as well as policies, procedures and systems which together govern the management of the business. The company continuously embraces the principles of good corporate governance to ensure that its business remains sustainable, relevant and profitable. The Board of Directors and Management have embraced the principles of integrity, accountability and transparency in directing and running the affairs of the company.

The Corporate Governance Framework also guides the relationship between Heritage Insurance Company Kenya Limited its parent shareholder, Liberty Kenya Holdings Ltd, as well as its relations with other member companies of the Liberty Africa Group.

2. BOARD OF DIRECTORS

The Mandate of the Heritage Insurance Company Board of Directors is to implement principles of good corporate governance, determine the strategic direction of the company and ensure sustainability of the business. The Board of Directors is therefore responsible for implementing the Strategic Plan through oversight, enhanced shareholder value, company growth, profitability, financial reporting, accountability and safeguarding of company assets.In order to achieve this efficiently, the Board has delegated various responsibilities to various committees of the Board and Management Committees, while the mandate to oversee the running of the business has been conferred to the Managing Director. There are three committees of the board, namely: The Directors Affairs Committee, Audit and Risk Committee and the Investment Committee.

The Board of Directors is constituted of six non-executive directors and the Managing Director and holds meetings at least once every quarter.

In 2017, the Board of Directors held meetings as follows:

Member 02.03.2017 25.05.2017 30.08.2017 17.11.2017 11.12.2017

Peter N Gethi P P P P P

Godfrey Kioi P P P P P

Gayling R May P P P P P

Stuart Wenman P P P P P

Mike du Toit P P P P P

Claire W Mwangi * 1 P P P N/A N/A

Sonal Sejpal * 2 P A P P N/A

Rachel Mbai * 3

Catherine Mitchem * 4

-

-

--

P-

P

-

P

P

*1 Resigned on 14 June 2017 *2 Resigned on 20 November 2017

*3 Joined the Board on 30 August 2017 *4 Joined the Board on 17 November 2017P - Present A - Absent with apologies N/A - Resigned

CORPORATEGOVERNANCE REPORT

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CORPORATE GOVERNANCE REPORT (CONT’D)

3. THE DIRECTORS’ AFFAIRS COMMITTEE

This Committee is established by the directors of Liberty Kenya Holdings Limited. The mandate of this committee is to supervise the management of key human resources of all its subsidiaries. This includes the appointment and management of executives and review of remuneration policies.

4. THE AUDIT AND RISK COMMITTEE (ARC)

The mandate of this committee is to oversee the implementation of effective policies, procedures and internal controls.

The ARC also sets and reviews the company’s risk management strategy, while enforcing compliance with internal and regulatory provisions.

This committee also reviews the scope of work, skills of the Internal Audit function and provides guidance in the resolution of audit findings. The ARC reinforces best practice in Corporate Governance through the implementation of its mandate.

The Audit and Risk committee is charged with approving the company’s financial statements, and acts as the liaison with the External Auditors. In this regard, the ARC provides oversight and assurance for financial reporting.

The Audit and Risk Committee is constituted of four non-executive directors, and holds meetings every quarter:

In the year 2017, the Audit and Risk Committee held meetings as follows:

Director 28.02.2017

23.05.2017

28.08.2017

14.11.2017

G R May P P P P

M L du Toit P P P P

S Sejpal A P P N/A

S C Wenman P P P P

P - Present A - Absent with apologies N/A - Resigned

5. THE INVESTMENT COMMITTEE

The objective of the Investment Committee is to oversee the design of the company’s investment strategy and to monitor its implementation. The committee monitors performance of the company’s investment portfolio, as administered by professional asset managers in accordance with the Board Investment Strategy, and reviews compliance of the investment

managers with benchmarks and performance standards.The committee is constituted of three non-executive directors, the Managing Director and representatives from the Finance Department and holds quarterly meetings.

In year 2017, the Investment Committee held meetings as follows:

Director 01.02.2017

24.05.2017

29.08.2017

15.11.2017

M.L . du Toit P P P P

S.C. Wenman P P P P

C.W. Mwangi * A A N/A N/A

G.M. Kioi P P P P

P - Present A - Absent with apologies N/A - Resigned

6. MANAGEMENT AND OPERATIONS COMMITTEES

Three Management and Operations Committees have been constituted to facilitate effective implementation of the Strategic Plan and efficient Company operations. They include:

6.1 THE EXECUTIVE COMMITTEE (EXCO)

The mandate of ExCo is to oversee strategic and operational matters of the company, as well as all its relations with the Liberty Group. The objective of this committee is to enhance coordination and communication across the business units, and carry out review of company performance and implementation of the Strategic Plan. This committee meets weekly, and also holds monthly Mission Status Review (MSR) forums to monitor implementation of the Strategic Plan.

The members of ExCo are;

• Managing Director• Director – Medical• Director – Operations• General Manager – Finance and Administration• General Manager – Risk and Compliance• Senior Manager – ICT• Senior Manager – Human Resources• Head of Retail Business• Head of Corporate Business

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CORPORATE GOVERNANCE REPORT (CONT’D)6. MANAGEMENT AND OPERATIONS COMMITTEES(CONT’D)

6.2 THE CREDIT MANAGEMENT COMMITTEE

The mandate of the Credit Management committee is to ensure full implementation of the Credit Policy, as well as providing policy guidance and oversight in credit management.

It is chaired by the General Manager-Finance and Administration, and is constituted by members whose functions have the greatest impact in debt management and credit control. Its core responsibilities are:

• To ensure compliance with the credit management policy;• To ensure that all money owed to the company is

promptly collected in accordance with credit terms;• To take appropriate measures in dealing with defaulters;

and• To recommend to the Board, through the Managing

Director and Audit and Risk Committee, provision for doubtful debts and write off of uncollectible debts.

L. Magambo ChairmanL. Wachira SecretaryG.M. Kioi Member B.N.G. Hiuhu Member F. Muikamba Member A.P. Ngunjiri Member A. Njiru Member S. Chege Member S. Githinji Member

6.3 THE HUMAN RESOURCES COMMITTEE

The objectives of this committee are as follows:

• To develop policies on terms and conditions of service, performance management and staff remuneration in line with best market practice

• To ensure compliance with legislation regarding human capital management

• To develop and review the code of ethics and evaluate cases of unethical behavior

The members of this committee are the Managing Director, General Manager – Finance and Administration, Director – Medical, and the Senior Manager – Human Resources.

The committee meets bi-monthly or as deemed necessary.

7. THE OPERATIONS COMMITTEE

The company has implemented an enterprise risk management framework and upholds internal controls designed to enhance compliance, integrity and reliability of financial data.This framework is also supported by policies, procedures and segregation of duty, which ensure accountability and safeguarding of company assets.

The effectiveness of the risk management and internal control environment is monitored regularly through the internal audit function and annual review by external auditors.

As part of risk governance, internal control and compliance oversight, the company has established an Operating Company (OpCo) Committee.

The objective of this committee is to monitor key risk indicators and to set the tone in management of operational, market, insurance and compliance risks. This committee holds monthly meetings.

The members of the OpCo are:

G.M Kioi ChairmanM. Kivuitu MemberB.N.G. Hiuhu MemberA. Ngunjiri MemberL. Magambo MemberJ. Kinoti MemberI. Kaviti Member

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CORPORATESOCIALINVESTMENT

1.

2.

3.

4.

STUDENT SPONSORSHIP PROGRAMME - 7

Members of the Heritage Corporate Social Investment committee with one of the student under the sponsorship programme when they paid her a visit at Kyeni Girls High School in Embu County. Currently, the programme has enrolled over 50 students from across the country in secondary and university institutions.

DIABETES AWARENESS - 3

Members of staff take part in a diabetes awareness campaign walk organised by the Kenya Diabetes Management Information Centre. The company donated Ksh.100,000

HEALTHY DIET - 1

Heritage Managing Director Mr. Godfrey Kioi (centre) leads members of staff in launching an internal staff campaign on healthy living during “HAPPY DAY”

MARKING NELSON MANDELA DAY - 6

Heritage Insurance and Liberty Life Kenya CSI patrons Albert Ngunjiri and Kivuitu Musili present a sponsorship cheque to teachers and students of Kajiado Township Primary School in marking the 2017 Nelson Mandela Day. The funds will go towards the school feeding programme for all the students in the school.

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5.

6.

7.

MEDICAL CAMP - 4

The company in partnership with the Association of Kenya Insurers (AKI) organised a public medical camp in Gatanga Kiambu County targeting members of the public as part of Heritage CSI initiative.

STAIRWELL CHALLENGE - 5

Members of staff from Heritage Insurance, Liberty Life and Stanlib sign commemorative t-shirts after successfully taking part in a stairwell challenge at Liberty House. The initiative involved staff taking stairs from ground floor to the rooftop with each trip raising funds towards school feeding programme while promoting healthy living.

WALKING FOR A CAUSE -2

A group of staff from Heritage express their delight after successfully finishing a 20 km walk in support of the Celebral Palsy Society of Kenya.Heritage actively supports the society’s campaigns to create awareness and advocacy for the rights of persons afflicted by celebral palsy in Kenya.

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STATEMENT OF DIRECTORS’ RESPONSIBILITIESThe Directors are responsible for the preparation and presentation of the consolidated and separate financial statements of The Heritage Insurance Company Kenya Limited set out on pages 39 to 103 which comprise the Group and Company statements of financial position as at 31 December 2017, the statements of profit or loss, statements of other comprehensive income, statements of changes in equity and statements of cash flows for the Group and Company for the year then ended, and the notes to the financial statements which include a summary of significant accounting policies and other explanatory information.

The Directors responsibilities include: determining that the basis of accounting described in Accounting policy 1.2 is an acceptable basis for preparing and presenting the financial statements in the circumstances, preparation and presentation of financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015 and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatements, whether due to fraud or error.

Under the Kenyan Companies Act, 2015, the Directors are required to prepare financial statements for each financial year that give a true and fair view of the financial position of the Group and Company as at the end of the financial year and of the profit or loss of the Group and company for that year. It also requires the Directors to ensure the company keeps proper accounting records that disclose with reasonable accuracy the financial position of the Group and the company.

The Directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, in conformity with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. The Directors are of the opinion that the financial statements give a true and fair view of the financial position of the Group’s and Company’s profit or loss.

The Directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control.The Directors have made an assessment of the Group and the Company’s ability to continue as a going concern and have no reason to believe the Group and the Company will not be a going concern for at least the next twelve months from the date of this statement.

APPROVAL OF THE FINANCIAL STATEMENTSThe financial statements, as indicated above, were approved and authorized for issue by the Board of Directors on 28 March 2018.

P.N. Gethi G.M. KioiDate: 28 March 2018

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MOTOR INSURANCE

because we believeyou deserve peace of mind

INDEPENDENT AUDITORS’ REPORT TO THE SHAREHOLDERSREPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

OPINION

We have audited the consolidated and separate financial statements of The Heritage Insurance Company Kenya Limited (the Group and Company ) set out on pages 39 to 103 which comprise the Group and Company statements of financial position as at 31 December 2017, Group and Company statements of profit or loss, Group and Company statements of other comprehensive income, Group and Company statements of changes in equity and Group and Company statements of cash flows for the year then ended, and notes to the consolidated and separate financial statements, including a summary of significant accounting policies and other explanatory information.

In our opinion, the accompanying consolidated and separate financial statements give a true and fair view of the consolidated and separate financial position of The Heritage Insurance Company Kenya Limited as at 31 December 2017, and of the consolidated and separate financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards and in the manner required by Kenyan Companies Act, 2015.

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the consolidated and separate Financial Statements section of our report. We are independent of the Group and Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Kenya and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion, and we do not provide a separate opinion on these matters.34

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INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS (CONT’D)REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS (CONT’D)KEY AUDIT MATTERS (CONT’D)

INSURANCE CONTRACT LIABILITIES

See accounting policy note 1.2e) and disclosure note 25 - Insurance contract liabilities

The key audit matter How the matter was addressed

Insurance contract liabilities constitute about 37% of the Group’s total liabilities. Valuation of these liabilities is highly judgemental and requires a number of assumptions to be made that have high estimation uncertainty.

This is particularly the case for those liabilities that are recognized in respect of claims that have occurred but have not yet been reported to the Group. Small changes in the assumptions used to value the liabilities, particularly those relating to the amount and timing of future claims, can lead to material impacts on the valuation of insurance liabilities..

The key assumptions that drive the reserving calculations include graduated development factors, loss ratios, inflation assumptions and claims expense assumptions.

The valuation of insurance contract liabilities depends on the accuracy of data about the volume, amount and pattern of cur-rent and historical claims since they are often used to form expectations about future claims.

If the data used in calculating insurance liabilities, or for forming judgements over key assumptions, is not complete and accurate then material impacts on the valuation of insurance liabilities may arise. Consequently, we have determined the valuation of insur-ance contract liabilities to be a key audit matter.

Our audit procedures in this area included among others:

• Evaluating and testing of key controls around the claims handling and reserve setting processes of the Group;

• Checking for any unrecorded liabilities at the end of the period;

• Checking samples of claims reserves by comparing the estimated amount of the reserve to appropriate docu-mentation, such as reports from loss adjusters;

• Re-performing reconciliations between the data record-ed in the financial systems and the data used in the actu-arial reserving calculations;

• Using our actuarial specialists to review the reserving methodology applied and analytically reviewing the valu-ation results presented and movements since the pre-vious year-end. We focused on understanding the meth-odologies applied and examining areas of judgement such as changes in valuation assumptions; and

• We also considered the validity of management’s liability adequacy testing by assessing the reasonableness of the projected cash flows and challenging the assumptions adopted in the context of company and industry experi-ence data and specific product features.

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The recognition of premium revenue, determination of un-earned premiums and estimation of provisions for uncollected premiums receivables involves significant judgment.

There are inherent risks in the valuation of reinsurance assets and insurance receivables (Note 35 (c)).

These balances require judgement to be applied by the Compa-ny for their valuation and their processing requires manual ad-justments to be made.

Due to the above factors, we considered premium income and receivables to be a key audit matter.

Our audit procedures in this area included, among others:

• Understanding the terms of the reinsurance programmes in place and conducting relevant substantive procedures and substantive analytical procedures to assess the rea-sonableness of the reinsurance assets relative to gross provisions;

• Inspection of management’s aged analysis for recoveries as at 31 December 2017;

• Evaluation and testing of key controls over the processes designed to record and monitor premium income and insurance and reinsurance receivables;

• Testing of the manual adjustments on a sample basis by tracing back to supporting documentation; and

• Considering credit ratings for reinsurers, facultative and brokerage entities.

See accounting policy notes:

• 1.2 (f) (i)) recognition and measurement of premium income• 1.2 (f) (vi) receivables and payables related to insurance contracts and investment contracts• 1.2 (k) impairment of financial assets

See notes to the financial statements:

• 35 (c) Management of insurance and financial risk (Credit risk)• 2 Gross earned premiums


PREMIUM INCOME AND RECEIVABLES

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Many financial reporting controls depend on the correct functioning of operational and fi-nancial Information Technology (IT) systems, for example interfaces between the operat-ing systems and financial reporting systems, or automated controls that prevent or detect inaccurate or incomplete transfers of financial information.

If these systems or controls fail, a significant risk of error in reported financial information can arise from the failure to transfer data ap-propriately between systems or inappropriate changes being made to financial data or sys-tems.

This is an area requiring particular audit atten-tion in our audit due to the complexity of the IT infrastructure and legacy systems which re-quire manual inputs, relative to more automat-ed processes.

In this area our audit procedures included,among others:

• Testing general IT controls around system access and change management and testing controls over computer operations within specific applications which are required to be operating correctly to mitigate the risk of misstatement in the fi-nancial statements;

• With the support of our own IT specialists, we tested these controls through ex-amining the process for approving changes to the systems, and assessing the restrictions placed on access to core systems through testing the permissions and responsibilities of those given that access.; and

• Where we identify the need to perform additional procedures, place reliance on manual compensating controls, such as reconciliation between systems and other information sources or performing additional testing, such as extending the size of our sample sizes, to obtain sufficient appropriate audit evidence over the financial statement balances that were impacted.


INFORMATION TECHNOLOGY SYSTEMS AND CONTROLS

INDEPENDENT AUDITOR’S REPORT TO THE SHAREHOLDERS (CONT’D)REPORT ON THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS (CONT’D)

OTHER INFORMATION

The Directors are responsible for the other information. The other information obtained at the date of this aduitor’s report is information included in the Annual Report and Financial Statements, but does not include consolidated and separate financial statements and our auditors report thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

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OTHER INFORMATION

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditors’ report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

RESPONSIBILITIES OF DIRECTORS FOR THE FINANCIAL STATEMENTS

As stated on page 30, the Directors are responsible for the preparation of the financial statements that give a true and fair view in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015 and for such internal control, as the Directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the Directors are responsible for assessing the group’s and company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for overseeing the Company’s financial reporting process.

AUDITORS’ RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the financial statements of the consolidated and separate as a whole are free from material misstatement, whether due to fraud or error and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s and Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors.

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• Conclude on the appropriateness of the Director’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt

on the Group’s and Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group and/or Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure, and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves a fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities within the group to express an opinion on the consolidated and separate financial statements. We are responsible for the direction, suspension, and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

From the matters communicated with the Director’s, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS

As required by the Kenyan Companies Act, 2015 we report to you, based on our audit, that:• In our opinion, the information given in the report of the directors on page 7 is consistent with financial statements.• Our opinion is unqualified.

The Engagement Partner responsible for the audit resulting in this independent auditors’ report is CPA Alexander Mbai P/2172

KPMG Kenya8th Floor, ABC TowersWaiyaki WayP O Box 4061200100 Nairobi GPODate: 28 March 2018

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39

LADIES FIRST CAR INSURANCE

because your prizedpossessions matter

FINANCIAL STATEMENTS 2017

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2017


2017 2016 2017 2016

Note(s) Shs '000 Shs '000 Shs '000 Shs '000

Gross earned premiums 2 7,584,902 7,519,324 5,606,220 5,206,092

Less: reinsurance premium ceded (3,933,831) (3,762,092) (2,508,219) (2,143,667)

Net earned premiums 3,651,071 3,757,232 3,098,001 3,062,425

Commissions earned 834,634 776,942 648,476 570,333

Investment income 3 567,561 462,848 561,042 478,085

Gain/(loss) on sale of subsidiary 4 (10,549) - 49,615 -

Other income/(loss) 5 32,173 17,268 15,056 5,765

1,423,819 1,257,058 1,274,189 1,054,183

Net income 5,074,890 5,014,290 4,372,190 4,116,608

Claims and policyholder benefits 6 3,466,013 3,329,367 2,710,775 2,586,027

Less: amounts recoverable from re insurers (1,705,130) (1,657,550) (1,209,415) (1,230,725)

Net insurance benefits and claims 1,760,883 1,671,817 1,501,360 1,355,302

Operating and other expenses 7 1,790,058 1,696,549 1,425,477 1,422,194

Commissions payable 844,948 863,589 674,371 634,035

Total expenses and commissions 2,635,006 2,560,138 2,099,848 2,056,229

Result of operating activities 679,001 782,335 770,982 705,077

Profit before income tax 679,001 782,335 770,982 705,077

Income tax expenses 9 (220,258) (258,088) (193,892) (206,885)

Profit for the year 458,743 524,247 577,090 498,192

Profit attributable to:

Owners of the Company 437,961 481,993 577,090 498,192

Non controlling interests 20,782 42,254 - -

458,743 524,247 577,090 498,192

The accounting policies on pages 47 to 61 and the notes on pages 61 to 103 form an integral part of the financial statements 2017.

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STATEMENT OF OTHER COMPREHENSIVE INCOME


2017 2016 2017 2016


Profit for the year 458,743 524,247 577,090 498,192

Other comprehensive income:

Items that may be reclassified to profit or loss:

Foreign currency translation differences 13 (b) (17,013) (20,517) - -

Total other comprehensive income (17,013) (20,517) - -

Total comprehensive income for the year 441,730 503,730 577,090 498,192

Total comprehensive income attributable to:

Owners of the parent 426,154 464,589 577,090 498,192

Non controlling interest 15 15,576 39,141 - -

441,730 503,730 577,090 498,192


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STATEMENT OF FINANCIALPOSITION AS AT 31 DECEMBER 2017


2017 2016 2017 2016


CAPITAL EMPLOYED

Share capital 11 500,000 500,000 500,000 500,000

Retained earnings 12 2,757,219 2,334,037 2,601,768 2,024,678

Reserves 13(a) 179,329 171,812 - -

Currency translation reserve 13(b) (43,788) (39,243) - -

Equity attributable to equity holders 3,392,760 2,966,606 3,101,768 2,524,678

Non controlling interest 15 291,550 331,529 - -

Total equity 3,684,310 3,298,135 3,101,768 2,524,678

REPRESENTED BY: Assets

Property, plant and equipment 16 112,330 127,163 87,780 103,448

Intangible assets 17 39,216 15,941 38,155 15,941

Investment property 18 - 94,563 - 14,563

Investments in subsidiaries 14 - - 146,557 121,370

Equity investments at fair value through profit or loss (quoted) 19 a (i 435,738 200,261 334,696 97,826

Equity investments at fair value through profit or loss (unquoted) 19 (a (ii)) 27,722 45,793 - -

Government securities at fair value through profit or loss 19 (a (iii)) 3,465,744 2,868,612 3,279,797 2,662,602

Corporate bonds and short term notes 181,881 196,571 175,124 190,770

Loans and receivables 19 (b) 315,946 311,563 315,946 311,563

Deferred acquisition costs 21 68,593 95,041 12,746 19,728

Deferred tax asset 28 228,171 131,175 165,279 90,354

Receivables arising out of reinsurance arrangements 717,469 490,076 443,501 136,362

Receivables arising out of direct insurance 859,611 1,379,413 859,611 1,109,673

Reinsurers’ share of insurance liabilities 20 2,260,519 2,194,645 1,572,664 1,274,258

Other receivables 22 387,183 158,348 390,365 187,259

Current income tax 9 10,428 22,120 - -

Deposits with financial institutions 23 1,864,345 1,749,851 742,381 820,653

Cash and bank balances 23 361,425 108,573 311,870 54,914

Total assets 11,336,321 10,189,709 8,876,472 7,211,284

Continued on page 42

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STATEMENT OF FINANCIALPOSITION AS AT 31 DECEMBER 2017 CONTINUED


2017 2016 2017 2016


Liabilities

Insurance contract liabilities 25 2,823,722 2,652,724 2,182,858 2,048,629

Unearned premium 27 2,918,386 2,926,838 2,355,765 2,018,889

Deferred commission income 21 59,594 87,318 - -

Deferred income tax 28 - 1,719 - -

Current income tax 36,511 19,604 36,511 19,225

Creditors arising from direct insurance 585,119 449,402 546,310 449,408

Creditors arising from reinsurance arrangements 755,146 540,791 484,578 -

Amounts due to related companies 29 10,429 9,042 10,429 13,741

Other payables 29 463,104 204,136 158,253 136,714

Total liabilities 7,652,011 6,891,574 5,774,704 4,686,606

Total net assets 3,684,310 3,298,135 3,101,768 2,524,678

The annual report and financial statements 2017 and the notes on pages 39 to 103, were approved and authorised for issue by the board on the 28 March 2017 and were signed on its behalf by:

P.N. Gethi G.R. May G.M. Kioi


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STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017

Share capital

Currency translation

Statutoryreserve

Retainedearnings

SubtotalOwners of

the Company

Noncontrolling

interestTotal

equityShs ‘000 Shs '000 Shs '000 Shs '000 Shs ‘000 Shs ‘000 Shs '000

THE GROUP 2017Balance at 1 January 2017 500,000 (39,243) 171,812 2,334,037 2,966,606 331,529 3,298,135

Profit for the year - - - 437,961 437,961 20,782 458,743

Other comprehensive income

Foreign currency translation differences - (4,545) (1,825) (5,437) (11,807) (5,206) (17,013)

Transfer to statutory reserve - - 9,342 (9,342) - - -

Total comprehensive income for the year - (4,545) 7,517 423,182 426,154 15,576 441,730

Issue of shares - - - - - 18,519 18,519

Interim dividends for 2017 - - - - - (74,074) (74,074)

Balance at31 December 2017 500,000 (43,788) 179,329 2,757,219 3,392,760 291,550 3,684,310

THE GROUP 2016Balance at 1 January 2016 500,000 (34,135) 161,922 1,934,230 2,562,017 333,936 2,895,953

Profit for the year - - - 481,993 481,993 42,254 524,247

Other comprehensive income

Foreign currency translation differences - (5,108) (1,446) (10,850) (17,404) (3,113) (20,517)

Transfer to statutory reserve - - 11,336 (11,336) - - -

Total comprehensive income for the year - (5,108) 9,890 459,807 464,589 39,141 503,730

Issue of shares - - - - - 18,886 18,886

Interim dividends for 2016 - - - (60,000) (60,000) (60,434) (120,434)

Total contributions with owners of the company - - - (60,000) (60,000) (41,548) (101,548)

Balance at 31 December 2016 500,000 (39,243) 171,812 2,334,037 2,966,606 331,529 3,298,135


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STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 DECEMBER 2017

Share capital

Retained earnings

Total equity

Shs ‘000 Shs '000 Shs '000

THE COMPANY 2017Balance at 1 January 2017 500,000 2,024,678 2,524,678

Profit for the year - 577,090 577,090

Total comprehensiveincome for the year - 577,090 577,090

Balance at 31 December 2017 500,000 2,601,768 3,101,768

THE COMPANY 2016Balance at 1 January 2016 500,000 1,586,486 2,086,486

Profit for the year - 498,192 498,192

Total comprehensiveincome for the year - 498,192 498,192

Interim Dividends for 2016 - (60,000) (60,000)

Total contributions withowners of the company - (60,000) (60,000)

Balance at 31 December 2016 500,000 2,024,678 2,524,678


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STATEMENT OF CASH FLOWS


2017 2016 2017 2016


Cash flows from operating activities

Cash generated from operations 32 1,025,549 688,822 878,261 495,248

Interest income 541,870 475,473 449,841 478,085

Tax paid 9 (290,374) (182,821) (251,531) (138,968)

Net cash from operating activities 1,277,045 981,474 1,076,571 834,365

Cash flows from investing activities

Purchase of property equipment and investment property 16 (34,214) (27,214) (12,131) (24,306)

Proceeds from disposal of property and equipment 16 18,943 - - -

Additions to investment property 18 - (27,188) - (27,188)

Proceeds from disposal of investment property 18 - 145,000 - 145,000

Purchase of intangibles 17 (31,626) - (29,800) -

Purchase of quoted shares 19 (211,710) (352) (211,710) (352)

Purchase of government securities 19 (4,052,500) (2,590,200) (4,052,500) (2,590,200)

Proceeds from disposal of government securities 19 3,467,328 1,310,309 3,422,175 1,310,309

Proceeds from disposal of quoted equity securities 19 2 223,943 2 53,621

Loans advanced (68,111) (75,441) (68,111) (75,441)

Loans repaid 63,728 109,130 63,729 109,130

Net investment in corporate bonds and short term notes 14,690 7,091 15,646 1,579

Currency translation (2,155) 3,842 - -

Net cash from investing activities (835,625) (921,080) (872,700) (1,097,848)

Cash flows from financing activities

Dividends paid (74,074) (120,434) - (60,000)

Additional share capital injection in subsidiary - - - (25,187) (33,000)

Net cash from financing activities (74,074) (120,434) (25,187) (93,000)

Total cash movement for the year 367,346 (60,040) 178,684 (356,483)

Cash at the beginning of the year 1,858,424 1,918,464 875,567 1,232,050

Total cash at end of the year 23 2,225,770 1,858,424 1,054,251 875,567

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DIRECTORS AND OFFICERS LIABILITY

beacause we believe in protecting you from legalliabilities

ACCOUNTINGPOLICIES1. PRESENTATION OF ANNUAL REPORT AND FINANCIAL STATEMENTS 2017

1.1 GENERAL INFORMATION

The Company is incorporated in Kenya under the Kenyan Companies Act, 2015 and is domiciled in Kenya. The address of its registered office is:Liberty HouseMamlaka RoadP.O. Box 30390 0010000100 Nairobi.

The Group and Company underwrites all classes of short term (General) insurance risks as defined by the Insurance Act except Micro Insurance.

For Kenyan Companies Act, 2015 reporting purposes, the balance sheet is represented by the statement of financial position and the profit and loss account is represented by the statement of profit or loss in these financial statements.

1.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented unless otherwise stated.

A) BASIS OF PREPARATION

The financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The financial statements are presented in the functional currency, Kenya Shillings (Shs), rounded to the nearest thousand, and prepared under the historical cost convention, as modified by the carrying of investment property and available for sale investments at fair value and actuarially determined liabilities at their present value. For Kenyan Companies Act, 2015 reporting purposes in these financial statements, the balance sheet is represented by the statement of financial position and the profit and loss account is represented by the statement of profit or loss.The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree

of judgement or complexity or where assumptions and estimates are significant to the financial statements are discussed in Note 34.

B) NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS

(i) New standards, amendments and interpretations effective and adopted during the year

The Company has adopted the following new standards and amendments during the year ended 31 December 2017, including consequential amendments to other standards with the date of initial application by the Company/Branch/Group being 1 January 2017.The nature and effects of the changes are as explained herein.

The nature and effects of the changes are explained below:

New standards or amendments Effective for annual periods

beginning on or after

Disclosure Initiative (Amendments to IAS 7)

1 January 2017

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)

1 January 2017

DISCLOSURE INITIATIVE (AMENDMENTS TO IAS 7)

The amendments in Disclosure Initiative (Amendments to IAS 7) come with the objective that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities.The International Accounting Standards Board (IASB) requires that the following changes in liabilities arising from financing activities are disclosed (to the extent necessary):

(i) changes from financing cash flows; (ii) changes arising from obtaining or losing control of subsidiaries or other businesses;(iii) the effect of changes in foreign exchange rates; (iv) changes in fair values; and (v) other changes.

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ACCOUNTING POLICIES (CONTINUED)

1.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

B) NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS (CONTINUED)

DISCLOSURE INITIATIVE (AMENDMENTS TO IAS 7)

The IASB defines liabilities arising from financing activities as liabilities “for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities”. It also stresses that the new disclosure requirements also relate to changes in financial assets if they meet the same definition.

The amendments state that one way to fulfill the new disclosure requirement is to provide a reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities.

Finally, the amendments state that changes in liabilities arising from financing activities must be disclosed separately from changes in other assets and liabilities.

The amendments apply for annual periods beginning on or after 1 January 2017 and early application is permitted.

The adoption of these changes did not have a significant impact on the financial statements of the Group and Company.

Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12)

The amendments in Recognition of Deferred Tax Assets for Unrealised Losses clarify the following aspects:

• Unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use.

• The carrying amount of an asset does not limit the estimation of probable future taxable profits.

• Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.

• An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type.

The standard was effective for annual periods beginning on or after 1 January 2017 with early application permitted.

As transition relief, an entity may recognize the change in the opening equity of the earliest comparative period in opening retained earnings on an initial application without allocating the change between opening retained earnings and other components of equity. The Board has not added additional transition relief for first time adopters.

The adoption of these changes did not have a significant impact on the financial statements of the Group and Company.

Annual improvements cycle (2012 - 2016)various standards

Standard Amendments

IFRS 12 Disclosure of Interests in other Entities

Disclosure of interest in other entities. Clarifies that disclosure requirements for interest in other entities also ap-plies to interests that are classified as held for sale or distribution.

The adoption of these changes did not affect the amount and disclosures of the Group and Company’s financial statements.

A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2017, and have not been applied in preparing these financial statements.

The Group does not plan to adopt these standards early.These are summarised below;

New standard or amendments Effective for annual periods beginning on or after

IFRS 15 Revenue from Contracts with Customers

1 January 2018

IFRS 9 Financial Instruments (2014) 1 January 2018

Classification and Measurement of Share based Payment. Transactions (Amendments to IFRS 2)

1 January 2018

Applying IFRS 9 Financial Instruments with IFRS 4. Insurance Contracts (Amendments to IFRS 4)

1 January 2018

IFRS 16 Leases 1 January 2018

IFRIC 22 Foreign Currency Transac-tions and Advance Consideration

1 January 2018

IAS 40 Transfers of Investment property

1 January 2018

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ii) New and amended standards and interpretations in issue but not yet effective for the year ended 31 December 2017. (Continued)

New standard or amendments Effective for annual periods

beginning on or after

IFRIC 23 Income tax exposure 1 January 2019

IFRS 9 Prepayment Features with Negative Compensation

1 January 2019

IAS 28 Long term Interests in Associ-ates and Joint Ventures

1 January 2019

IFRS 17 Insurance contracts 1 January 2019

Sale or Contribution of Assets be-tween an Investor and its Associate or Company (Amendments to IFRS 10 and IAS 28).

To bedetermined

IFRS 15: Revenue from contracts with customers

This standard replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC 31 Revenue ñ Barter of Transactions Involving Advertising Services

The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The standard specifies how and when an IFRS reporter will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures.

The standard provides a single, principles-based five-step model to be applied to all contracts with customers in recognising revenue being: Identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; Allocate the transaction price to the performance obligations in the contract; and recognise revenue when (or as) the entity satisfies a performance obligation.

IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted.

The Group and Company are assessing the potential impact on their financial statements of applying this amendment.

IFRS 9: Financial Instruments (2014)

On 24 July 2014 the IASB issued the final IFRS 9 Financial Instruments Standard, which replaces earlier versions of IFRS 9 and completes the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement.

This standard introduces changes in the measurement bases of the financial assets to amortized cost, fair value through other comprehensive income or fair value through profitor loss.

Even though these measurement categories are similar to IAS 39, the criteria for classification into these categories are significantly different. In addition, the IFRS 9 impairment model has been changed from an incurred loss model from IAS 39 to an expected credit loss model.

The standard is effective for annual period beginning on or after 1 January 2018 with retrospective application, early adoption permitted.


Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2)

Accounting for cash settled share-based payment transactions that include a performance condition

Up until this point, IFRS 2 contained no guidance on how vesting conditions affect the fair value of liabilities for cash-settled share-based payments. IASB has now added guidance that introduces accounting requirements for cash settled share-based payments that follows the same approach as used for equity-settled share-based payments.

Classification of share based payment transactions with net settlement features

IASB has introduced an exception into IFRS 2 so that a share-based payment where the entity settles the share- based payment arrangement net is classified as equity settled in its entirety provided the share-based payment would have been classified as equity-settled had it not included the net settlement feature.

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Accounting for modifications of share based payment transactions from cash settled to equity settled

Up until this point, IFRS 2 did not specifically address situations where a cash-settled share-based payment changes to an equity-settled share-based payment because of modifications of the terms and conditions.

The IASB has introduced the following clarifications:On such modifications, the original liability recognized in respect of the cash-settled share-based payment is derecognized and the equity-settled share-based payment is recognized at the modification date fair value to the extent services have been rendered up to the modification date.

Any difference between the carrying amount of the liability as at the modification date and the amount recognised in equity at the same date would be recognized in profit and loss immediately.

The amendments are effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted. The amendments are to be applied prospectively. However, retrospective application if allowed if this is possible without the use of hindsight. If an entity applies the amendments retrospectively, it must do so for all of the amendments described above.


Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts (Amendments to IFRS 4)

The amendments in Applying IFRS 9 ‘Financial Instruments’ with IFRS 4 ‘Insurance Contracts’ (Amendments to IFRS 4) provide two options for entities that issue insurance contracts within the scope of IFRS 4:

• an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so called overlay approach;

• an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so called deferral approach.

The application of both approaches is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied.An entity applies the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9. Application of the overlay approach requires disclosure of sufficient information to enable users of financial statements to understand how the amount reclassified in the reporting period is calculated and the effect of that reclassification on the financial statements.

An entity applies the deferral approach for annual periods beginning on or after 1 January 2018. Predominance is assessed at the reporting entity level at the annual reporting date that immediately precedes 1 April 2016. Application of the deferral approach needs to be disclosed together with information that enables users of financial statements to understand how the insurer qualified for the temporary exemption and to compare insurers applying the temporary exemption with entities applying IFRS 9. The deferral can only be made use of for the three years following 1 January 2018. Predominance is only reassessed if there is a change in the entity’s activities.

The Group and Company are assessing the potential impact on their financial statements of applying this amendment

IFRS 16: Leases

On 13 January 2016 the IASB issued IFRS 16 Leases, completing the IASB’s project to improve the financial reporting of leases. IFRS 16 replaces the previous leases standard, IAS 17 Leases, and related interpretations.IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (lessee) and the supplier (lessor). The standard defines a lease as a contract that conveys to the customer (lessee) the right to use an asset for a period of time in exchange for consideration. A company assesses whether a contract contains a lease on the basis of whether the customer has the right to control the use of an identified asset for a period of time.

The standard eliminates the classification of leases as either operating leases or finance leases for a lessee and introduces a single lessee accounting model. All leases are treated in a similar way to finance leases. Applying that model significantly affects the accounting and presentation of leases and consequently, the lessee is required to recognize:

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1.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)



a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A company recognizes the present value of the unavoidable lease payments and b) depreciation of lease assets and interest on lease liabilities in profit or loss over the lease term; and shows them either as lease assets (right of use assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognizes a financial liability representing its obligation to make future lease payments.

c) separate the total amount of cash paid into aprincipal portion (presented within financing activities) and interest (typically presented within either operating or financing activities) in the statement of cash flows.

IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently. However, compared to IAS 17, IFRS 16 requires a lessor to disclose additional information about how it manages the risks related to its residual interest in assets subject to leases.

The standard does not require a company to recognize assets and liabilities for:

a) short term leases (i.e. leases of 12 months or less) b) leases of low value assets

The new Standard is effective for annual periods beginning on or after 1 January 2019. Early application is permitted insofar as the recently issued revenue Standard, IFRS 15 Revenue from Contracts with Customers is also applied.


IFRIC Interpretation 22 Foregn Currency Transactions and Advance Consideration

This Interpretation applies to a foreign currency transaction (or part of it) when an entity recognizes a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income (or part of it).

This Interpretation stipulates that the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.

(a) at fair value; or

(b) at the fair value of the consideration paid or received at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability arising from advance consideration (for example, the measurement of goodwill applying IFRS 3 Business Combinations).

The amendments apply retrospectively for annual periods beginning on or after 1 January 2018, with early application permitted.

The Group and Company are assesing the potential impact on their financial statements of applying this amendment.

Transfers of investment property (amendments to IAS 40)

The IASB has amended the requirements in IAS 40 Investment property on when a company should transfer a property asset to, or from, investment property.

The adoption of this standard will not have a significant impact on the financial statements of the Group and Company.

IFRIC 23 Clarification on Accounting for Income Tax Exposures

IFRIC 23 clarifies the accounting for income tax treatments that have yet to be accepted by tax authorities, whilst also aiming to enhance transparency. IFRIC 23 explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment.

An uncertain tax treatment is any tax treatment applied by an

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ACCOUNTING POLICIES (CONTINUED) 1.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)



entity where there is uncertainty over whether that treatment will be accepted by the tax authority.

If an entity concludes that it is probable that the tax authority will accept an uncertain tax treatment that has been taken or is expected to be taken on a tax return, it should determine

its accounting for income taxes consistently with that tax treatment.If an entity concludes that it is not probable that the treatment will be accepted, it should reflect the effect of the uncertainty in its income tax accounting in the period in which that determination is made. Uncertainty is reflected in the overall measurement of tax and separate provision is not allowed.

The entity is required to measure the impact of the uncertainty using the method that best predicts the resolution of the uncertainty (that is, the entity should use either the most likely amount method or the expected value method when measuring an uncertainty).

The entity will also need to provide disclosures, under existing disclosure requirements, about

(a) judgments made;(b) assumptions and other estimates used; and(c) potential impact of uncertainties not reflected.


Prepayment Features with Negative Compensation (Amendments to IFRS 9)

The amendments clarify that financial assets containing prepayment features with negative compensation can now be measured at amortized cost or at fair value through other comprehensive income (FVOCI) if they meet the other relevant requirements of IFRS 9.

The amendments apply for annual periods beginning on or after 1 January 2019 with retrospective application, early adoption is permitted.

Management is currently evaluating the impact of the new standard on the Group’s and Company’s financial statements.

Long Term Interests in Associates and Joint Ventures (Amendments to IAS 28)

The amendments clarify that an entity applies IFRS 9 to long term interests in an associate and joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.


The amendments apply for annual periods beginning on or after 1 January 2019 with retrospective application, early adoption is permitted. IFRS 17 Insurance Contracts

IFRS 17 Insurance Contracts sets out the requirements that an entity should apply in reporting information about insurance contracts it issues and reinsurance contracts it holds. An entity shall apply IFRS 17 Insurance Contracts to:

(a) insurance contracts, including reinsurance contracts, it issues;

(b) reinsurance contracts it holds; and

(c) investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts

IFRS 17 requires an entity that issues insurance contracts to report them on the statement of financial position as the total of:

(a) the fulfilment cash flows—the current estimates of amounts that the entity expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts;

(b) the contractual service margin—the expected profit for providing insurance coverage. The expected profit for providing insurance coverage is recognized in profit or loss over time as the insurance coverage is provided.

IFRS 17 requires an entity to recognise profits as it delivers insurance services, rather than when it receives premiums, as well as to provide information about insurance contract profits that the Company expects to recognize in the future. IFRS 17

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requires an entity to distinguish between groups of contracts expected to be profit making and groups of contracts expected to be loss making.

Any expected losses arising from loss making, or onerous, contracts are accounted for in profit or loss as soon as the Company determines that losses are expected.

IFRS 17 requires the entity to update the fulfilment cash flows at each reporting date, using current estimates of the amount, timing and uncertainty of cash flows and of discount rates. The entity:

(a) accounts for changes to estimates of future cash flows from one reporting date to another either as an amount in profit or loss or as an adjustment to the expected profit for providing insurance coverage, depending on the type of change and the reason for it; and

(b) chooses where to present the effects of some changes in discount rates—either in profit or loss or in other comprehensive income.

IFRS 17 also requires disclosures to enable users of financial statements to understand the amounts recognized in the entity’s statement of financial position and statement of profit or loss and other comprehensive income, and to assess the risks the Company faces from issuing insurance contracts.

IFRS 17 replaces IFRS 4 Insurance Contracts. IFRS 17 is effective for financial periods commencing on or after 1 January 2021. An entity shall apply the standard retrospectively unless impracticable. A Company can choose to apply IFRS 17 before that date, but only if it also applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.

The Group and Company are assessing the potential impact on their financial statements of applying this amendment. Sale or contribution of assets between an investor and its associate or company (amendments to IFRS 10 and IAS 28)

The amendments require the full gain to be recognized when assets transferred between an investor and its associate or

Company meet the definition of a ‘business’ under IFRS 3.

Business Combinations. Where the assets transferred do not meet the definition of a business, a partial gain to the extent of unrelated investors’ interests in the associate or Company is recognized.

The definition of a business is key to determining the extent of the gain to be recognized.The effective date for these changes has now been postponed until the completion of a broader review.The adoption of these changes will not have a significant impact on the financial statements of the Group.

C) CONSOLIDATION

i) Business Combinations

The Group applies the acquisition method of accounting to account for business combinations, when control is transferred to the group. The consideration transferred for the acquisition of a subsidiary is generally measured at fair values, as are the fair value of assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date.

The Group recognizes any non-controlling interest in the acquiree on an acquisition by acquisition basis, either at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. Any gain on a bargain purchase is recognized in profit or loss immediately. Acquisition related costs are expensed as incurred, except if related to the issue of debt or equity securities.

Investments in subsidiaries are accounted for at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendment. Cost also includes directly attributable cost of investment. Intercompany transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

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C) CONSOLIDATION (CONTINUED)

ii) Subsidiaries

Subsidiaries are all entities (including structured entities) over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are deconsolidated from the date that control ceases.

iii) Associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost.

The Group’s share of its associates’ post acquisition profits or losses is recognised in the income statement, and its share of post acquisition movements in reserves is recognized in reserves. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

iv) Non controlling interest (NCI)

NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss in control are accountable for as equity transactions.

v) Loss of Control

When the Group loses control of a subsidiary, it de recognizes the assets and liabilities of the subsidiary and any related NCI and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

D) FUNCTIONAL CURRENCY AND TRANSLATION OF FOREIGN CURRENCIES

i) Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Kenya Shillings thousands (Shs), except where indicated.

ii) Translations of foreign currencies and balances in group entities

Foreign currency transactions are translated into the functional currency of the respective entity using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Non-monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate when the fair value was determined.

iii) Consolidation of group entities

The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows:

(i) assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;

(ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income expenses are translated at the dates of the transactions);

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D) FUNCTIONAL CURRENCY AND TRANSLATION OF FOREIGN CURRENCIES (CONTINUED)

(iii) all resulting exchange differences are recognized as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are recognized in other comprehensive income and accumulated in the currency translation reserve except to the extent that the translation is allocated to the non-controlling interests. When a foreign operation is sold, such exchange differences are recognized in the profit and loss account as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

E) INSURANCE CONTRACTS

Classification

The Group issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline, the group defines as significant insurance risk, the possibility of having to pay benefits on the occurrence of an insured event that is at least 10% more than the benefits payable if the insured event did not occur. Investment contracts are those contracts that transfer financial risk with no significant insurance risk. See accounting policy for these contracts under.A number of insurance and investment contracts contain a discretionary participation feature (DPF). This feature entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses:

a) that are likely to be a significant portion of the total contractual benefits;

b) whose amount or timing is contractually at the discretion of the Group

c) that are contractually based on:

i) The performance of a specified pool of contracts or a specified type of contract;

ii) Realized and/or unrealized investment returns on a specified pool of assets held by the Group;

iii) The profit or loss of the Company, fund or other entity that issues the contract.

Short term insurance business. Means insurance business of any class or classes not being long term insurance business.Classes of Short term Insurance include Aviation insurance, Engineering insurance, Fire insurance Domestic risks Fire insurance Industrial and Commercial risks, Liability insurance, Marine Insurance, Motor insurance private vehicles, Motor insurance commercial vehicles, Personal Accident insurance,Theft insurance , Workmen’s Compensation and Employer’s Liability insurance and Miscellaneous insurance (i.e. class of business not included under those listed above)

Motor insurance business means the business of affecting and carrying out contracts of insurance against loss of, or damage to, or arising out of or in connection with the use of, motor vehicles, inclusive of third party risks but exclusive of transit risks.

Personal Accident insurance business means the business of affecting and carrying out contracts of insurance against risks of the persons insured sustaining injury as the result of an accident or of an accident of a specified class or dying as the result of an accident or of an accident of a specified class or becoming incapacitated in consequence of disease or of disease of a specified class.

Fire insurance business means the business of affecting and carrying out contracts of insurance, otherwise than incidental to some other class of insurance business against loss or damage to property due to fire, explosion, storm and other occurrences customarily included among the risks insured against in the fire insurance business.

F) RECOGNITION AND MEASUREMENT

i. Premium income

For short term insurance business, premium income is recognized on assumption of risks, and includes estimates of premiums due but not yet received, less an allowance for cancellations, and less unearned premium.

Unearned premiums represent the proportion of the premiums written in periods up to the accounting date that relates to the unexpired terms of policies in force at the financial reporting date, and is computed using the 1/365th method. Premiums are shown before deduction of commission and are gross of any taxes or duties levied on premiums.

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F) RECOGNITION AND MEASUREMENT (CONTINUED)

ii. Claims

A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognized. The liability is determined as the sum of the expected discounted value of the benefit payments and the future administration expenses that are directly related to the contract, less the expected discounted value of the theoretical premiums that would be required to meet the benefits and administration expenses based on the valuation assumptions used (the valuation premiums).

The liability is based on assumptions as to mortality, persistency, maintenance expenses and investment income that are established at the time the contract is issued. A margin for adverse deviations is included in the assumptions.

Where insurance contracts have a single premium or a limited number of premium payments due over a significantly shorter period than the period during which benefits are provided, the excess of the premiums payable over the valuation premiums is deferred and recognized as income in line with the decrease of unexpired insurance risk of the contracts in force or, for annuities in force, in line with the decrease of the amount of future benefits expected to be paid.

The liabilities are recalculated at each financial reporting date using the assumptions established at inception of the contracts.

For short term insurance business, claims incurred comprise claims paid in the year and changes in the provision for outstanding claims. Claims paid represent all payments made during the year, whether arising from events during that or earlier years.

Outstanding claims represent the estimated ultimate cost of settling all claims arising from incidents occurring prior to the financial reporting date, but not settled at that date. Outstanding claims are computed on the basis of the best information available at the time the records for the year are closed and include provisions for claims incurred but not reported (“IBNR”). The method used in computing IBNR is described in note 25Outstanding claims are not discounted.

iii. Commissions payable and deferred acquisition costs (“DAC”)

A proportion of commission’s payable is deferred and

amortized over the period in which the related premium is earned. Deferred acquisition costs represent a proportion of acquisition costs that relate to policies that are in force at the year end.

iv. Liability adequacy test

At each financial reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used.

Any deficiency is immediately charged to profit or loss initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision).

v. Reinsurance contracts held

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 held. Contracts that do not meet these classification requirements are classified as financial assets. Insurance contracts entered into by the Group under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts.

The benefits to which the Group is entitled under its reinsurance contracts held are recognized as reinsurance assets. These assets consist of short term balances due from reinsurers, as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts.

Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognized as an expense when due.

The Group assesses its reinsurance assets for impairment on a quarterly basis. If there is objective evidence that the reinsurance asset is impaired, the Group reduces the

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F) RECOGNITION AND MEASUREMENT (CONTINUED)

carrying amount of the reinsurance asset to its recoverable amount and recognizes that impairment loss in the income statement.

The Group gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortised cost. The impairment loss is also calculated following the same method used for these financial assets. These processes are described in accounting policy 1.2 (k).

vi. Receivables and payables related to insurance contracts and investment contracts

Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders.If there is objective evidence that the insurance receivable is impaired, the Group reduces the carrying amount of the insurance receivable accordingly and recognizes that impairment loss in profit or loss. The processes followed by the Group in assessing impairment of these receivables are described in accounting policy 1.2 (k).

vii. Salvage and subrogation reimbursements

Some insurance contracts permit the Group to sell (usually damaged) property acquired in settling a claim (for example, salvage). The Group may also have the right to pursue third parties for payment of some or all costs (for example, subrogation).

Estimates of salvage recoveries are included as an allowance in the measurement of the insurance liability for claims, and salvage property is recognized in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.

Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognized in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party.

G) OTHER INCOME RECOGNITION

Commissions receivable are recognized as income in the period in which they are earned.Investment income is stated net of investment expenses.

Interest income is recognized on a time proportion basis that takes into account the effective yield on the asset. Dividends are recognized as income in the period in which the right to receive payment is established. Rental income is recognized as income in the period in which it is earned.

H) PROPERTY AND EQUIPMENT

All property and equipment are initially recorded at cost. All property and equipment is stated at historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Freehold land is not depreciated. Depreciation is calculated on other property and equipment on the straight line basis to write down the cost of each asset, to its residual value over its estimated useful life applicable to the current and prior year Buildings 25 - 30 years Equipment and motor vehicles 3 - 10 yearsFurniture and fittings 10 years Asset residual values and their estimated useful lives are reviewed at each financial reporting date and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount.Gains and losses on disposal of property and equipment are determined by reference to their carrying amounts and are included in the income statement.

I) INTANGIBLE ASSETS

Intangible assets relate to computer software.Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives (3 - 5 years). Costs associated with developing or maintaining computer software programmes are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the

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I) INTANGIBLE ASSETS (CONTINUED)

Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads.

Computer software development costs recognized as assets are amortized over their estimated useful lives (not exceeding three years). Intangible assets comprise capitalised software costs. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software.

These costs are amortized over their estimated useful lives (three to five years). Costs associated with developing or maintaining computer software programmes are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortized over their estimated useful lives.

J) INVESTMENT PROPERTY

Buildings, or part of a building, (freehold or held under a finance lease) and land (freehold or held under an operating lease) held for long term rental yields and/or capital appreciation and are not occupied by any company in the group are classified as investment property under non current assets. Investment property is carried at fair value, representing open market value determined annually by external valuers. Changes in fair values are recorded in the profit and loss account.

The Group reclassifies investment property to property and equipment upon change in use of the building from commercial to owner occupied.

K) FINANCIAL ASSETS

The Group classifies its financial assets into the following categories: financial assets at fair value through profit or loss; and loans and receivables. Management determines the appropriate classification of its financial assets at initial recognition and reevaluates such designation at every reporting date.

(i) Financial assets at fair value through profit or loss.

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified as held for trading if acquired principally for the purpose of selling in the short term. Derivatives are also categorized as held for trading. Financial assets are designated at fair value through profit or loss when: doing so significantly reduces or eliminates a measurement inconsistency; or they form part of a Group of financial assets that are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than:

(a) Those classified as held for trading and those that the Group on initial recognition designates as at fair value through profit and loss;

(b) Those that the Group upon initial recognition designates as available for sale; or

(c) Those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

Regular way purchases and sales of financial assets at fair value through profit or loss are recognized on trade date – the date on which the Group commits to purchase or sell the asset.Financial assets are initially recognized at fair value plus, for all financial assets except those carried at fair value through profit or loss, transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership.

Loans, advances and, receivables financial assets are carried at amortized cost using the effective interest method. Financial assets at fair value through profit or loss are carried at fair value. Gains and losses arising from changes in the fair value of ‘financial assets at fair value through profit or loss’ are included in the profit or loss Statement in the period in which they arise. Gains and losses arising from changes in the fair value of financial assets are recognized directly in equity until

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K) FINANCIAL ASSETS (CONTINUED)

the financial asset is derecognized or impaired, at which time the cumulative gain or loss previously recognized in equity is recognized in the income statement. However, interest calculated using the effective interest method is recognized in the income statement.

Dividends on equity instruments are recognized in the Profit or Loss Statement when the Group’s right to receive payment is established.Fair values of quoted investments in active markets are based on current bid prices. Fair values for unlisted equity securities are estimated using valuation techniques.

These include the use of recent arm’s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants. Equity securities for which fair values cannot be measured reliably are recognized at cost less impairment.

Impairment of financial assets

The Group assesses at each financial reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events:

a) Significant financial difficulty of the borrower;

b) A breach of contract, such as default or delinquency in interest or principal repayments;c) The Group granting to the borrower, for economic or legal reasons relating to the borrower’s financial difficulty, a concession that the Company would not otherwise consider;

d) The becoming probable that the borrower will enter bankruptcy or other financial reorganisation;

e) The disappearance of an active market for that financial asset because of financial difficulties; or

f) Observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the payment status of borrowers in the Group; or national or local economic conditions that correlate with defaults on the assets in the Group.

The estimated period between a loss occurring and its identification is determined by management for each identified portfolio.

(i) Assets carried at amortized cost

The Group assesses whether objective evidence of impairment exists individually for financial assets. If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred.

The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial instrument’s original effective interest rate.

The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the income statement. If a loan or held to maturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement.

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K) FINANCIAL ASSETS (CONTINUED)

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognized in the income statement.

(ii) Renegotiated loans

Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer considered to be past due but are treated as new loans. In subsequent years, the renegotiated terms apply in determining whether the asset is considered to be past due

L) CASH AND CASH EQUIVALENTS

Cash and cash equivalents are carried in the date of financial reporting at amortized cost. For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less, and bank overdrafts.

M) LEASES

Leases of assets where a significant proportion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to income on a straight line basis over the period of the lease. Lease incentives received are recognized as an integral part of the total term of the lease.

N) EMPLOYEE BENEFITS

(i) Retirement benefit obligations

The Group operates a defined contribution retirement benefit scheme for its employees.A defined contribution plan is a pension plan under which the Group companies pay fixed contributions into a separate entity.

The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

The assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the Group and employees. The Group and all its employees also contribute to the appropriate national Social Security Fund, which are defined contribution schemes.

The Group’s contributions to the defined contribution schemes are charged to profit or loss in the year to which they relate.

(ii) Other entitlements

Employee entitlements to long service awards are recognised when they accrue to employees. A provision is made for the estimated liability for such entitlements as a result of services rendered by employees up to the date of financial reporting.

The estimated monetary liability for employees’ accrued annual leave entitlement at the financial reporting date is recognized as an expense accrual is only reassessed if there is a change in the entity’s activities.

O) TAXATION

Income tax expense is the aggregate of the charge to the income statement in respect of current income tax and deferred income tax. Current income tax is the amount of income tax payable on the taxable profit for the period determined in accordance with the relevant tax legislation.

Deferred income tax is provided in full, using the liability method, on all temporary differences arising between the tax bases of financial assets and financial liabilities and their carrying values for financial reporting purposes. However, if the deferred income tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for.

Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted at the financial reporting date and are expected to apply when the related deferred income tax liability is settled.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized.

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NOTES TO THE FINANCIAL STATEMENTS


2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

2. Gross earned premiums

The premium income of the Group and Company can be analysed between the main classes of business as shown below:

Class of business:

Accident 2,163,690 2,219,692 1,458,659 1,403,303

Fire 1,564,863 1,721,272 687,617 691,290

Marine 172,513 134,224 102,813 67,947

Medical 1,906,988 1,613,952 1,906,988 1,613,952

Motor 1,776,848 1,830,184 1,450,143 1,429,600

7,584,902 7,519,324 5,606,220 5,206,092

3. Investment income

Interest on government securities 337,859 260,128 316,110 260,078

Interest on bank deposits 158,080 118,557 88,451 61,959

Interest from corporate bonds and commercial paper 23,595 25,558 22,688 24,571

Interest on loans and receivables 22,591 32,089 22,591 32,089

Rental income from investment property 9,384 34,545 - 24,989

Fair value gain on investment property - (12,625) - (12,625)

Dividend income (12,569) 13,631 96,158 68,881

Fair value gain/(loss) on sale of financial investments 28,621 (9,035) 15,044 18,143

567,561 462,848 561,042 478,085



O) TAXATION (CONTINUED)

Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

P) DIVIDENDS

Dividends payable to the Group’s shareholders are charged to equity in the period in which they are declared. Proposed dividends are shown as a separate component of equity until declared.

Q) COMPARATIVES

Where necessary, comparative figures have been adjusted to conform to changes to presentation in the current year.

The financial assets were revalued through the statement of profit or loss as disclosed on page 39

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Shs '000 Shs '000 Shs '000 Shs '000

4. Gain/(Loss) on sale of subsidiary

During the year the group disposed off the entire investment in Azali Limited. The gain/(Loss) on disposal is shown below

Profit/(Loss) on disposal of subsidiary

Receivable from disposal of Azali 95,000 - 95,000 -

Intercompany account (39,736) - (39,736) -

Investment in Azali (5,649) - (5,649) -

Cumulative retained earnings (60,164) - - -

(10,549) - 49,615 -

5. Other income

(Loss)/Profit on sale of property, plant and equipment (52) 345 - -

Profit from Kenya Motor Insurance Pool - 1,200 - 1,200

Other income 25,981 8,789 8,812 -

Miscellaneous income 6,244 6,934 6,244 4,565

32,173 17,268 15,056 5,765

6. Claims and policyholder benefits payable

Accident 616,244 908,763 390,963 535,187

Fire 518,993 433,286 123,288 241,287

Marine 56,370 66,954 50,683 59,171

Medical 1,272,618 903,571 1,272,617 903,467

Motor 1,001,788 1,016,793 873,224 846,915

Total claims and policyholder benefits 3,466,013 3,329,367 2,710,775 2,586,027


NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

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Shs '000 Shs '000 Shs '000 Shs '000

7. Operating and other expenses

Employee benefits expenses (Note 8) 867,294 845,447 675,375 648,015

Severance pay (Note 8) (94,560) 108,715 (94,560) 108,715

Directors’ fees 17,254 15,198 8,955 7,723

Audit fees 9,760 10,708 5,258 6,731

Depreciation (Note 16) 31,145 32,197 27,799 29,271

Amortisation of intangible assets (Note 17) 7,586 7,084 7,586 7,084

Impairment for doubtful receivables 282,341 84,354 206,568 68,631

Operating lease rentals land and buildings 98,599 93,810 72,859 81,254

Repairs and maintenance expenditure 58,349 42,431 57,013 40,524

Other 512,290 456,605 458,625 424,246

1,790,058 1,696,549 1,425,477 1,422,194

8. Employee benefit expenses

Employee benefit expenses includes the following:

Salaries and wages 609,133 601,425 442,431 413,322

Social security benefit costs 52,199 47,556 40,785 38,227

Other 205,962 196,466 192,157 196,466

Employee benefit expenses 867,294 845,447 675,373 648,015

Severance pay (94,560) 108,715 (94,560) 108,715

772,734 954,162 580,813 756,730



Severance pay-staff severance package costs comprise of employee benefits awarded in a court case in year 2016 and set aside on appeal in 2017.

During the year, the average number of persons employed by the Group was 228 (2016: 223). This comprised an average of 97 female and 131 male employees (2016: Female 95, Male 128)The Group also had an average of 25 employees in management and 203 in non-management (2016: management 26, non-management 197)

During the year, the average number of persons employed by the Company was 177 (2016: 174). This comprised an average of 73 female and 104 male employees (2016: Female 78, Male 96)The Group also had an average of 22 employees in management and 155 in non-management (2016: management 24, non-man-agement 150)

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Shs '000 Shs '000 Shs '000 Shs '000

9. Income tax expenses

Reconciliation of the tax expenses.

The Group’s and Company’s current tax charge is computed in accordance with income tax rules applicable to short term insurance companies. A reconciliation of the tax charge is shown below:

Profit before income tax 679,001 782,335 770,982 705,077

Tax calculated at a rate of 30% (2016: 30%) 203,633 234,701 231,227 211,523

Tax effect of:

Income not subject to tax (40,586) (49,899) (86,169) (49,899)

Tax effect of interest income 33,312 28,838 33,312 28,838

Expenses not deductable for tax purposes 50,374 51,675 22,781 24,054

Over provision of deferred tax in prior years (25,747) (5,977) (6,531) (6,381)

Capital gains tax @ 5% (728) (1,250) (728) (1,250)

Income tax charge 220,258 258,088 193,892 206,885

There was no tax charge relating to components of other comprehensive income.

Income tax expense

Current tax 318,973 265,315 268,817 211,259

Deferred tax (98,715) (7,227) (74,925) (4,374)

Total 220,258 258,088 193,892 206,885

Tax recoverable /(payable) movement

As at 1 January 2017 2,516 85,010 (19,225) 56,322

Current tax charge for the year (318,973) (265,315) (268,817) (214,515)

Paid in the year 290,374 182,821 251,531 138,968

As at 31 December 2017 (26,083) 2,516 (36,511) (19,225)

Comprising

Tax recoverable 10,428 22,120 - -

Tax payable (36,511) (19,604) (36,511) (19,225)

Total (26,083) 2,516 (36,511) (19,225)

10. Dividend payable

Proposed dividends are accounted for as a separate component of equity until they have been ratified at an annual general meeting. The Directors did not propose an interim dividend (2016 : Shs 2.4 per share, Shs 60 Million) and do not recommend payment of a final dividend (2016 :Nil).

11. Share capital

The total authorized number of ordinary shares is Shs 25 Million with a par value of Shs 20 per share. At 31 December 2017, 25 Million ordinary shares were in issue (2016 : 25 Million ordinary shares). All issued shares are fully paid.



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Authorised, issued and paid up

25 Million ordinary shares with a par value ofShs 20 per share 500,000 500,000 500,000 500,000

All ordinary shares rank equally with regard to the Company’s residual assets, are entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company.

12. Retained earnings

The retained earnings balance represents the amount available for dividend distribution to the shareholders of the Company, except for cumulative fair value gains of the Company’s investment properties of Shs nil (2016: Shs 12.6 Million) whose distribution is subject to restrictions by the Kenyan Insurance Act.


2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

13. Other reserves a) Statutory reserves

Statutory reserves comprise:

Contingency reserve Tanzania 179,329 171,812 - -

Movements in the statutory reserve are shown in the statement of changes in equity on pages 43 to 44The contingency reserve is maintained by the Tanzania subsidiary as required by the Tanzania Insurance Act. The reserve is calculated annually as the greater of 3% of net written premium or 20% of the net profit. This reserve shall accumulate until it reaches the minimum paid up share capital or 50% of the net premiums, whichever is greater.

b) Currency translation reserve

The currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations.

14. Investment in subsidiary

Country of incorporation and place of

business

Nature ofbusiness

Proportion ofordinary shares directly held by the parent (%)

Proportion ofordinary shares

held by the group (%)

Proportion ofordinary share

held by non controlling

interest (%)

The Heritage Insurance Company Tanzania Limited Tanzania Insurance 60% 60% 40%

Azali Limited (Disposed of on 31 August 2017) Kenya Property 100% 100% - %



All subsidiary undertakings are included in the consolidation. The proportion of the voting rights in the subsidiary undertakings held directly by the parent company do not differ from the proportion of ordinary shares held. The parent company further does not have any shareholdings in the preference shares of subsidiary undertakings included in the group.

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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 14. Investment in subsidiary (Continued) THE GROUP THE COMPANY

2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

Investment in The Heritage Insurance Company Tanzania Limited (60%) 146,557 115,721

Investment in Azali Limited (100%) - 5,649

146,557 121,370

Movements during the year

The following was the movements during the year:

Opening balance 121,370 88,368

Additional capital in Heritage Tanzania 30,836 33,002

Disposal of Azali (5,649) -

146,557 121,370

15. Non -controlling Interests (NCI)

NCI percentage 40% 40%

Non-current assets 122,982 97,501

Current assests 2,498,503 2,941,026

Non-current liabilities - -

Current liabilities (1,892,611) (2,209,704)

Net Assets 728,874 828,832

Net assets attributable to NCI 291,550 331,529

Revenue 1,978,682 2,313,233

Profit 51,956 105,635

OCI - -

Total comprehensive income 51,956 105,635

Profit allocated to NCI 20,782 4,2254

OCI allocated to NCI (5,206) (3,113)

Cash flows from operating activities 112,207 110,690

Cash flow from investing activities (37,728) (68,606)

Cash flow from financing activities (55,556) (41,549)

Net increase (decrease) in cash and cash equivalents 18,923 535

16. Property, plant and equipment THE GROUP

2017 2016

Cost orrevaluation

Accumulateddepreciation

Carryingvalue

Cost or revaluation

Accumulated depreciation

Carryingvalue

Buildings on leasehold land 18,523 (18,523) - 18,523 - 18,523

Furniture and equipment 515,356 (407,948) 107,408 524,482 (423,989) 100,493

Motor vehicles 28,605 (23,683) 4,922 29,648 (21,501) 8,147

Total 562,484 (450,154) 112,330 572,653 (445,490) 127,163

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16. Property, plant and equipment (Continued) THE COMPANY

2017 2016

Cost orrevaluation


Carrying value

Cost or revaluation


Carryingvalue

Furniture and equipment 433,074 (349,134) 83,940 420,943 (323,521) 97,422

Motor vehicles 11,638 (7,798) 3,840 11,638 (5,612) 6,026

Total 444,712 (356,932) 87,780 432,581 (329,133) 103,448

THE GROUP

Reconciliation of property, plant and equipment 2017

Opening balance Additions Disposals Currency

translation Depreciation Total

Buildings 18,523 - (18,523) - - -

Fittings and equipment 100,493 34,163 (322) 1,000 (27,926) 107,408

Motor vehicles 8,147 51 (98) 41 (3,219) 4,922

Total 127,163 34,214 (18,943) 1,041 (31,145) 112,330


Opening balance Additions Disposals Transfers Currency

translationCumulated on disposal Depreciation Total

Furniture and equipment 18,523 - - - - - - 18,523

Fittings and equipment 103,765 27,114 (302) (1,341) (39) 269 (28,973) 100,493

Motor vehicles 9,958 100 (1,128) 1,341 (28) 1,128 (3,224) 8,147

Total 132,246 27,214 (1,430) - (67) 1,397 (32,197) 127,163

THE COMPANY


Opening balance Additions Depreciation Total

Fittings and equipment 97,422 12,131 (25,613) 83,940

Motor vehicles 6,026 - (2,186) 3,840

Total 103,448 12,131 (27,799) 87,780


Opening balance Additions Depreciation Total

Fittings and equipment 100,203 24,306 (27,087) 97,422

Motor vehicles 8,210 - (2,184) 6,026

Total 108,413 24,306 (29,271) 103,448

Equipment with a cost of Shs 222,228,089 (2016 Shs 221,912,000) was fully depreciated as at 31 December 2017. The notional depreciation charge in respect of this equipment amounts to Shs 42,026,076 (2016 Shs 40,268,000).

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17. Intangible assets THE GROUP

2017 2016

Cost orrevaluation


Carryingvalue

Cost / Valuation


Carryingvalue

Intangible assets 62,491 (23,275) 39,216 64,429 (48,488) 15,941

THE COMPANY

Cost orrevaluation


Carryingvalue

Cost or revaluation


Carryingvalue

Intangible assets 60,369 (22,214) 38,155 64,429 (48,488) 15,941

THE GROUP

Reconciliation of intangible assets 2017 Opening balance Additions Amortisation Total

Intangible assets 15,941 31,626 (8,351) 39,216


Intangible assets 23,025 - (7,084) 15,941

THE COMPANY


Intangible assets 15,941 29,800 (7,586) 38,155


Intangible assets 23,025 - (7,084) 15,941



Intangible assets with a cost of Shs 60,839,000 (2016 Shs 26,914,000) were fully amortised as at 31 December 2017.The notional amortisation charge in respect of these assets amounts to Shs 5,935,000 (2016 Shs 5,383,000).

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18. Investment property THE GROUP

2017 2016

Cost / Valuation


Carryingvalue

Cost / Valuation


Carryingvalue

Investment property - - - 94,563 - 94,563

THE COMPANY

Cost orrevaluation


Carryingvalue

Cost or revaluation


Carryingvalue

Investment property - - - 14,563 - 14,563

THE GROUP

Reconciliation of investment property 2017 Opening balance Disposal Total

Investment property 94,563 (94,563) -

Reconciliation of investment property 2016

Opening balance Additions Disposals Revaluation Total

Investment property 225,000 27,188 (145,000) (12,625) 94,563

THE COMPANY


Opening balance Additions Transfers Total

Investment property 14,563 - (14,563) -


Opening balance Additions Disposals Amortisation Total

Investment property 145,000 27,188 (145,000) (12,625) 14,563



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19. Financial instruments THE GROUP THE COMPANY

2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

At fair value through profit or loss designated

Quoted shares 100,482 102,435 - -

At fair value through profit or loss held for trading

Treasury bills 186,462 206,010 - -

Available for sale

Listed shares 335,256 97,826 334,696 97,826

Unlisted shares 27,722 45,793 - -

Government securities 3,279,282 2,662,602 3,279,797 2,662,602

3,642,260 2,806,221 3,614,493 2,760,428

Held to maturity

Corporate bonds 181,881 196,571 175,124 190,770

Loans and receivables

Mortgage loans 264,746 262,860 264,746 262,860

Other loans and deposits maturing after 90 days - 4,286 - 4,286

Staff loans 51,200 44,417 51,200 44,417

315,946 311,563 315,946 311,563

Quoted shares 435,738 200,261 334,696 97,826

Unquoted shares 27,722 45,793 - -

Government securities 3,465,744 2,868,612 3,279,797 2,662,602

Corporate bonds and short term notes 181,881 196,571 175,124 190,770

Loans and receivables 315,946 311,563 315,946 311,563

4,427,031 3,622,800 4,105,563 3,262,761



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19. Financial instruments (Continued)a) Equity investments at fair value through profit or loss


i) Quoted shares 2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

At start of year 200,261 471,924 97,826 161,577

Additions 211,710 352 211,710 352

Disposals (2) (223,943) (2) (53,621)

Fair value gain/ (loss) 25,760 (45,289) 25,162 (10,482)

Currency translation (1,991) (2,783) - -

At end of the year 435,738 200,261 334,696 97,826

ii) Unquoted sharesAt start of year 45,793 42,660 - -

Currency translation (890) (825) - -

Fair value (loss)/gains (17,181) 3,958 - -

At end of the year 27,722 45,793

iii) Government securitiesAt start of the year 2,868,612 1,590,981 2,662,602 1,432,563

Additions 4,052,500 2,590,200 4,052,500 2,590,200

Maturities (3,467,328) (1,310,309) (3,422,175) (1,310,309)

Fair value gain/(loss) 15,965 (839) (13,130) (49,852)

Currency translation (4,005) (1,421) - -

At end of the year 3,465,744 2,868,612 3,279,797 2,662,602

Instruments held under lien with Insurance Regulatory Authority as at 31 December 2017 werevalued at Shs 450 Million (2016 : Shs 300 Million).

b.) Loans and receivables

Mortgage loansAt start of the year 267,145 294,890 267,145 294,890

Loans advanced 37,217 32,230 37,217 32,230

Loan repayments (39,616) (59,975) (39,616) (59,975)

At end of the year 264,746 267,145 264,746 267,145



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19. Financial instruments (Continued)b) Loans and receivables (Continued)


Maturity profile of mortgage loans 2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

Loans maturing:

Within 1 year - 4,286 - 4,286

In 1 - 5 years 23,008 9,108 23,008 9,108

In over 5 years 241,738 253,751 241,738 253,751

At end of the year 264,746 267,145 264,746 267,145

Other loansAt start of the year 44,418 50,361 44,418 50,361

Loans advanced 30,894 43,211 30,894 43,211

Loan repayments (24,112) (49,154) (24,112) (49,154)

At end of the year 51,200 44,418 51,200 44,418

Maturity profile of other loans Loans maturing:

Within 1 year 1,678 940 - -

In 1-5 years 49,522 43,478 - -

At end of the year 51,200 44,418 - -

Book amount ofMortgage loans 264,746 267,145 264,746 267,145

Other loans 51,200 44,418 51,200 44,418

Total loans and receivables at year end 315,946 311,563 315,946 311,563



There is no concentration of credit risk with respect to mortgage and other loans.

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20. Reinsurers’ share of insurance liabilities


Reinsurers’ share of: 2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

Unearned premium (Note 27) 1,455,851 1,516,632 1,091,388 810,769

Notified claims outstanding (Note 26) 652,487 570,485 377,618 391,715

Claims incurred but not reported (Note 26) 152,181 107,528 103,658 71,774

At end of the year 2,260,519 2,194,645 1,572,664 1,274,258

Amounts due from reinsurers in respect of claims already paid by the Company on contracts that are reinsured are included in receivables arising out of reinsurance arrangements in the statement of financial position. Reinsurers’ share of insurance liabilities is classified as current assets. Movements in the above reinsurance assets are shown in Note 26.

21. Deferred acquisition costs

AssetsAt start of the year 95,041 120,344 19,728 34,097

Additions 191,301 270,232 21,114 49,333

Amortisation charge (216,284) (294,761) (28,096) (63,702)

Currency translation (1,465) (774) - -

At end of the year 68,593 95,041 12,746 19,728

LiabilitiesAt start of the year (87,318) (88,414) - -

Additions (180,497) (223,471) - -

Amortisation charge 206,522 223,721 - -

Currency translation 1,699 846 - -

At end of the year (59,594) (87,318) - -

Net 8,999 7,723 12,746 19,728



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22. Other receivables


2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

Due from related parties (Note 33 (v) 67,093 11,085 82,361 50,965

Prepayments 288,740 128,629 300,720 127,052

Operating lease receivables 17,046 1,477 - -

Other receivables 14,304 17,157 7,284 9,242

387,183 158,348 390,365 187,259

23. Cash and cash equivalents

Cash and cash equivalents consist ofDeposits with financial institutions 1,864,345 1,749,851 742,381 820,653

Cash at bank and in hand 361,425 108,573 311,870 54,914

2,225,770 1,858,424 1,054,251 875,567

The following table summarises the maturity of deposits with Financial Institutions.

Maturing within 90 days 1,368,928 1,043,426 742,381 820,653

Maturing within 90-360 days 495,417 706,425 - -

Total 1,864,345 1,749,851 742,381 820,653



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24. Weighted average effective interest rates

The following table summarizes the weighted average effective interest rates at the period end on the principal interest bearing investments:


2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

% % % %

Loans Receivable 8 8 8 8

Government securities 10 13 10 13

Deposits with financial institutions 12 8 12 8

Corporate bonds 13 11 13 11

Deposits with financial institutions have an average maturity of 3 to 4 months (2016: 3 to 4 months), while corporate bonds have an average maturityof 1 to 6 years (2016: 1 to 6 years).

25. Insurance contract liabilities


2017 2016 2017 2016

Shs '000 Shs '000 Shs '000 Shs '000

Short term non-life insurance contracts

Claims reported and claims handling expenses 2,238,853 2,116,912 1,695,142 1,600,628

Claims incurred but not reported 584,869 535,812 487,716 448,001

At end of the year 2,823,722 2,652,724 2,182,858 2,048,629

Movements in insurance liabilities and reinsurance assets are shown in note 26.

The Company uses Bornehuetter Fergusson (BF) technique to estimate the ultimate cost of claims for the Incurred But Not Reported (IBNR) provision. The BF method recognizes the occasional limitation of the chain ladder in using the actual claims paid or reported only but also takes into account the loss ratios of the business classes to provide an additional indication of the expected ultimate claims. During the year the company fully adopted the actuarial reserving basis of IBNR.

As the data is still sparse and not fully matured for the various classes of business, basic chain ladder will be rather volatile.BF was therefore recommended to provide a more stable statistical estimate of the liabilities for the IBNR provisions.



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25. Insurance contract liabilities

THE GROUP

Estimate of ultimate claims costs:

2011Shs ‘000

2012Shs ‘000

2013Shs ‘000

2014Shs‘000

2015Shs ‘000

2016Shs ‘000

2017Shs ‘000 Total

At end of accident year 2,199,467 1,531,634 5,817,104 2,012,270 2,379,655 2,136,277 2,208,048 18,284,455

One year later 1,692,157 1,554,580 5,324,233 1,996,098 1,761,723 2,357,402 - 14,686,193

Two years later 1,539,068 1,377,902 5,286,549 1,427,188 1,477,496 - - 11,108,203

Three years later 1,614,349 1,427,973 1,680,596 1,542,359 - - - 6,265,277

Four years later 1,616,287 1,169,959 1,689,967 - - - - 4,476,213

Five years later 1,027,172 1,139,175 - - - - - 2,166,347

Six years later 1,024,367 - - - - - - 1,024,367

Current estimate of cumulative claims 1,024,367 1,139,175 1,689,967 1,542,359 1,477,496 2,357,402 2,208,04 12,253,857

Less: cumulative payments to date (968,102) (1,092,174) (1,617,071) (1,292,680) (1,228,751) (1,916,569) (1,236,989) (9,352,336)

Liability in the statement of financial position

56,265 47,001 72,896 249,679 248,745 440,833 971,059 2,086,478

Liability in respect of prior years 152,375

Incurred but not reported 584,869

Total gross claims liability included in the statement of financial position

56,265 47,001 72,896 249,679 248,745 440,833 971,059 2,823,722



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25. Insurance contract liabilities (Continued)

THE COMPANY

Accident year Estimate of ultimateclaims costs:

2011Shs ‘000

2012Shs ‘000

2013Shs ‘000

2014Shs

‘0002015

Shs ‘0002016

Shs ‘0002017

Shs ‘000 Total

At end of accident year 1,283,515 850,064 954,808 1,281,658 1,317,688 1,381,701 1,449,064 8,518,498

One year later 967,010 1,142,028 1,568,825 1,439,584 1,405,054 1,654,247 - 8,176,748

Two years later 921,726 1,078,406 1,509,430 1,345,393 1,107,198 - - 5,962,153

Three years later 1,014,168 1,127,469 1,635,486 1,450,935 - - - 5,228,058

Four years later 1,018,832 1,154,658 1,638,374 - - - - 3,811,864

Five years later 1,021,656 1,128,497 - - - - - 2,150,153

Six years later 1,008,268 - - - - - - 1,008,268

Current estimate of cumulative claims 1,008,268 1,128,497 1,638,374 1,450,935 1,107,198 1,654,247 1,449,064 9,436,583

Less: cumulative payments to date (954,710) (1,084,614) (1,572,899) (1,253,290) (957,621) (1,323,861) (766,338) (7,913,333)

Liability in the statement of financial position

53,558 43,883 65,475 197,645 149,577 330,386 682,726 1,523,250

Liability in respect of prior years 171,892

Incurred but not reported 487,716

Total gross claims liability included in the statement of financial position

53,558 43,883 65,475 197,645 149,577 330,386 682,726 2,182,858

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26. Movements in insurance liabilities and reinsurance assets

THE GROUP

2017 2016

Gross Shs ‘000

ReinsuranceShs ‘000

NetShs ‘000

GrossShs ‘000


NetShs ‘000

Notified claims 2,116,912 570,485 1,546,427 1,936,381 553,050 1,383,331

Incurred but not reported 535,812 107,528 428,284 685,327 246,906 438,421

Total at the beginningof the year 2,652,724 678,013 1,974,711 2,621,708 799,956 1,821,752

Cash paid for claims settled in year (3,285,225) (1,579,712) (1,705,513) (3,297,446) (1,779,850) (1,517,596)

Increase in liabilities:

Arising from current year claims 2,989,044 1,621,749 1,367,295 2,053,409 1,299,908 753,501

Arising from prior year claims 467,179 84,619 382,560 1,275,053 357,999 917,054

Total at end of the year 2,823,722 804,669 2,019,053 2,652,724 678,013 1,974,711

Notified claims 2,238,853 652,478 1,586,366 2,116,912 570,485 1,546,427



THE COMPANY

2017 2016

Gross Shs ‘000


NetShs ‘000

GrossShs ‘000


NetShs ‘000

Notified claims 1,600,628 391,715 1,208,913 1,364,340 301,513 1,062,827


Total at the beginning of the year 2,048,629 463,489 1,585,140 1,945,737 498,111 1,447,626

Cash paid for claims settled in year (2,576,405) (1,191,488) (1,384,917) (2,483,380) (1,265,592) (1,217,788)

Increase in liabilities:

Arising from current year claims 2,200,692 1,146,283 1,054,409 1,619,081 1,091,403 527,678

Arising from prior year claims 509,942 62,993 446,949 967,191 139,567 827,624


Notified claims 1,695,142 377,619 1,317,523 1,600,628 391,715 1,208,913





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27. Unearned premiumUnearned premium represents the liability for short term business contracts where the Group and Company’sobligations are not expired at the year end. Movement of the reserve is shown below:

THE GROUP

2017 2016

Gross Shs ‘000


NetShs ‘000

GrossShs ‘000


NetShs ‘000

At beginning of the year 2,926,838 1,516,632 1,410,206 2,832,885 1,416,928 1,415,957

Increase in the period (net) 9,203 (79,305) 88,508 102,901 106,552 (3,651)

Currency translation (17,655) 18,524 (36,179) (8,948) (6,848) (2,100)

At end of the year 2,918,386 1,455,851 1,462,535 2,926,838 1,516,632 1,410,206

THE COMPANY

At beginning of the year 2,018,889 810,769 1,208,120 1,884,802 691,382 1,193,420

Increase in the year (net) 336,876 280,618 56,258 134,087 119,387 14,700

At end of the year 2,355,765 1,091,387 1,264,378 2,018,889 810,769 1,208,120

28. Deferred income tax


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Deferred tax liability - (1,719) - -

Deferred tax asset 205,202 131,175 165,279 90,354

Net deferred tax asset 205,202 129,456 165,279 90,354

Deferred tax is calculated, in full, on all temporary differences under the liability method using a principal tax rate of 30% (2016 : 30%). The movement on the deferred income tax account is as follows:

At start of the year 129,456 122,229 90,354 82,723

Profit or loss credit (Note 9) 75,746 7,227 74,925 4,374

Underprovision in previous year - - - 3,257

At end of the year 205,202 129,456 165,279 90,354

Deferred tax assets and liabilities, deferred tax charge/(credit) in the statement of profit or loss account are attributable to the following items:

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28. Deferred income tax (Continued)

THE GROUP

Charged/(credited)

Charged/(credited)

1.1.2017Shs ‘000

to p/lShs ‘000

31.12.2017Shs ‘000

1.1.2016Shs ‘000

to p/lShs ‘000

31.12.2016Shs ‘000

Property and equipment:On historical cost basis (18,959) 868 (18,091) (15,140) (3,819) (18,959)

Investment property fair value gains 9,260 - 9,260 16,448 (7,188) 9,260

Provisions (118,227) (98,763) (216,990) (118,604) 377 (118,227)

Deferred tax effect on fair value gains on government securities 3,658 - 3,658 - 3,658 3,658

Currency translation (5,188) (820) (6,008) (4,933) (255) (5,188)

Total (129,456) (98,715) (228,171) (122,229) (7,227) (129,456)

THE COMPANY

Charged/(credited)

Charged/(credited)

1.1.2017Shs ‘000

to p/lShs ‘000

31.12.2017Shs ‘000

1.1.2016Shs ‘000

to p/lShs ‘000

31.12.2016Shs ‘000

Property and equipment:On historical cost basis (5,357) (218) (5,575) (1,846) (3,511) (5,357)

Investment property fair value gains - - - 7,188 (7,188) -

Provisions (84,997) (74,707) (159,704) (88,065) (3,068) (84,997)

Total (90,354) (74,925) (165,279) (82,723) (7,631) (90,354)

29. Other liabilities


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Other liabilities 332,789 85,066 76,632 63,948

Accrued expenses 130,319 119,070 81,625 72,766

Other payables 463,108 204,136 158,257 136,714

Amounts due to related companies 10,429 9,042 10,429 13,741

473,537 213,178 168,686 150,455

Other payables are classified as current liabilities



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31. Capital commitments THE GROUP THE COMPANY

2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

The Company’s commitment for capital expenditure was as follows:

Computers, Furniture and Fittings 111,829 91,828 111,829 91,828

Operating leases as lessee (expense) Minimum lease payments due

Within one year 13,605 11,055 - 11,055

In second to fifth year inclusive 148,063 99,310 99,310 99,310

161,668 110,365 99,310 110,365

Operating lease payments represent rentals payable by the group for some of its office properties. Leases are negotiated for an average term of six years and rentals are fixed for an average of two years. No contingent rent is payable.

32. Cash generated from operations


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Profit before taxation 679,001 782,335 770,982 705,077

Adjustments for: Interest received (Note 3) (541,922) (475,473) (449,840) (478,085)

Depreciation (Note 16) 31,145 32,197 27,799 29,271

Amortisation of intangibles (Note 17) 8,351 7,084 7,586 7,084

Profit on sale of property and equipment (Note 5) 52 (345) - -

Fair value gain on investment property (Note 3) - 12,625 - 12,625

Revaluation reserve of bonds & shares (Note 19) (24,544) 42,170 2,531 60,334

Loss on disposal of subsidiary (Note 4) 10,549 - - -

Changes in working capital:

Receivables arising out of reinsurance arrangements (227,393) (35,218) (307,139) (2,610)

Insurance contract liabilities 170,998 31,015 134,229 102,891

Provision for unearned premium reserve (8,452) 93,953 336,876 134,087

Deferred acquisition costs (1,276) 24,207 6,982 14,369

Reinsurers’ share of insurance liabilities (65,874) 22,239 (298,406) (84,764)

Other payables 610,424 (121,166) 806,323 (337,853)

Other receivables 384,490 273,199 (159,662) 332,822

1,025,549 688,822 878,261 495,248



30. Contingent Liabilities

In common with the insurance industry in general, the Group companies are subject to litigation arising in the normal course of insurance business. The directors are of the opinion that this litigation will not have a material effect on the financial position or profits of the Group and Company with the exception of our Tanzania subsidiary which has tax disputes with Tanzania Revenue Authority with respect to Value Added Tax (VAT), corporation tax, withholding tax and Pay As You Earn (PAYE) tax from year 2003 to 2005 totalizing Tshs 270 million. The Company has paid one third of amount in dispute as per provisions of Tanzania Income Tax Act. In the opinion of the Directors, no additional material liability is expected to arise from the disputed assessments.

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2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

i) Gross premiums written

Stanbic Bank Limited 347,625 320,208 347,625 320,208

Stanlib Kenya Limited 12,240 11,780 12,240 11,780

Azali Limited - 248 - 248

359,865 332,236 359,865 332,236

ii) Claims incurred

Stanbic Bank Limited 175,524 176,234 175,524 176,234

iii) Rental expense/(income) Rent paid to:

Liberty Life Assurance Company Kenya Limited 39,878 34,538 39,878 34,538

Azali Limited - - - 2,231

39,878 34,538 39,878 36,769

Rent received from Stanbic Bank Limited (9,384) (9,556) - -

(9,384) (9,556) - -

iv) Interest earned on related party balances

Interest on bank deposits with Stanbic Bank Limited 7,945 8,711 7,945 8,711

7,945 8,711 7,945 8,711

v) Outstanding balances with related parties

Due from Liberty Life (Uganda) Limited - 2,478 - -

Due from Heritage Insurance Company Tanzania Limited - - 15,301 9,320

Due from Liberty Kenya Holdings Limited 43,091 2,900 43,091 -

Due from Liberty Life Assurance Company Limited 23,918 5,707 23,970 -

Due from Azali Limited - - - 41,645

67,093 11,085 82,362 50,965

Due to Stanbic Bank Limited 342 175 342 175

Due to Liberty Holdings (South Africa) Limited 2,309 3,683 2,309 8,382

Due to Stanlib Kenya Limited 7,778 5,184 7,778 5,184

10,429 9,042 10,429 13,741



33. Related party transactions

The Company is controlled by Liberty Kenya Holdings Limited, incorporated in Kenya, which owns 100% of the Company’s shares. The ultimate parent company is The Standard Bank of South Africa Limited. These are other companies which are related to the Heritage Insurance Company Kenya Limited through common shareholdings or common directorships. The following transactions were carried out with related parties:

Balances due from related parties are interest free and have no specific repayment period.

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33. Related party transactions (Continued)


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

vi) Investments in related parties

Stanbic Bank Limited deposits and bank balances 331,480 105,338 331,480 105,338

331,480 105,338 331,480 105,338

vi) Advances to related parties

Staff mortgages 264,746 267,145 264,746 267,145

Other Loans 51,200 44,416 51,200 44,416

315,946 311,561 315,946 311,561

viii) Loans to directors of the Company

At start of the year 26,969 25,357 26,969 25,357

Additions - 10,000 - 10,000

Loan repayments received (2,865) (8,388) (2,865) (8,388)

At end of the year 24,104 26,969 24,104 26,969

ix) Directors’ remuneration

Directors’ fees 12,311 14,277 8,955 7,722

Key management personnel remuneration (excluding directors).

Post employment and other short term benefits 83,244 74,218 83,244 74,218

83,244 74,218 83,244 74,218



34. Critical accounting estimates and judgements in applying accounting policies

The Group and Company make estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and based on historical experience and other factors, including expected future events that are believed to be reasonable under the circumstances.

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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)34. Critical accounting estimates and judgements in applying accounting policies (Continued) The directors have made the following assumptions that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

• Insurance contract liabilities

The estimation of future benefit payments from general insurance contracts is the Group and Company’s most critical ac-counting estimate. There are several sources of uncertainty that need to be considered in the estimate of the liability that the Company will ultimately pay for such claims.

The determination of the liabilities under general insurance contracts is dependent on estimates made by the Group and Company. Estimates are made as to the expected amounts of claims to be paid in future. Judgement is also applied in the estimation of future contractual cash flows in relation to reported Judgement is also applied in the estimation of future contractual cash flows in relation to reported losses and losses incurred but not reported. There are several sources of un-certainty that need to be considered in the estimate of the ability that the Group and Company will ultimately pay for such claims. Case estimates are computed based on the historical claims development statistics and evaluation of the current, past and future assumptions. Using the BF model, the Company has developed estimates of expected claims outstanding. The development of insurance liabilities provides a measure of the Company’s ability to estimate the ultimate value of the claims. The carrying amounts of insurance liabilities as at the end of the year period and as at 31 December 2017 are set out in note 25.

• Impairment of receivables

The Company reviews its portfolio of receivables on an annual basis. In determining whether receivables are impaired, the management makes judgement as to whether there is any evidence indicating that there is a measurable decrease in the estimated future cash flows expected.

• Fair value measurement and valuation process

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. The Group and Company uses their judgements to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting date. The Group has used a discounted cash flow analysis for various financial assets that are not traded in active markets.

• Useful lives of vehicles and equipment

Management reviews the useful lives and residual values of the items of property, plant and equipment on a regular basis. During the financial year, the directors determined no significant changes in the useful lives and residual values.

• Income taxes

The Group is subject to income taxes in various jurisdictions. Significant judgement is required in determining the Group’s provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncer-tain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on esti-mates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.

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THE GROUP

Class of business Maximum insured loss (Shs’ 000)

Short term insurance business Shs 0 Shs 15M Shs 15M Shs 250M Over Shs 250M Total

Motor Gross 26,757,422 16,541,822 488,841 43,788.085

Net 26,194,420 14,822,850 216,857 41,234,127

Fire Gross 13,471,065 95,546,520 769,960,473 878,978,058

Net 12,471,065 72,153,176 31,235,323 115,599,321

Personal accident Gross 532,707 13,431,303 7,565382 21,529,392

Net 478,026 10,811,403 6,685,382 17,974,811

Other Gross 26,311,168 146,042,438 328,385,285 500,738,891

Net 30,395,694 136,049,000 150,724,108 317,168,802

Total Gross 67,072,362 271,562,083 1,106,399,981 1,445,034,426

Net 69,278,962 233,836,429 188,861,670 491,977,061


NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)35. Management of insurance and financial risk The Company’s activities expose it to a variety of risks, including insurance risk, financial risk, credit risk, and the effects of changes in property values, debt and equity market prices, foreign currency exchange rates and interest rates and liquidity risks. The Company’s overall risk management programme focuses on the identification and management of risks and seeks to minimise potential adverse effects on its financial performance by use of underwriting guidelines and capacity limits, re-insurance planning, credit policy governing the acceptance of clients, and defined criteria for the approval of intermediaries and reinsurers. Investment policies are in place which help manage liquidity and seek to maximise return within an accept-able level of interest rate risk.

This section summarises the way the company manages key risks:

A) INSURANCE RISK

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 very nature of an insurance contract, this risk is random and therefore unpredictable.For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are 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 level established using statistical techniques. 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 company 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.

Factors that aggravate insurance risk include lack of risk diversification in terms of type and amount of risk, geographical location and type of industry covered. The following tables disclose the concentration of insurance liabilities by the class of business in which the contract holder operates and by the maximum insured loss limit included in the terms of the policy:

Year ended 31 December 2017.

The concentration by sector or maximum insured loss at the end of the year is broadly consistent with the prior year.

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35. Management of insurance and financial risk (Continued)





THE COMPANY



Motor Gross 26,478,456 15,876,107 - 42,354,563

Net 25,927,171 14,616,989 - 40,544,160

Fire Gross 13,095,246 89,989,079 395,988,267 499,072,592

Net 10,973,540 66,759,558 26,618,906 104,351,004

Personal accident Gross 533,707 13,431,303 7,565,382 21,529,392

Net 478,026 10,811,403 6,685,382 17,974,811

Other Gross 25,058,245 133,820,662 165,654,182 324,533,089

Net 20,293,292 100,663,623 27,979,854 148,936,769

Gross 65,164,654 253,117,151 569,207,831 887,489,636

Net 57,671,029 192,851,573 61,284,142 311,806,744


THE GROUP



Motor Gross 31,194,004 13,683,889 623,168 45,501,061

Net 31,993,829 12,594,453 269,704 44,857,986

Fire Gross 28,157,345 91,782,264 580,696,108 700,635,717

Net 28,735,317 82,993,424 38,997,564 150,726,305

Personal accident Gross 2,323,014 29,250,340 167,499,112 199,072,466

Net 8,518,130 43,341,657 99,489,099 151,348,886

Other Gross 24,288,447 148,646,923 135,511,448 308,446,818

Net 20,743,132 112,275,120 28,471,373 161,489,625

Gross 85,962,810 283,363,416 884,329,836 1,253,656,062

Net 89,990,40 251,204,654 167,227,740 508,422,802

The concentration by sector or maximum insured loss at the end of the year is broadly consistent with the prior year.88Th

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THE COMPANY



Motor Gross 30,838,382 12,835,244 - 43,673,626

Net 31,661,452 12,338,425 - 43,999,877

Fire Gross 27,770,202 86,057,370 195,455,617 309,283,189

Net 27,682,953 78,409,612 35,074,264 141,166,829

Personal accident Gross 1,106,092 17,379,736 9,443,811 27,929,639

Net 1,106,092 17,379,736 9,432,785 27,918,613

Other Gross 24,288,447 148,646,923 135,511,448 308,446,818

Net 20,743,132 112,275,120 28,471,373 161,489,625

Gross 84,003,123 264,919,273 340,410,876 689,333,272

Net 81,193,629 220,402,893 72,978,422 374,574,944





B) FINANCIAL RISK

The Group is exposed to financial risk through its financial assets, financial liabilities (investment contracts and borrowings), reinsurance assets and insurance liabilities. In particular the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts. The most important types of risk are credit risk, liquidity risk and market risk. Market risk includes currency risk, interest rate risk, equity price risk and other price risks.These risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The risks that the Group primarily faces due to the nature of its investments and liabilities are interest rate risk and equity price risk. The Group manages these positions through an Investment Committee and investment policy that has been developed to achieve long term investment return in excess of its obligations under insurance and investment contracts. The principal technique of the company is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to contract holders. For each distinct category of liabilities, a separate portfolio of assets is maintained. Funds are applied to investments that fit the criteria developed as being acceptable and optimize the return on investment.

Asset Liability Matching (ALM) Balance sheet of the Company as at 31 December 2017Th

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THE COMPANY


Asset classPolicy Holders

2017Shs ‘000

%Share Holder

2017Shs ‘000

%

Investible assets 2,061,116 37% 2,470,882 75%

Non-investible 2,328,035 42% 496,322 15%

Inadmissible assets 1,180,360 21% 336,011 10%

Total 5,569,511 - 3,303,215 -

Liabilities 5,569,511 100% 205,193 100%

Excess - - 3,098,022 -

Asset classPolicy Holders

2016Shs ‘000

%Share Holder

2016Shs ‘000

%

Investible assets 1,855,690 43% 1,930,722 71%

Non-investible 1,465,534 34% 466,733 15%

Inadmissible assets 980,696 23% 305,514 11%

Total 4,301,920 - 2,702,969 -

Liabilities 4,301,920 100% 178,066 100%

Excess - - 2,524,903 -




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35. Management of insurance and financial risk (Continued) C) CREDIT RISK

The Company has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Key areas where the Company is exposed to credit risk are:

• receivables arising out of direct insurance arrangements;

• receivables arising out of reinsurance arrangements; and

• reinsurers share of insurance liabilities.

Other areas where credit risk arises include cash and cash equivalents, corporate bonds, commercial papers, loans receivable, government securities and deposits with banks and other receivables.

The Group has no significant concentrations of credit risk. The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparty, and to geographical and industry segments. Such risks are subject to an annual or more frequent review. Limits on the level of credit risk by category and territory are approved quarterly by the Board of Directors.

Reinsurance is used to manage insurance risk. This does not, however, discharge the company’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the company remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on an annual basis by reviewing their financial strength prior to finalisation of any contract. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset where counterparties are both debtors and creditors of the company. Management information reported to the company includes details of provisions for impairment on loans and receivables and subsequent write offs. Internal audit makes regular reviews to assess the degree of compliance with the company procedures on credit.

Exposures to individual policyholders and groups of policyholders are collected within the ongoing monitoring of the controls associated with regulatory solvency. Where there exists significant exposure to individual policyholders, or homogenous groups of policyholders, a financial analysis equivalent to that conducted for reinsurers is carried out by the company risk department.

The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to the external credit ratings if available or historical information about counterparty default rate. None of the Company’s credit counterparties has an external credit rating other than the government of Kenya which has a Standard and Poor’s rating of B+. For credit risk counterparties without an external credit rating, the group classifies them as follows.

• Group 1 New customers/related parties

• Group 2 Existing customers/related parties with no defaults in the past

• Group 3 Existing customer/related parties with some defaults in the past.

All defaults were fully recovered maximum exposure to credit risk before collateral held

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Credit quality

2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Receivables arising out of reinsurance arrangements Group 2 717,469 490,076 443,501 136,362

Receivables arising out of direct insurance arrangements

See analysis below 859,611 1,379,413 859,611 1,109,673

Other receivables (excluding prepayment) Group 2 387,183 158,348 390,365 187,259

Reinsurers’ share of insurance liabilities Group 2 2,260,519 2,194,645 1,572,664 1,274,258

Government securities B+ 3,465,744 2,868,612 3,279,797 2,662,602

Corporate bond and short term notes Group 2 181,881 196,571 175,124 190,770

Loans receivable Group 2 315,946 311,563 315,946 311,563

Deposits with financial institutions Group 2 1,864,345 1,749,851 742,381 820,653

Cash and bank balances Group 2 361,425 108,573 311,870 54,914

10,414,123 9,457,652 8,091,259 6,748,054




Collateral is held for mortgage, car and development loans above Shs 100,000; all other assets are collateral free. Some receivables that are past due but not impaired are not within their approved credit limits, and have had their terms renegotiated.

None of the above assets are past due or impaired except for the receivables arising out of direct insurance arrangements (which are due within 60 days of the end of the month in which they are invoiced except those related to Motor and Fire Insurance policies which are due on inception of insurance cover):

Financial assets that are past due or impaired

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Receivables arising out of direct insurance arrangements are summarized as follows:


Credit quality

2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Past due but not impaired Group 2 859,611 1,379,413 859,611 1,109,673

Impaired Group 2 446,400 330,954 446,400 239,833

Gross 1,306,011 1,710,367 1,306,011 1,349,506

Less: allowance for impairment (446,400) (330,954) (446,400) (239,833)

Net 859,611 1,379,413 859,611 1,109,673

Receivables arising out of direct insurance arrangements past due but not impaired;


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Past due but not impaired 296,177 262,170 296,177 262,170

by up to 30 days 90,949 91,670 742,381 91,670

Over 61 days 472,485 1,025,573 472,485 755,833

Total past due but not impaired 859,611 1,379,413 859,611 1,109,673

All receivables past due by more than 360 days are carried at their estimated recoverable value. No collateral is held on impaired debts.

Allowance for impairment

Receivables arising out of direct insurance arrangements


2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

Past due impaired

Brokers 178,540 166,622 178,540 86,982

Agents 158,983 124,556 158,983 113,075

Insurance companies - 836 - 836

Direct clients 108,877 38,940 108,877 38,940

446,400 330,954 446,400 239,833



No collateral was held in relation to the receivables that are past due or impaired.The movement in allowance for impairment account is as below:

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2017Shs ‘000

2016Shs ‘000

2017Shs ‘000

2016Shs ‘000

At start of year 330,954 319,716 239,833 209,744

Charge to profit or loss 115,446 12,225 206,567 30,089

Currency translation - (987) - -

At end of the year 446,400 330,954 446,400 239,833



D) MARKET RISK

i) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various foreign currency transactions, primarily with respect to the US dollar. Foreign exchange risk arises from our reinsurance dealings with foreign reinsurance brokers. This risk is significant, particularly in respect of the subsidiary in Tanzania, and has in the past been mitigated through the use ofa dollar denominated account.

In the year ending 31 December 2017, we had an equivalent of Shs 11.1M (2016: Shs 13.4M) in reinsurance balances denominated in foreign currency and foreign currency deposit accounts. The impact of normal exchange fluctuations in the Kenya and Tanzania shilling against the US dollar would not have a material effect on Group’s results. The average rate was Shs 102.50 (2016 Shs 101.5) to the dollar, whereas the closing rate was Shs 103.00 (2016 Shs 102.50) to the dollar. ii) Price risk

The Group is exposed to equity securities price risk because of investments in quoted and unquoted shares classified at fair value through the income statement. The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity and debt securities, the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with limits set by the Group in the Investment Policy. All quoted shares held by the Group are traded on the Stock Exchange.

At 31 December 2017, if the market prices of equity had increased/decreased by 5% all other variables held constant, the fair value of equities held by the Company would have changed by Shs 16,735,000 (31 December 2016: Shs 14,674,000). This would result in a change in profit for the year.

At 31 December 2017, if the market prices of equity had increased/decreased by 5% all other variables held constant, the fair value of equities held by the Group would have changed by Shs 21,781,000 (31 December 2016: Shs 30,042,000). This would result in a change in profit for the year.

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THE GROUP

As at 31 December 2017 Liabilities

Up to 1 month

Shs ‘0001 3 months

Shs ‘0003 12

monthsShs ‘000

1 5 yearsShs ‘000

Over 5 years

Shs ‘000Total

Insurance contract liabilities 666,970 496,161 350,940 1,018,010 291,641 2,823,722

Other payables 74,106 - 388,998 - - 463,104

Creditors arising from reinsurance arrangements - - 585,119 - - 585,119

Due to related parties - - 10,429 - - 10,429

Creditors arising from direct insurance arrangements - 755,146 - - - 755,146

Total financial liabilities (expected maturity dates) 741,076 1,251,307 1,335,486 1,018,010 291,641 4,637,520



35. Management of insurance and financial risk (Continued) D) MARKET RISK

iii.) Cash flow and fair value interest rate risk

Fixed interest rate financial instruments expose the Group to fair value interest rate risk. Variable interest rate financial instruments expose the Group to cash flow interest rate risk.The Group’s fixed interest rate financial instruments are government securities, deposits with financial institutions and corporate bonds.

No limits are placed on the ratio of variable rate financial instruments to fixed rate financial instruments.

At 31 December 2017, if the interest rate of the fixed interest bearing instruments increased/decreased by 1%, all other variables held constant, the profit of the Company would have changed by Shs 45,516,000 (31 December 2016: Shs. 16,355,000).

At 31 December 2017, if the interest rate of the fixed interest bearing instruments increased/decreased by 1%. all other variables held constant, the profit of the Group would have changed by Shs 45,849,000 (31 December 2016: Shs. 38,041,160).

e) Liquidity risk

Liquidity risk is the risk that the Company is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn.

The Group is exposed to daily calls on its available cash for claims settlement and other administration expenses. The Group does not maintain cash resources to meet all of these needs but maintains a balanced portfolio of short term and long term investments to suit the Company’s settlement cycle. Experience shows that reinvestment of maturing funds can be predicted with a high level of certainty and therefore can be matched to maturing liabilities.

Large unexpected payments are met out of call deposits conveniently placed with various financial institutions at competitive interest rates. Prompt premium collection ensures that the day to day liquidity requirements of the Group are adequately met.The table below presents the cash flows payable and receivable by the Group under liabilities and assets respectively by remaining contractual maturities at the balance sheet date. All figures are in thousands of Kenya Shillings.

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35. Management of insurance and financial risk (Continued)THE COMPANY

As at 31 December 2017Liabilities

Up to 1 month


Shs ‘0003 12

monthsShs ‘000

1 5 yearsShs ‘000

Over 5 years

Shs ‘000Total

Insurance contract liabilities 515,596 383,554 271,292 786,965 225,451 2,182,858

Creditors arising from reinsurance arrangements

- 484,578 - - - 484,578

Other payables 74,106 - 84,147 - - 158,253

Creditors arising from direct insurance arrangements - - 546,310 - - 546,310


Total financial liabilities (expected maturity dates) 589,702 868,132 912,178 786,965 225,451 3,382,428

THE GROUP


Up to 1 month


Shs ‘0003 12

monthsShs ‘000

1 5 yearsShs ‘000

Over 5 years

Shs ‘000Total


Insurance contract liabilities Creditors arising from reinsurance arrangements

63,805 125,305 15,021 - - 204,131

Other payables - - 540,791 - - 540,791



Total financial liabilities (expected maturity dates) 920,307 762,461 1,439,025 355,252 379,045 3,856,090

THE COMPANY


Up to 1 month


Shs ‘0003 12

monthsShs ‘000

1 5 yearsShs ‘000

Over 5 years

Shs ‘000Total


Other payables 42,733 83,921 10,060 - - 136,714



Total financial liabilities (expected maturity dates) 704,187 575,979 821,247 274,352 272,727 2,648,492



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Kenya Short term divisionShs ‘000

Tanzania Short term divisionTShs ‘000

Regulatory requirement 500,000 300,000

Amount of capital held by the company 500,000 500,000


F) CAPITAL MANAGEMENT

The Group’s capital comprises the paid up share capital and the solvency margin required to meet the requirements of the insurance regulator. The Group’s objectives when managing capital, which is a broader concept than the ‘equity’ on the balance sheets, are:

• To comply with the capital requirements as set out in the Kenyan Insurance Act, 2015.

• To comply with regulatory solvency requirements as set out in the Insurance Act, 2015. This is consistently carried out to ensure the Company’s ability to meet all its obligations as they fall due is not compromised;

• To safeguard the company’s ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits for other stakeholders; and

• To provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk.

The Kenyan Insurance Act, 2015 requires general insurance companies to hold the minimum level of paid up capital of Shs 500 million by 30 June 2017 and Shs 600 million by 30 June 2018.

The Company had a share capital of 25 Million fully paid up ordinary shares (Shs 20 par value each) totalling Shs 500 Million.This is in line with the above guidelines.

The Group’s paid up capital at the end of 2017 and 2016 is presented in Note 11. The table below summarises the capital requirements of the company and its subsidiary in the various jurisdiction that the Company operates.

SOLVENCYShort term insurance businesses are required to maintain a minimum capital requirement of Shs 600 million by June 2018, 20% of the previous years net earned premium and risk based capital as determined from time to time.

The Kenyan Insurance Regulatory Authority (IRA) has set the minimum required capital adequacy ratio of 180% from 30 June 2017 and 200% and above by 30 June 2018.

During the period the Group and Company held the minimum paid up capital required. The Company has met the required solvency margin as at 31 December 2017. The following table sets out an analysis of the capital adequacy ratio as at 31 December 2017 for the Company:

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G) FAIR VALUE ESTIMATION

IFRS 7 requires disclosure of fair value measurements by level of the following fair value measurement hierarchy for financial instruments that are measured at fair value:

• Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group’s assets that are measured at fair value at 31 December 2017.

35. Management of insurance and financial risks (Continued)

Solvency (Cont’d)

Capital adequacy ratio computationKenya Short term division

2017Shs ‘000

Kenya Short term division2016

Shs ‘000Credit Risk Capital 859,429 865,831

Market Risk Capital 116,783 33,717

Insurance Risk Capital 314,233 261,459

Operational Risk capital 276,749 271,666

Risk-Based Capital 1,199,245 1,176,741

Total Capital available 2,797,808 2,295,431

Absolute amount minimum 600,000 600,000

Volume of Business Minimum 612,485 581,871

Risk-Based Capital Minimum 1,199,245 1,176,741

Minimum Required Capital 1,199,245 1,176,741

Capital Adequacy Ratio 233% 195%



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THE GROUP

As at 31 December 2017Assets

Level 1Shs ‘000

Level 2Shs ‘000

Level 3Shs ‘000

TotalShs ‘000

Financial assets

Quoted shares 435,738 - - 435,738

Unquoted shares - - 27,722 27,722

Bonds - 3,465,744 - 3,465,744

Total assets 435,7382 3,465,744 27,722 3,929,204

THE COMPANY

As at 31 December 2017 Assets

Level 1Shs ‘000

Level 2Shs ‘000

Level 3Shs ‘000

TotalShs ‘000

Financial assets

Quoted shares 334,696 - - 334,696

Bonds - 3,279,797 - 3,279,797

Total assets 334,696 3,279,797 - 3,614,493

THE GROUP

As at 31 December 2016Assets

Level 1Shs ‘000

Level 2Shs ‘000

Level 3Shs ‘000

TotalShs ‘000

Financial assets

Quoted shares 200,261 - - 200,261

Unquoted shares - - 45,793 45,793

Bonds - 2,868,612 - 2,868,612

Investment property - 94,563 - 94,563

Total assets 200,261 2,963,175 45,793 3,209,229

THE COMPANY

As at 31 December 2016 Assets

Level 1Shs ‘000

Level 2Shs ‘000

Level 3Shs ‘000

TotalShs ‘000

Financial assets

Quoted shares 97,826 - - 97,826

Bonds - 2,662,602 - 2,662,602

Investment property - 14,563 - 14,563

Total assets 97,826 2,677,165 - 2,774,991

35. Management of insurance and financial risks (Continued) g) Fair value estimation (Continued)



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35. Management of insurance and financial risks (Continued) g) Fair value estimation (Continued)

36. Subsequent events

The fair value of other classes of financial assets and liabilities that are not traded in an active market (for example, unquoted equity investments) is determined by using valuation techniques.

These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates.

If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.Specific valuation techniques used to value financial instruments include:

• Quoted market prices or dealer quotes for similar instruments

• The fair value government security is calculated as the present value of the estimated future cash flows based on observable yield curves.

• Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments.

Note that all of the resulting fair value estimates are included in level 2 or 3. There were no transfers into or out of level 3 during the period.

There were no events after 31 December 2017 that would have a material effect, adjusting or non-adjusting, on the financial statements.

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17

SUPP

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FORM

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Shs ‘

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0 72

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54

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) (8

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)39

,644

9,

489

(85,4

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1,081

9,

812

(3,5

14)

(10,

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Less

: rei

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pay

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311,7

77

25,8

36

1,250

,131

284,

560

94,5

23

57,6

51

59,8

57

38,8

21

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1,451

,088

10

,862

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0,39

8 3,9

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Net

ear

ned

prem

ium

s53

,897

13

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1 15

4,75

5 15

6,74

9 77

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1,2

46

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56

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61

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(17,5

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334

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6 55

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18,6

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(20,

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22,5

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4,61

6 30

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78

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18,6

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8 17

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1,705

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clai

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69

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5 30

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9 48

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6 10

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7 11

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1,760

,883

Com

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) (3

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) (1

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1,118

) (7

,164)

904

(11,3

93)

(370

,799)

16

(4,5

10)

(27,5

00)

(834

,634

)

Com

miss

ions

pay

able

81,5

89

27,3

96

179,1

89

45,5

28

23,2

91

8,85

3 96

,140

71,6

91

50,5

62

157,6

06

18,8

89

62,9

92

21,2

22

844,

948

Expe

nses

of m

anag

emen

t 49

,041

53

,170

134,

200

101,9

41

26,6

64

5,681

32

5,931

22

8,90

9 16

1,253

27

6,18

0 46

,828

83

,506

90

,405

1,5

83,70

9

Tota

l exp

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san

d co

mm

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,120

72

,059

79

,344

10

8,31

6 31

,100

3,

416

414,

907

301,5

04

200,

422

62,9

87

65,7

33

141,9

88

84,12

7 1,5

94,0

23

Und

erw

ritin

g p

rofit

/(lo

ss)

tran

sfer

red

to P

& L

acc

ount

- 20

17 (2

6,94

0)

35,2

59

23,8

35

31,12

7 35

,643

(2

,115)

(10

0,90

8)97

,464

(1

9,37

7)87

,075

31

,755

68

,890

34

,457

29

6,16

5

Key

ratio

s:

Loss

ratio

(net

claim

s inc

urre

d / n

et

earn

ed p

rem

ium

)98

20

33

11

14

(4)

68

44

24

67

33

33

50

41

Com

miss

ions

ratio

(com

miss

ions

pa

yabl

e / g

ross

pre

miu

m w

ritte

n)14

17

16

10

13

12

9

10

18

8 12

19

8

11

Expe

nses

ratio

(man

agem

ent

expe

nses

/ gr

oss w

ritte

n pr

emiu

m)

8

33

12

23

15

8

31

32

57

14

30

25

18

21

The

Her

itage

Insu

ranc

e Co

mpa

ny K

enya

Lim

ited

Annu

al R

epor

t and

Fin

anci

al S

tate

men

ts 2

017

101

Clas

s of

insu

ranc

e Bu

sines

sEn

gine

erin

gFi

reD

omes

ticFi

reIn

dust

rial

Liab

ility

Mar

ine

Avia

tion

Mot

or

Priv

ate

Mot

or

Com

mer

-ci

alPe

rson

al

Acci

dent

Med

ical

Thef

tW

.C.A

Misc

ella

-ne

ous

2017

Shs ‘

00

0Sh

s '0

00

Shs '

00

0Sh

s '0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs '

00

0To

tal

Gros

s pre

miu

ms w

ritte

n31

2,160

16

3,433

1,5

47,4

80

446

,257

14

0,01

9 15

,287

1,0

07,12

1 8

12,2

83

386

,770

1,7

61,10

3 12

6,42

2 3

91,6

74

511,

981

7,621

,990

Chan

ge in

gro

ss U

PR (2

1,915

)(5

,451

) 15

,810

(5

,767)

(5,79

6)(11

,450

)(2

7,105

) 3

7,885

18

,313

(14

7,150

)(3

,249

) 16

,218

3

6,99

1 (10

2,666

)

Less

: rei

nsur

ance

pay

able

233,0

56

27,5

24

1,396

,686

2

75,78

6 6

6,42

6 3

,726

57,8

55

65,

278

64,

698

1,266

,101

8,4

12

29,

787

266

,757

3,762

,092

Net

ear

ned

prem

ium

s57

,189

130,

458

166,

604

164,

704

67,7

97

111

922

,161

784,

890

3

40,3

85

347

,852

11

4,76

1 3

78,10

5 2

82,2

15

3,75

7,232

Gros

s clai

ms p

aid24

0,29

8 3

4,69

6 4

79,5

08

23,4

59

60,

177

- 5

60,4

36

354

,644

13

5,024

1,0

04,2

34

24,

628

75,1

71

299

,718

3,

291,9

93

Chan

ge in

gro

ss o

/s cl

aims

48,5

46

13,8

87

(94,

805)

6,5

27

6,7

77

4,2

75

79,

769

22,0

48

3,4

97

(100,

767)

(17,6

61)

40,

608

24,

673

37,3

74

Less

: Rei

nsur

ance

reco

vera

ble

258,

607

(513

) 3

37,3

15

29,

600

40,

148

4,0

55

27,8

80

21,8

23

63,

342

706,

731

(2,0

36)

(1,88

1) 17

2,58

2 1,6

57,6

53

Net

clai

ms i

ncur

red

30,2

37

49,0

96

47,3

88

386

26

,80

6 2

20

612

,325

3

54,8

69

75,17

9 19

6,73

6 9,

003

11

7,660

15

1,912

1,6

71,8

17

Com

miss

ions

rece

ivabl

e (4

0,73

3)(3

,623

)(2

40,19

2)(3

6,53

0)(11

,674

)(3

,680

)(9

,039

)(5

,196)

(15,9

97)

(370

,827

) (5

44)

(5,2

84)

(33,6

23)

(776

,942

)

Com

miss

ions

pay

able

36,7

25

25,

564

208

,004

4

2,85

7 19

,318

1,4

88

91,8

80

83,9

54

73,

553

128,

034

18,79

2 8

0,44

3 5

2,977

8

63,5

89

Expe

nses

of m

anag

emen

t 25

,027

9

1,509

10

8,66

8 8

6,10

8 17

,602

7,

987

336

,566

2

06,3

90

175,6

14

266

,990

4

1,477

7

2,467

7

9,46

8 1,5

15,8

73

Tota

l exp

ense

s and

co

mm

issio

ns21

,019

11

3,45

0

76,4

80

92,4

35

25,2

46

5,79

5 4

19,4

07

285

,148

233

,170

24

,197

59,7

25

147,6

26

98,8

22

1,60

2,52

0

Und

erw

ritin

g pr

ofit/

(loss

)

tran

sfer

red

to P

& L

acc

ount

- 20

165,

933

(32,

088

)42

,736

71

,883

15

,745

(5

,90

4)(1

09,

571)

144,

873

32,0

36

126,

919

46,0

33

112,

819

31,4

81

482,

895

Key

ratio

s:

Loss

ratio

(net

claim

s inc

urre

d / n

et

earn

ed p

rem

ium

)53

38

28

0

40

198

66

45

22

57

8 31

54

41

Com

miss

ions

ratio

(com

miss

ions

pa

yabl

e / g

ross

pre

miu

m w

ritte

n)12

16

13

10

14

10

9

10

19

7 15

21

10

11

Expe

nses

ratio

(man

agem

ent

expe

nses

/ gr

oss w

ritte

n pr

emiu

m)

8 56

7

19

13

52

33

25

45

15

33

19

16

20

FIN

AN

CIA

L ST

ATEM

ENTS

20

17

SUPP

LEM

ENTA

RY IN

FORM

ATIO

NCO

NSO

LID

ATED

SH

ORT

TER

M IN

SURA

NCE

BU

SIN

ESS

REV

ENU

E AC

COU

NT

– 20

16

102

The

Her

itage

Insu

ranc

e Co

mpa

ny K

enya

Lim

ited

Annu

al R

epor

t and

Fin

anci

al S

tate

men

ts 2

017

Clas

s of

insu

ranc

e Bu

sines

sEn

gine

erin

gFi

reD

omes

ticFi

reIn

dust

rial

Liab

ility

Mar

ine

Avia

tion

Mot

or

Priv

ate

Mot

or

Com

mer

-ci

alPe

rson

al

Acci

dent

Med

ical

Thef

tW

.C.A

Misc

ella

-ne

ous

2017

Shs ‘

00

0Sh

s '0

00

Shs '

00

0Sh

s '0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs '

00

0To

tal

Gros

s pre

miu

ms w

ritte

n42

7,536

16

1,957

48

4,88

9 20

6,65

8 117

,208

72

,414

86

0,13

0 60

2,697

22

0,68

4 1,9

92,4

57

141,6

91

326,

458

328,

318

5,943

,097

Chan

ge in

gro

ss U

PR (2

27,9

77)

(1,9

80)

42,75

0 (7

,532

)(14

,395

)(13

,517

) (3

1,421

)18

,737

9,88

1 (8

5,468

)19

7 4,

579

(30,

728)

(336

,874

)

Less

: rei

nsur

ance

pay

able

156,

945

25,8

36

405,7

63

80,11

3 32

,577

57

,651

28

,697

19

,756

46,2

04

1,451

,088

2,

718

22,9

43

177,9

31

2,50

8,22

2

Net

ear

ned

prem

ium

s42

,614

13

4,14

1 12

1,876

11

9,01

3 70

,236

1,2

46

800,

012

60

1,678

18

4,36

1 45

5,90

1 13

9,17

0

308,

094

11

9,66

1 3,

098

,00

1

Gros

s clai

ms p

aid56

,197

42,4

90

112,0

61

6,22

2 49

,200

-

495,1

94

280,

344

77,0

70

1,250

,053

52

,646

75

,762

79,16

5 2,

576,

404

Chan

ge in

gro

ss o

/s cl

aims

340

(15,7

14)

(15,

549)

23,2

75

1,483

2,

506

77,9

44

19,74

2 (2

2,914

)22

,564

9,

814

23,6

44

7,235

13

4,37

0

Less

: Rei

nsur

ance

reco

vera

ble

6,26

3 (4

7)71

,801

13

,646

42

,875

2,

561

1,987

21

,303

9,

213

966,

778

12,2

69

241

60,5

24

1,209

,414

Net

clai

ms i

ncur

red

50,2

74

26,8

23

24,7

11

15,8

51

7,80

8 (5

5)57

1,151

27

8,78

3 44

,943

30

5,83

9 50

,191

99,16

5 25

,876

1,5

01,3

60

Com

miss

ions

rece

ivabl

e (7

8,12

4) (8

,507

) (1

01,3

40)

(16,

887)

(5,4

67)

(11,1

18)

(3,3

44)

(1,70

8) (1

3,460

) (3

70,79

9)57

6 (4

,341

) (3

3,957

) (6

48,4

76)

Com

miss

ions

pay

able

64,2

67

27,3

96

87,8

17

31,12

9 16

,455

8,

853

77,0

46

60,2

84

40,5

62

157,6

06

17,12

4 61

,410

24

,422

67

4,37

1

Expe

nses

of m

anag

emen

t 40

,955

53

,170

112,8

16

58,5

56

22,9

82

5,681

23

3,637

72

,573

14

8,92

2 27

6,18

0 44

,045

82

,559

54

,675

1,3

06,75

1

Tota

l exp

ense

s and

co

mm

issio

ns27

,098

72

,059

99

,293

72

,798

33

,970

3,

416

307,

339

231,1

49

176,

024

62

,987

61

,745

13

9,62

8 45

,140

1,3

32,6

46

Und

erw

ritin

g pr

ofit/

(loss

)

tran

sfer

red

to P

& L

acc

ount

- 20

17 (3

4,75

8)35

,259

(2

,128)

30,3

64

28,4

58

(2,11

5) (7

8,47

8)91

,746

(3

6,60

6)87

,075

27

,234

69

,30

1 48

,643

26

3,99

5

Key

ratio

s:

Loss

ratio

(net

claim

s inc

urre

d / n

et

earn

ed p

rem

ium

)118

20

20

13

11

(4)

71

46

24

67

36

32

22

48

Com

miss

ions

ratio

(com

miss

ions

pa

yabl

e / g

ross

pre

miu

m w

ritte

n)15

17

18

15

14

12

9

10

18

8 12

19

7

11

Expe

nses

ratio

(man

agem

ent

expe

nses

/ gr

oss w

ritte

n pr

emiu

m)

10

33

23

28

20

8 27

29

67

14

31

25

17

22

FIN

AN

CIA

L ST

ATEM

ENTS

20

17

SUPP

LEM

ENTA

RY IN

FORM

ATIO

NCO

MPA

NY

SHO

RT T

ERM

INSU

RAN

CE B

USI

NES

S RE

VEN

UE

ACCO

UN

T – 2

017

The

Her

itage

Insu

ranc

e Co

mpa

ny K

enya

Lim

ited

Annu

al R

epor

t and

Fin

anci

al S

tate

men

ts 2

017

103

Clas

s of

insu

ranc

e Bu

sines

sEn

gine

erin

gFi

reD

omes

ticFi

reIn

dust

rial

Liab

ility

Mar

ine

Avia

tion

Mot

or

Priv

ate

Mot

or

Com

mer

-ci

alPe

rson

al

Acci

dent

Med

ical

Thef

tW

.C.A

Misc

ella

-ne

ous

2017

Shs ‘

00

0Sh

s '0

00

Shs '

00

0Sh

s '0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs ‘

00

0Sh

s ‘0

00

Shs '

00

0To

tal

Gros

s pre

miu

ms w

ritte

n13

6,68

5 16

3,433

54

3,698

21

0,32

6 64

,541

15

,287

76

7,789

65

5,34

4 31

5,028

1,7

61,10

3 10

9,40

5 36

1,214

23

6,32

9 5,

340,

182

Chan

ge in

gro

ss U

PR (2

5,101

) (5

,451

) (1

0,38

9) (1

1,182

)3,4

06

(11,4

50)

(33,7

00)

40,16

7 14

,177

(147

,150)

183

10,9

45

41,4

55

(134

,090

)

Less

: rei

nsur

ance

pay

able

67,5

73

27,5

24

403,8

60

72,3

08

9,35

8 3,7

26

15,2

64

37,11

9 47

,711

1,266

,101

2,433

25

,930

16

4,76

0 2,1

43,6

67

Net

ear

ned

prem

ium

s44

,011

13

0,45

8 12

9,44

9 12

6,83

6 58

,589

11

1 71

8,82

5 65

8,39

2 28

1,494

34

7,852

10

7,155

34

6,22

9 11

3,02

4 3,

062

,425

Gros

s clai

ms p

aid10

9,21

2 34

,696

18

1,492

7,2

60

52,6

98

- 44

1,428

32

3,128

111

,387

1,0

04,2

34

13,8

19

74,6

27

129,

396

2,483

,377

Chan

ge in

gro

ss o

/s cl

aims

25,4

34

13,8

87

11,21

2 1,0

25

6,47

3 4,

275

69,2

08

13,2

55

1,745

(1

00,76

7) (1

9,73

3)41

,555

35

,183

102,

752

Less

: Rei

nsur

ance

reco

vera

ble

122,

315

(513

)15

2,169

11,

046

35,79

8 4,

055

12,5

69

16,9

04

53,9

80

706,

731

(7,0

67)

245

122,

595

1,230

,827

Net

clai

ms i

ncur

red

12,3

31

49,0

96

40,5

35

(2,7

61)

23,3

73

220

49

8,0

67

319,

479

59,15

2 19

6,73

6 1,1

53

115,

937

41,9

84

1,355

,302

Com

miss

ions

rece

ivabl

e (1

6,15

7) (3

,623

) (1

15,6

67)

(16,

291)

(967

) (3

,680

) (3

,529

) (1

,667

) (1

3,478

) (3

70,8

27)

- (4

,660

) (1

9,78

7) (5

70,3

33)

Com

miss

ions

pay

able

17,4

99

25,5

64

109,

024

30,9

77

11,88

5 1,4

88

67,0

63

68,8

15

62,11

6 12

8,03

4 16

,918

74

,593

20

,059

63

4,03

5

Expe

nses

of m

anag

emen

t19

,408

91

,509

92

,414

53

,839

13

,032

7,9

87

233,

263

148,

616

164,

983

266,

990

39,0

64

67,8

33

40,3

29

1,239

,267

Tota

l exp

ense

san

d co

mm

issio

ns20

,750

11

3,45

0

85,7

71

68,5

25

23,9

50

5,79

5 29

6,79

7 21

5,76

4 21

3,62

1 24

,197

55,9

82

137,7

66

40,6

01

1,30

2,96

9

Und

erw

ritin

g pr

ofit/

(loss

)

tran

sfer

red

to P

& L

acc

ount

- 20

1610

,930

(3

2,0

88)

3,14

3 61

,072

11

,266

(5

,90

4) (7

6,03

9)12

3,14

9 8,

721

126,

919

50,0

20

92,5

26

30,4

39

404,

154

Key

ratio

s:

Loss

ratio

(net

claim

s inc

urre

d / n

et

earn

ed p

rem

ium

)28

3831

(2)

4019

869

4921

571

3337

44

Com

miss

ions

ratio

(com

miss

ions

pa

yabl

e / g

ross

pre

miu

m w

ritte

n)13

1620

1518

109

1120

715

218

12

Expe

nses

ratio

(man

agem

ent

expe

nses

/ gr

oss w

ritte

n pr

emiu

m)

1456

1726

2052

3023

5215

3619

1723

FIN

AN

CIA

L ST

ATEM

ENTS

20

17

SUPP

LEM

ENTA

RY IN

FORM

ATIO

NCO

MPA

NY

SHO

RT T

ERM

INSU

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DOMESTIC PACKAGE

because we believe in protecting you against burglary

THE HERITAGE INSURANCE COMPANY TANZANIA LIMITEDAbridged Annual Report And Financial StatementsFor The Year Ended 31 December 2017

The directors of the Company at the date of this report, all of whom have served since 1 January 2017, are shown on page 109.

COMPANY SECRETARY

Gemma MoshyP.O.Box 78196Dar es Salaam

SENIOR MANAGEMENT

N. Shanmugarajan - Chief Executive OfficerPuneet Jain (ACA, ACS) - - Chief Financial Officer (Resigned on 30th June 2017)Thecla Magashi ( CPA (T),MBA - Chief Financial Officer (Joined on 1st May 2017)Gilliard Mardai ( ADI) - Joined 1st October 2017

INDEPENDENT AUDITORS

KPMG11th Floor, PPF Tower, Ohio StreetGarden AvenueP.O. Box 1160,Dar es Salaam

REGISTERED OFFICE

4th Floor Masaki IkonBains Avenue- Msasani Peninsula P.O. Box 7390, Dar es SalaamTanzania

PRINCIPAL BANKERS

Citibank Tanzania Limited36 Upanga RoadP.O. Box 71625, Dar es Salaam,Tanzania

CORPORATE INFORMATION

TANZANIA

The Exim Bank Tanzania LimitedExim Tower 1404/45 Ghana AvenueP.O. Box 1431, Dar es SalaamTanzania

STANBIC BANK

Plot no. 99A,Cnr Kinondoni Road & Ali Hassan Mwinyi RoadP.O. Box 72647, Dar es SalaamTanzania

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I am delighted to present the results of The Heritage Insurance Company Tanzania Limited for the 12 months ended 31 December 2017. We continue to differentiate ourselves in capital strength and the resulting financial flexibility; this gives our clients and other business partners peace of mind whilst we endeavor to build our culture of sustainable progress & reliability at the same time, maintaining our position as the insurer of choice.

OVERVIEW

Tanzania has sustained a relatively high economic growth over the last decade, averaging 6%–7% a year. Tanzania’s economy has been expanding rapidly, putting it close to the top of the fastest growing economies in Sub-Saharan Africa. World Bank had predicted a growth rate of 7% in 2017. The trend is expected to be maintained in 2018.

The government continues to cut its spending and putting aggressive measures to ensure that a tax payment culture is cultivated amongst all eligible Tanzanians. These measures aim to ensure that the government has adequate financial resources which will have a positive effect on the economy in the medium to long term.

In 2016, the insurance market grew by 7% compared to the target of 18%. The growth aligned to the reported growth in GDP. In 2017, the general insurance market is expected to have grown in line with the economic growth as well. In 2018, the general insurance market is expected to grow in double digit based on the historical trend.

2018 is promising to be a year of economic opportunities due to various large investments/project being undertaken by the Government, namely; construction of flyovers, standard – gauge railway project, completion of Terminal III at the JNIA, Uganda – Tanzania crude oil pipeline etc. The insurance industry is positioning itself to offer various insurance products to the market.

PERFORMANCE REVIEW

The gross written premium decreased by 26% over the previous year primarily due to regulatory changes, loss of large corporate clients and other market conditions. The net earned premium decreased by 19% over 2016.

During the year, the Company had a reasonable claims experience and recorded an overall net claims ratio of 47% (net claims over net earned premium) in line with the budget and previous year loss. Operating expenses remained marginally higher at 17% compared to the international benchmark of 10% of gross written premium. The Company continues to focus on prudently reducing the cost base and on improving the operational cost ratios.

Interest & dividend incomes at Tshs 2,089 million were 6% higher than the previous year due mainly to increase in bank deposits from Tshs 19,680 million to Tshs 24,234 million. Fair value gain on investment was Tshs 293 million compared to a loss of Tshs 587 million in 2016. Unrealized exchange loss of TZS 22 million and realized exchange gains of TZS 417 million have also been recorded as at the end of December 2017.

The underwriting profit decreased by 51% to TShs 696.8 million in 2017 from TShs 1,409 million in 2016. The profit before tax at TShs 1,677 million is 23% lower compared with profit before tax of TShs 4,331 million in 2016. Besides the drop in business at the top line, the bottom line results were significantly affected by a one off bad debt provision of a disputed claim recovery worth Tshs 1,189 million. During the year, the company paid an interim dividend of Tshs 4 billion.

With total assets of Tshs 56.6 billion and a strong relationship with reputable reinsurers the Company remains both strong and dynamic.

CHAIRMAN’S STATEMENT

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FUTURE OUTLOOK The Company strives to ensure success for the benefits of all of our stakeholders by providing efficient service to its loyal clients and enhancing shareholders’ value. Early this year we opened a Customer Service Point (CSP) conveniently located at Haidery Plaza in the city centre. In November 2017, the Company’s registered office was relocated to a new office in Msasani Peninsular and this has improved the work environment and clients service delivery.

The Company will continue to focus on its core market segment of large corporate clients alongside making concerted efforts to develop and strengthen business relationships with Tier II, Tier III brokers and retail channel partners to broaden its client base. The positive impact of various government projects and the focus on industrialization will have a positive impact to the Company. The Company is expecting to derive substantial growth from Aviation, Engineering, Marine business segments and other retail business especially motor segment.

The success of our business derives from our stakeholders – Employees, Clients, Brokers, Agents, Reinsurers, Business partners, Regulators and Shareholders. I would like to sincerely extend my appreciation to all our stakeholders for their continued support. Particularly to staff I record the Board recognition for the valuable contribution and for commitments to the values and ideals that Heritage represents. To our esteemed clients, we remain grateful for your support.

ACKNOWLEDGEMENTS

The Board acknowledges the support and guidance provided by the Commissioner of Insurance and his team to the Company. The Company will continue to live and promote a culture of prudent business underwriting.

Lastly, I take this opportunity to thanking my fellow directors for their valuable support, guidance, vision and the intellect they bring to the Board.

YOGESH M. MANEK DATECHAIRMAN

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1. The directors submit their report together with the audited financial statements for the year ended 31 December 2017, which disclose the state of affairs of The Heritage Insurance Company Tanzania Limited (“the Company”).

2 INCORPORATION The Company is incorporated in Tanzania under the Companies Act as a limited liability company.

3 VISION

Our vision is to be the obvious and preferred choice of risk partner for buyers, intermediaries and reinsurers, and the point of reference for the Tanzania insurance industry.

4 MISSION

Our mission is to maintain a viable and sustainable risk transfer enterprise that maximizes returns for key stakeholder groups – our shareholders, business partners and staff.

5 PRINCIPAL ACTIVITIES

The Company is registered for general insurance business, which is its principal activity.

6 COMPOSITION OF THE BOARD OF DIRECTORS

The directors of the Company at the date of this report and who have served since 1 January 2017, except where otherwise stated, are:

Name Position Nationality Age Yogesh M. Manek Chairman Tanzanian 63 Nanalal L. Chohan Director Tanzanian 70 Michael L. du Toit Director South African 56 Juma V. Mwapachu Director Tanzanian 75 Peter N. Gethi Director Kenyan 52 Godfrey Kioi Director Kenyan 53 Ravi Singh Director South African 41

7 COMPANY SECRETARY

The Company’s Secretary as at the date of the report was Mrs. Gemma Moshy.

8 CORPORATE GOVERNANCE

The Board of Directors consists of 7 directors and 1 alternate director. None of the directors hold executive positions. The Board of Directors consists of 7 directors. None of the directors hold executive positions in the Company. The Board takes overall responsibility for the Company, including responsibility for identifying key risk areas, considering and monitoring investment decisions, considering significant financial matters, and reviewing the performance of management business plans and budgets. The Board is also responsible for ensuring that a comprehensive system of internal control policies and procedures is operative, and for compliance with sound corporate governance principles.

DIRECTOR’S REPORT

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The Board is required to meet at least four times a year. The Board delegates the day to day management of the business to the Chief Executive Officer assisted by the Management Team. The Management Team is invited to attend board meetings and facilitate the effective control of the Company’s operational activities, acting as a medium of communication and coordination between the various departments.

The Company is committed to the principles of effective corporate governance. The Directors also recognize the importance of integrity, transparency and accountability. During the year, the Board had the following sub-committees to ensure a high standard of corporate governance throughout the Company.

BOARD AUDIT AND RISK COMMITTEE

No. Name Position 1 Ravi Singh Chairman 2 Geetha Sivakumar Member 3 Michael L. du Toit Member 4 Peter N. Gethi Member

BOARD INVESTMENT COMMITTEE

No. Name Position 1 Yogesh M. Manek Chairman 2 Michael L. du Toit Member 3 Geetha Sivakumar Member

BOARD HUMAN RESOURCES AND REMUNERATION COMMITTEE

No. Name Position 1 Juma V. Mwapachu Chairman 2 Yogesh M. Manek Member 3 Godfrey Kioi Member

9 RISK MANAGEMENT AND INTERNAL CONTROL

The Board accepts final responsibility for the risk management and internal control systems of the Company. It is the task of management to ensure that adequate internal financial and operational control systems are developed and maintained on an ongoing basis in order to provide reasonable assurance regarding:

• The effectiveness and efficiency of operations; • The safeguarding of the Company’s assets; • Compliance with applicable laws and regulations; • The reliability of accounting records; • Business sustainability under normal as well as adverse conditions, and • Responsible behaviours towards all stakeholders.

The efficiency of any internal control system is dependent on the strict observance of prescribed measures. There is always a risk of non-compliance with such measures by staff. Whilst no system of internal control can provide absolute assurance against misstatement or losses, the Company’s system is designed to provide the Board with reasonable assurance that the procedures in place are operating effectively.

The Board assessed the internal control systems throughout the financial year ended 31 December 2017 and is of the opinion that they met accepted criteria.

DIRECTOR’S REPORT (CONT’D)CORPORATE GOVERNANCE (CONT’D)

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The Board performs risk and internal control assessment through the Board Audit and Risk Committee. The efficiency of any internal control system is dependent on the strict observance of prescribed measures. There is always a risk of non-compliance with such measures by staff. Whilst no system of internal control can provide absolute assurance against misstatement or losses, the Company’s system is designed to provide the Board with reasonable assurance that the procedures in place are operating effectively.

The Board assessed the internal control systems throughout the financial year ended 31 December 2017 and is of the opinion that they met accepted criteria.

The Board performs risk and internal control assessment through the Board Audit and Risk Committee.

10 CAPITAL STRUCTURE

The Company’s capital structure for the year is shown in Note 12 to the financial statements.

11 MANAGEMENT TEAM

The management of the Company is under the Chief Executive Officer, assisted by the following:

• Chief Financial Officer; • General Manager, • Human Resources Officer and • System Administration Manager.

12 SHAREHOLDERS OF THE COMPANY

The total number of shareholders during the year 2017 is 2 (2016: 2 shareholders). One director, Mr. Yogesh M. Manek has an indirect interest of 37.44% in the shares of the Company through his shareholding in MAC Group Tanzania Limited. No other director holds shares of the Company. The shares of the Company are held as follows:

13 FUTURE DEVELOPMENT PLANS

The Company will continue to improve its profitability through the introduction of innovative products and focusing on value-added customer services while carefully managing both costs and risks. The Company will continue to focus on improving productivity and introducing new products to the market.

Based on gross premium written in the current year, the Company is one of the leading private insurance Companies in Tanzania. After deducting reinsurance premium, the Company registered net earned premium of TShs 11,979 million

(2016: TShs 14,813 million). The directors believe that the Company is well placed to consolidate its position as a leading Company in the market during the next two to three years.

DIRECTOR’S REPORT (CONT’D)RISK MANAGEMENT AND INTERNAL CONTROL (CONT’D)

Name of the Shareholder Number of Shares held in 2017

Number of Shares held in 2016

Heritage Insurance Company Kenya Limited 48,000 42,000

MAC Group Tanzania Limited 32,000 28,000

80,000 70,000

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14 PERFORMANCE FOR THE YEAR

During the year, the Company recorded a net profit after tax for the year of TShs 1,125 million (2016: TShs 2,295 million).

15 TRANSFERS TO RESERVE

An amount of TShs 336 million (2016: TShs 459 million), has been transferred from the retained earnings to a contingency reserve, in accordance with Regulation 27 (2) (b) of the Insurance Act 2009.

16 DIVIDEND

The Board of Directors approved payment of an interim dividend of TShs 4 billion (2016: TShs 3.2 billion). No final dividend is being proposed. In making the proposal the directors have taken into account the financial situation of the Company and the need for future investments.

17 RESOURCES Employees with appropriate skills and experience in running the business are a key resource available to the Company and they assist in pursuing the Company’s business objectives.

18 PRINCIPAL RISKS AND UNCERTAINTIES

The principal financial risks that may significantly affect the Company’s strategies and development are mainly insurance risk, credit risk, debt and equity market price, foreign currency exchange rate and interest rate risk. More details of the risks facing the Company are provided in Note 3 to the financial statements.

19 SERIOUS PREJUDICIAL MATTERS

In the opinion of the directors, there are no serious prejudicial matters that can affect the Company.

20 SOLVENCY

The Board of directors confirms that applicable accounting standards have been followed and that the financial statements have been prepared on a going concern basis. The Board of directors has reasonable expectations that the Company has adequate resources to continue in operational existence for the foreseeable future.

21 EMPLOYEES’ WELFARE

MANAGEMENT AND EMPLOYEES’ RELATIONSHIP

There was continued good relation between employees and management for the year 2017. There were no unresolved complaints received by management from the employees during the year. A healthy relationship continues to exist between management and staff.

The Company is an equal opportunity employer. It gives equal access to employment opportunities and ensures that the best available person is appointed to any given position free from discrimination of any kind.

TRAINING FACILITIES

During the year the Company spent TShs 20 million (2016: TShs 35 million) for staff training and related expenses in order to improve employees technical skills and hence effectiveness. Training programs have been and are continually being developed to ensure employees are adequately trained at all levels. All employees have some form of annual training to upgrade skills and enhance development.

DIRECTOR’S REPORT (CONT’D)

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MEDICAL ASSISTANCE

All members of staff and their spouses up to a maximum of four beneficiaries (dependants) for each employee were availed medical services by the Company through medical insurance.

PERSONS WITH DISABILITIES

Applications for employment by disabled persons are always considered, bearing in mind the aptitude of the applicant concerned. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Company continues and appropriate training is arranged. It is the policy of the Company that training, career development and promotion of persons with disabilities should, as far as possible, be identical to that of other employees.

EMPLOYEES BENEFIT PLAN

The Company pays contributions to publicly administered pension plan on mandatory basis which qualifies to be a defined contribution plan. The number of employees during the year was 51 (2016: 49).

22 GENDER PARITY

The Company had 51 employees, out of which 23 were female and 27 were male (2016: female 17, male 32).

23 RELATED PARTY TRANSACTIONS

All related party transactions and balances are disclosed in note 33 to these financial statements.

24 POLITICAL AND CHARITABLE DONATIONS

The Company did not make any political donations during the year. Donations made to charitable and other organizations during the year amounted to TShs 5.4 million (2016: TShs 5.4 million).

25 RELATIONSHIP WITH STAKEHOLDERS

The Company continued to maintain a good relationship with all stakeholders including the regulators.

26 CORPORATE SOCIAL RESPONSIBILITY (CSR)

The Company encourages its employees’ initiatives on participating in the CSR activities. Various activities were carried out during the year including visiting orphanage centers.

27 AUDITORS

The auditors, KPMG, have expressed their willingness to continue in office and are eligible for re-appointment. A resolution proposing reappointment of KPMG for the year ending 31 December 2018 will be put to the Annual General Meeting.

BY ORDER OF THE BOARD

Yogesh M. Manek Godfrey Kioi DATECHAIRMAN DIRECTOR

DIRECTOR’S REPORT (CONT’D)EMPLOYEES’ WELFARE (CONT’D)

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The Company’s directors are responsible for the preparation of financial statements that give a true and fair view of The Heritage Insurance Company Tanzania Limited comprising the statement of financial position as at 31 December 2017, and the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 2002.

The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management.

The directors have made an assessment of the ability of the Company to continue as going concern and have no reason to believe that the business will not be a going concern in the year ahead.

The auditors are responsible for reporting on whether the financial statements give a true and fair view in accordance with the applicable financial reporting framework.

Approval of financial statements:

The financial statements of The Heritage Insurance Company Tanzania Limited, as identified in the first paragraph, were approved by the board of directors and signed by

Yogesh M. Manek Godfrey Kioi DATECHAIRMAN DIRECTOR

STATEMENT OF DIRECTORS’ RESPONSIBILITIES


STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2017

2017 2016

TShs’000 TShs’000

Insurance premium revenue 42,858,245 49,318,132

Insurance premium ceded to reinsurers (30,878,756) (34,504,827)

Net insurance premium revenue 11,979,489 14,813,305

Investment income 2,089,714 2,006,280

Commission earned 4,032,174 4,404,896

Fair value gain/ (loss) 293,270 (587,969)

Other income 393,901 210,816

Net income 18,788,548 20,847,328

Insurance claims (16,358,446) (15,848,031)

Insurance claims recovered from reinsurers 10,737,194 9,099,908

Net insurance claims (5,621,252) (6,748,123)

Operating expenses (7,795,058) (5,861,716)

Commission expenses (3,694,687) (4,894,097)

Profit from operations 1,677,551 3,343,392

Share of profit of equity- accounted investee, net of tax - -

Profit before income tax 1,677,551 3,343,392

Taxation (552,177) (1,048,377)

Profit for the year 1,125,374 2,295,015

Other comprehensive income - -

Total comprehensive income for the year 1,125,374 2,295,015

The

Her

itage

Insu

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Lim

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Annu

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117


STATEMENT OF FINANCIALPOSITION AS AT 31 DECEMBER 2017

2017 2016

Note(s) TShs’000 TShs’000

REPRESENTED BY: Assets

Motor vehicle and equipment 13 553,161 109,974

Equity investment at fair value through profit or loss (quoted) 14 2,182,498 2,169,574

Equity investment at fair value through profit or loss (unquoted) 15 598,805 969,574

Receivables arising out of direct insurance arrangements 3 - 5,713,085

Receivables arising out of reinsurance arrangements 3 5,917,722 7,491,671

Reinsurers’ share of insurance liabilities 16 14,857,680 19,493,800

Deferred acquisition cost 17 1,206,301 1,595,126

Deferred tax asset 18 1,358,490 862,335

Income tax recoverable 225,234 513,635

Other receivables 19 256,932 197,986

Government securities at fair value through profit or loss 20 4,016,447 3,386,764

Government securities at amortized costs - 976,526

Corporate bonds at fair value through profit or loss 21 145,956 122,863

Deposits with financial institutions 22 24,234,414 19,680,419

Cash and bank balances 23 1,070,394 1,136,190

Total Assets 56,624,034 64,419,853

LIABILITIES

Insurance contract liabilities 24 13,842,659 12,794,734

Unearned premiums 25 12,152,613 19,230,359

Payables arising from reinsurance arrangements 26 5,844,269 11,449,133

Deferred acquisition income 17 1,287,236 1849,389

Creditors arising from direct insurance arrangements 838,282 -

Other payables 27 6,915,280 1,477,917

Total liabilities 40,880,339 46,801,532

EQUITY

Share capital 12 8,000,000 7,000,000

Contingency reserve 6,170,952 5,834,656

Retained earnings 1,572,743 4,783,655

Total equity and liabilities 15,743,695 17,618,321

The financial statements were approved for issue by the board of directors and signed on its behalf by:

Yogesh M. Manek Godfrey Kioi Shanmugarajan NatarajanCHAIRMAN DIRECTOR CHIEF EXECUTIVE OFFICER

118

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120

The

Her

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Lim

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Annu

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Fin

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017

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