Sagicor Financial Company Ltd. Annual Report 2005

Plain-text annual report

“A JOURNEY IS BEST MEASURED IN FRIENDS RATHER THAN IN MILES” – Tom Cahill Sagicor Financial Corporation Vision To be a great Caribbean Company committed to improving the lives of the people in the communities in which we operate. 2 Sagicor Financial Corporation Contents Board of Directors Financial Highlights Directors’ Report Chairman’s Report Management Discussion and Analysis Actuary’s Report Auditors’ Report Consolidated Balance Sheet Consolidated Income Statement Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Index of Notes to the Financial Statements Notes to the Consolidated Financial Statements Senior Management Advisors & Bankers Ofﬁ ces Notice of Annual Meeting Management Proxy Circular Shareholder Proxy 4 9 12 16 19 32 33 34 35 36 37 38 39 123 131 132 136 139 143 3 Sagicor Financial Corporation Mr. J. Arthur L. Bethell Chairman Mr. J. Arthur L. Bethell is our non-executive Chairman. He retired as President and Chief Executive Ofﬁ cer of The Mutual Group, now Sagicor, on June 30, 2002, having been appointed to that ofﬁ ce in 1995. He joined The Mutual as a sales representative in 1965 and has held the positions of Superintendent of Agencies, Sales Manager, Vice President, Marketing, and Chief Executive Ofﬁ cer of Capital Life Insurance Company Limited (Bahamas). Mr. Bethell was elected a director of The Mutual, now Sagicor Life Inc, in 1994 and is presently chairman of the subsidiary, Life of Jamaica Limited. Mr. Terrence A. Martins Vice Chairman Mr. Terrence Martins is our Deputy Chairman, with over forty years’ experience in the ﬁ nancial services industry. His areas of expertise include banking, ﬁ nance, administration, corporate governance and risk management. Mr. Martins, the former Group Chief Executive Ofﬁ cer of RBTT Financial Holdings Limited, is currently the Deputy Chairman of the DFL Caribbean Group and Chairman of the Label House Group of Companies. Mr. Martins has previously held several directorships within the RBTT Financial Holdings Group, in and outside of Trinidad and Tobago and is also a member of the Integrity Commission of Trinidad and Tobago. Mr. David W. Allan Mr. David W. Allan is a former President and Chief Executive Ofﬁ cer of The Mutual Group, now Sagicor, a position he held for 23 years. He joined the Group in 1956 and was elected director of The Mutual, now Sagicor Life Inc, in 1986. He also serves as director of various Group subsidiaries and is a director of Barbados registered exempt insurance companies. Mr. Allan is a former Barbados and West Indies cricketer. Board of Directors 4 Sagicor Financial Corporation Mr. Andrew Aleong Mr. Andrew Aleong is currently the Director, Sales and Marketing, of the Albrosco Group of Trinidad and Tobago and a director of several companies within the Albrosco Group. He has spent all of his professional career in various management positions within that group. Mr. Aleong is a past president of the Trinidad and Tobago Manufacturers’ Association. He holds an MBA from the Richard Ivey School of Business, University of Western Ontario, Canada. Prof. Hilary McD. Beckles Mrs. Marjorie Chevannes-Campbell Professor Hilary Beckles earned his PhD from Hull University, United Kingdom, in 1980, and received an Honorary Doctorate of Letters from the same university in 2003. He has served as the Head of the History Department and Dean of the Faculty of the Humanities, University of the West Indies. In 1998, he was appointed Pro-Vice-Chancellor for Undergraduate Studies, and, in 2002, the Principal of Cave Hill Campus. Professor Beckles has published widely on Caribbean economic history, cricket history and culture and higher education and serves on the editorial boards of several academic journals. He has lectured in Africa, Asia, Europe and the Americas. Mrs. Marjorie Chevannes-Campbell holds an MSc in Accounting from the University of the West Indies and is a member of the Institute of Chartered Accountants of Jamaica and of the Hospitality, Financial and Technology Professionals. She is General Manager of the Urban Development Corporation (the UDC Group), Jamaica, which is a large property owning company that manages a variety of several entities. Prior to assuming this position she worked in other positions within the UDC Group. She is a director of Life of Jamaica Limited, a subsidiary of Sagicor Financial Corporation, and also of several other private and public sector companies in Jamaica. 5 Sagicor Financial Corporation Mr. Christopher D. deCaires Mrs. Vivian-Anne L. Gittens Mr. Christopher deCaires is a Chartered Accountant and holds an MBA from Henley Management College, United Kingdom. He has over 25 years’ professional consulting and management experience in Barbados and the wider Caribbean, United Kingdom and Brazil. He is currently the principal of deCaires Associates, and his areas of expertise include corporate ﬁ nance, international taxation, ﬁ nancial management, mergers and acquisitions, information systems, organisational design and business planning. He is Chairman of the Barbados Tourism Investment Inc. and World Cup Barbados. Mr. deCaires is a former partner of Price Waterhouse, Barbados, where he was responsible for corporate ﬁ nance, business advisory, corporate secretarial and trust services. Mrs. Vivian-Anne L. Gittens, BSc (Eng), MBA, CMA, FCA, became a Director of The Mutual, now Sagicor Life Inc, in 1989. She is a Director and CEO Designate of The Nation Publishing Co. Ltd., a newspaper publishing company in Barbados. She is a former Deputy Chairman of the Fair Trading Commission in Barbados and also chaired its precursor, the Public Utilities Board, from 1994. Mrs. Gittens earned a BSc in Engineering from the University of the West Indies and an MBA from the University of Ohio, United States. Mr. Stephen D.R. McNamara Mr. Stephen D.R. McNamara is Senior Partner of McNamara & Company, Attorneys-at-Law of St. Lucia. He was elected to the board of The Mutual, now Sagicor Life Inc, in 1997. He is a former Chairman of the St. Lucia Tourist Board and is currently a Director of various subsidiaries in the Group. Board of Directors 6 Sagicor Financial Corporation Dr. Oscar W. Jordan G.C.M. Dr. Oscar W. Jordan, G.C.M., MB, ChB, FRCPE, is Consultant Physician, DCH, Diabetologist, Department of Medicine of the Queen Elizabeth Hospital, Barbados. He is Chairman of the Diabetes Foundation of Barbados and Director of Clinical Medicine in Barbados for the University of St. Georges, Grenada. A widely published and well respected physician, he is President of the Caribbean Golf Association. He became a Director of The Mutual, now Sagicor Life Inc, in 1990. Mr. William P. Lucie-Smith Mr. Dodridge D. Miller Mr. William P. Lucie-Smith earned an MA degree from Oxford University and is a Chartered Accountant. He is a retired senior partner of PricewaterhouseCoopers, Trinidad and Tobago, where he headed the Corporate Finance and Recoveries Divisions. Mr. Lucie-Smith has been a Special Advisor to the Trinidad and Tobago Government and Central Bank on divestment. He also served on the Rampersad Committee to review the Reorganisation and Rationalisation of State Enterprises of Trinidad and Tobago and the Daly Committee on Corporate Insolvency and Company Law with special reference to severance pay. Mr. Lucie-Smith is an independent consultant. Mr. Dodridge D. Miller, FCCA, MBA, LLM, with over 25 years’ experience in the ﬁ nancial services industry, was appointed President and Chief Executive Ofﬁ cer of The Mutual Group of Companies, now Sagicor, on July 1, 2002. He joined the Group in 1989 and held the positions of Treasurer and Vice President, Finance and Investments, Deputy Chief Executive Ofﬁ cer and Chief Operating Ofﬁ cer. He was elected a Director of the Group in 2001. He also chairs and is a Director of other subsidiaries. He is a Chartered Certiﬁ ed Accountant with an MBA from the University of Wales and Manchester Business School, United Kingdom and gained his LLM in Corporate and Commercial Law from the University of the West Indies. 7 “LET YOUR HOOK ALWAYS BE CAST… WHERE YOU LEAST EXPECT IT, WILL BE A FISH” – Ovid Sagicor Financial Corporation Financial Highlights SHAREHOLDER RETURNS Earnings per common share Dividends per common share: Interim Final Total Book value per common share at December 31 Market value per common share at December 31 2005 2004 52 cents 26 cents 6 cents 6 cents 12 cents $2.82 $4.30 4 cents 6 cents 10 cents $2.67 $4.35 Net income attributable to shareholders $136.6 million $67.7 million Total shareholder book value at December 31 $ 747.5 million $693.3 million Total shareholder market value at December 31 $1,141.9 million $1,131.1 million GROUP PERFORMANCE Net premium revenue Net investment income Beneﬁ ts Administrative and commission expenses Premium and corporation taxes Net income 2005 $ millions 2004 $ millions 639.2 415.4 (595.6) (309.5) (39.4) 199.6 537.5 242.9 (481.2) (239.7) (18.6) 73.0 9 Sagicor Financial Corporation Financial Highlights 10 Sagicor Financial Corporation Financial Highlights 11 Sagicor Financial Corporation Directors’ Report DIRECTORS’ INTEREST Particulars of Directors’ shareholdings in the issued capital of the Company are as follows: Director J Arthur L Bethell Terrence A Martins Andrew Aleong David W Allan Professor Hilary McD Beckles Marjorie M Chevannes-Campbell Christopher D de Caires Vivian-Anne L Gittens Dr Oscar W Jordan, GCM William P Lucie-Smith Stephen D R McNamara Dodridge D Miller SHAREHOLDING As at December 31, 2005 As at May 12, 2006 Beneﬁ cial Non Beneﬁ cial Beneﬁ cial Non Beneﬁ cial 30,000 70,000 251,833 1,705 9,579 1,087 2,378 21,295 18,381 5,000 2,011 17,612 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 30,000 70,000 252,833 1,705 9,579 1,087 2,378 21,295 18,381 5,000 2,011 500,281 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil No shareholder owns more than 5% of the capital of the Company. During 2005, 5,523,000 Series A Common Shares were issued pursuant to the acquisition by the Company’s subsidiary, Life of Jamaica Limited, of the business of Pan Caribbean Financial Services Limited and EBA Limited. This brought the total shares in issue as at December 31, 2005 to 265,552,748. At a special meeting held on December 19, 2005, Shareholders approved the establishment of a Long-Term Incentive Plan (“LTI”) for Executives and an Employee Share Ownership Plan (“ESOP”) for Employees and Advisors (“Sales Agents”) and for this purpose reserved 10% of Series A Common Shares outstanding or 26,555,274 Shares. Both Plans took effect on December 31, 2005. No shares were issued pursuant to the LTI or the ESOP as at December 31, 2005. Subsequent to year-end the Company issued 1,342,027 shares under the LTI. ANALYSIS OF SHAREHOLDING SHAREHOLDERS BY SIZE OF HOLDINGS AS AT DECEMBER 31, 2005 Number of Shareholders Percentage of Shareholders Size of Holding 1 - 1,001 - 2,501 - 5,001 - 10,001 - 1,000 2,500 5,000 10,000 25,000 25,001 - 100,000 100,001 - 1,000,000 1,000,001 and above Total 12 5,781 17,107 8,177 4,570 3,302 670 180 15 39,802 14.52 42.98 20.54 11.48 8.31 1.68 0.45 0.04 Total Shares Held 3,888,250 28,439,332 27,872,247 32,747,364 47,433,618 31,913,138 46,507,000 46,751,799 Percentage Shares Held 1.46 10.71 10.50 12.33 17.86 12.02 17.51 17.61 100.00 265,552,748 100.00 Sagicor Financial Corporation Directors’ Report NUMBER OF SHAREHOLDERS BY COUNTRY OF RESIDENCE AND BY TYPE AS AT DECEMBER 31, 2005 Country Directors, Management, Staff, Agents Companies Individuals Total Shareholders % Shareholders % Shareholders % Shareholders % Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total 44 25.44 120 69.36 5 3 1 2.89 1.73 0.58 623 172 35 38 2 71.61 19.77 4.02 4.37 0.23 16,856 43.49 17,523 44.03 12,903 33.29 13,195 33.15 7,926 20.45 7,966 20.01 230 844 0.59 2.18 271 847 0.68 2.13 173 100.00 870 100.00 38,759 100.00 39,802 100.00 NUMBER OF SHARE HELD BY COUNTRY OF RESIDENCE AND BY TYPE AS AT DECEMBER 31, 2005 Country Directors, Management, Staff, Agents Companies Individuals Total Shares % Shares % Shares % Shares % Trinidad and Tobago 733,507 46.44 53,457,787 75.63 100,936,494 52.22 155,127,788 58.42 Barbados 677,608 42.90 13,528,254 19.14 64,657,075 33.45 78,862,937 29.70 Eastern Caribbean 7,173 0.45 462,374 Other Caribbean 160,187 10.14 3,230,899 1,000 0.07 2,107 0.65 4.57 0.01 22,617,225 11.70 23,086,772 1,499,388 3,581,670 0.78 1.85 4,890,474 3,584,777 8.69 1.84 1.35 1,579,475 100.00 70,681,421 100.00 193,291,852 100.00 265,552,748 100.00 Other Total DIVIDENDS A ﬁ nal dividend of BDS 6 cents per Share, payable on May 17, 2006, was approved for the year ended December 31, 2005 to the holders of Common Shares whose names were registered on the books of the Company at the close of business on May 12, 2006. An interim dividend of BDS 6 cents per Share approved for the half year ended June 30, 2005 was paid on October 17, 2005 to the holders of Common Shares whose names were registered on the books of the Company at the close of business on October 3, 2005. The total dividend for the 2005 ﬁ nancial year amounted to BDS 12 cents per Common Share. SHARE RESTRICTIONS Shareholders have no pre-emptive rights in respect of the issue of shares. The Articles of the Company provide that, at any time during the 5-year period immediately following the date of incorporation of the Company, no person may hold, or be beneﬁ cially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than 5% of any class in the capital of the Company. The Articles provide further that, at any time after such 5-year period, no person may hold, or be beneﬁ cially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than 20% of any class in the capital of the Company unless: (i) not less than two-thirds of the directors then in ofﬁ ce approve of the same; and (ii) (iii) there is an agreement between the Company and such person restricting the transfer of such shares; the Supervisor of Insurance of Barbados (or the Supervisor’s successor regulatory authority) is satisﬁ ed that such shareholder is a ﬁ t and proper person. 13 Sagicor Financial Corporation Directors’ Report The Trinidad and Tobago Securities and Exchange Commission has issued Guidelines (“the Guidelines”) relating to the listing on the Trinidad and Tobago Stock Exchange (“the Exchange”) of demutualised companies with constrained share ownership provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares. Under the Guidelines, it is recommended that within two years of listing, such a company seek the approval of shareholders for the retention of its constrained share ownership provisions. The company may retain these provisions for a maximum period of ﬁ ve years after listing. At the expiration of the ﬁ ve-year period, the entity may retain its listing with constrained share ownership provisions only if it seeks and obtains the approval of shareholders and the Exchange. These approvals may only be granted for a further period not exceeding two years. Thereafter the entity may only continue to be listed if it removes the provisions completely. CORPORATE GOVERNANCE STATEMENT The Company’s Articles and By-Laws provide for a minimum of seven and a maximum of twelve Directors, of which only two are permitted to be Executives. Nine of the twelve Directors are considered independent of Management, while two are ex- CEO’s and one is the incumbent CEO. The By-Laws require that one-third of the Board retires annually and that the Board has the following composition: • • it must be controlled by Barbadians; and there must be at least one representative each from Trinidad & Tobago, Jamaica and the Eastern Caribbean region. The Board of Directors is mandated to develop the strategic direction and objectives, risk tolerances and policies and procedures of the Group. Speciﬁ cally, these include: • developing a competitive human resource strategy to attract and retain competent people, and to implement a code of conduct of ethical behaviour; developing an internal control environment to be applied throughout the Group, and to operate the • member companies in a safe and sound manner; and • developing a reporting process to provide the board and stakeholders more efﬁ ciently and accurately with information about the Group’s business activities, risks, ﬁ nancial condition and performance. Management is responsible for the day-to-day operations of Group. The Chairman of the Board of Directors is Mr. J. Arthur L. Bethell and the Vice-Chairman is Mr. Terrence A. Martins. The Audit and Corporate Governance Committees have been established in accordance with the By-Laws. In addition, there are other Board committees which enable the Board to review in greater depth particular areas of its mandate. The Governance Committee is independent of Management. Its members are Mr. Terrence A. Martins, Chairman, Dr. Oscar W. Jordan, G.C.M., and Mr. Stephen D.R. McNamara. The Committee’s mandate is to monitor best practices for governance worldwide, and review the Group’s governance practices to ensure they comply with the highest standards of corporate governance in areas such as the composition and size of the Board, the frequency of Board meetings, appointments to subsidiary Boards and Board committees, code of conduct and succession planning. The purpose of the Audit Committee is to assist with Board oversight of the integrity of the Group’s ﬁ nancial reporting, the Group’s compliance with legal and regulatory requirements, the Independent Auditor’s qualiﬁ cations and independence and the systems of internal controls, including the internal audit functions and the audit process. The Committee is independent of Management and its members are Mrs. Vivian-Anne L. Gittens, Chairman, Mr. David W. Allan and Mr. William P. Lucie- Smith. The role of the Human Resource Committee is to approve, review and exercise oversight responsibility over Sagicor’s Human Resource principles, policies and practices, including recruitment, compensation, beneﬁ ts and incentive and equity- based plans. The Committee comprises Mr. Terrence A. Martins, Chairman, Mrs. Vivian-Anne L. Gittens and Mr. Christopher D. deCaires. The mandate of the Investment Committee is to oversee the investing of excess funds and clients’ investment funds that will provide both short and long-term returns that meet the reasonable investment expectations of policyholders, clients, pensioners and other investors while maintaining portfolio risks within acceptable limits. The Committee members are Mr. Terrence A. Martins, Chairman, Messrs. David W. Allan, J. Arthur L. Bethell, William P. Lucie-Smith, Stephen D.R. McNamara, Dodridge D. Miller and Dr. M. Patricia Downes-Grant. 14 Sagicor Financial Corporation Directors’ Report During 2005, Directors’ record of attendance was as follows: Director Arthur Bethell Terrence Martins Andrew Aleong David Allan Professor Hilary Beckles Marjorie Chevannes-Campbell Christopher deCaires Vivian-Anne Gittens Dr Oscar Jordan, GCM William Lucie-Smith Stephen McNamara Dodridge Miller Board Meetings Attended 10 of 10 9 of 10 3 of 4 9 of 10 3 of 4 4 of 4 3 of 4 9 of 10 9 of 10 4 of 4 9 of 10 9 of 10 Audit Committee Meetings Attended Corporate Governance Committee Meetings Attended Human Resource Committee Meetings Attended Investments Committee Meetings Attended N/A 4 of 4 N/A N/A N/A N/A 2 of 3 6 of 7 N/A 3 of 3 N/A N/A N/A 1 of 1 N/A N/A N/A N/A N/A N/A 4 of 4 N/A 4 of 4 N/A 3 of 3 3 of 3 N/A 3 of 3 N/A N/A N/A N/A N/A N/A N/A N/A N/A 1 of 1 N/A N/A N/A N/A N/A N/A N/A N/A 0 of 1 1 of 1 Notes on changes to Board and Board Committees during the year: 1 Mr. Aleong, Professor Beckles, Mrs. Chevannes-Campbell, Mr. deCaires and Mr. Lucie Smith were elected Directors on June 24, 2005. 2 Mr. Martins ceased to be a member of the Audit Committee on August 24, 2005. 3 Messrs. deCaires and Lucie-Smith were appointed to the Audit Committee on August 24, 2005. 4 Mr. Martins was appointed a member of the Corporate Governance Committee on August 24, 2005. 5 Mr. deCaires ceased to be a member of the Audit Committee on October 26, 2005. 6 Mrs. Gittens and Mr. deCaires were appointed members of the Human Resource Committee on October 26, 2005. 7 Messrs. Allan, Bethell and Lucie-Smith were appointed members of the Investment Committee on October 26, 2005. 8 Mr. Allan was appointed a member of the Audit Committee on November 23, 2005. AUDITORS The incumbent Auditors, PricewaterhouseCoopers, offer themselves for re-appointment for the ensuing year. By Order of the Board of Directors Sandra Osborne Corporate Secretary May 15, 2006. 15 Sagicor Financial Corporation Chairman’s Report Mr. J. Arthur L. Bethell Chairman Dear Shareholders, I have the distinct pleasure of reporting to you for the ﬁ rst time in your Annual Report as your Chairman of the Sagicor Group of Companies. You may recall that in my review of our ﬁ nancial results for the nine months ended September 30, 2005, I indicated that 2005 was already proving to be an historic year in terms of our ﬁ nancial performance. I am pleased to conﬁ rm that the Sagicor Group of Companies enjoyed an exceptional year and recorded its highest proﬁ t ever. Net Income for the year, Bds $199.6 million, was an increase of 173% over Bds $73.0 million for 2004. The Group’s Total Revenue for the year, Bds $1.2 billion, was increased by 40.6% over that of 2004. Our Revenue beneﬁ ted from an unusual gain arising from the dilution of our equity interest in Life of Jamaica Limited on the acquisition of Pan Caribbean Financial Services Limited. Prior to that acquisition, our interest amounted to 78%, while it amounted to 60% after the acquisition. The unusual gain ﬂ owed directly through to Net Income for the year and contributed to our good performance. Your Board of Directors has approved a ﬁ nal dividend of Bds 6 cents per share, bringing the total dividend payable for the 2005 ﬁ nancial year to Bds 12 cents per share. Once again, A.M. Best has afﬁ rmed the ﬁ nancial strength rating of “A” (Excellent) and issuer credit rating (ICR) of “A” for Sagicor Life Inc, and its wholly-owned subsidiary, Sagicor Capital Life Insurance Company Limited (Bahamas). Following the acquisition in September of American Founders Life Insurance Company, now Sagicor Life Insurance Company, that company’s rating was increased by A.M. Best to “B++” (Very Good) and we expect that this rating will continue to improve. For the ﬁ rst time, A.M. Best has assigned a ﬁ nancial strength rating of “A” (Excellent) and an ICR of “A” to Life of Jamaica Limited (Jamaica), a majority-owned subsidiary of Sagicor Life Inc. After the end of this ﬁ nancial year, our Group applied to Standard and Poor’s (S&P) for a ﬁ nancial strength rating. We are pleased to report that S&P gave Sagicor Life Inc, our principal operating company, a ﬁ nancial strength rating of “BBB+”. This is an excellent rating and demonstrates the ﬁ nancial strength and operating capability of the Sagicor Group. Concurrently, Standard and Poor’s has assigned a debt rating of “BBB” for up to USD150 million of senior unsecured notes issued by Sagicor Finance Limited, a subsidiary of Sagicor Financial Corporation. 16 Sagicor Financial Corporation Chairman’s Report We continue to execute on our business strategy of streamlining our existing operations, expanding into new geographic markets and into new product markets, and we believe that this strategy continues to drive our exceptional results. During the year, our Group made ﬁ ve acquisitions. These included a majority interest in Pan Caribbean Financial Services Limited and certain insurance businesses of First Life Insurance Company, both of which are in Jamaica. These acquisitions are strategic to the Group’s operation in Jamaica, and are expected to contribute signiﬁ cantly to the future performance of the Sagicor Group. The more important aspect of these acquisitions is that they are in keeping with our strategy to expand globally by seeking opportunities for further consolidation within the region. While these acquisitions are indeed signiﬁ cant, on September 30, 2005 our Group made an historic entry into the US ﬁ nancial services market through the acquisition of 100% of Laurel Life Insurance Company and its wholly owned subsidiary American Founders Life Insurance Company (AFL), now re-branded Sagicor Life Insurance Company. Through this acquisition, Sagicor now has licences to operate in 41 states and the District of Columbia. In addition, Sagicor Life Insurance has licences to operate as a Reinsurer and as a Third Party Administrator. We are conﬁ dent that this strategic acquisition will facilitate the growth and development of Sagicor in the USA. We also acquired a controlling interest in Cayman General Insurance Company Limited. At the end of the ﬁ nancial year we acquired a 20% interest in FamGuard Corporation Limited, the parent company of leading Bahamian insurance provider Family Guardian Insurance Company Limited. This acquisition is in keeping with our strategy of geographic expansion, and gives the Sagicor Group a stronger position in the lucrative Bahamian ﬁ nancial services market. As a consequence, Sagicor will be one step closer to becoming a truly borderless company. By borderless, I mean that while we view ourselves as originating in the Caribbean, with the vision to becoming a great Caribbean company, we are at the same time committed to building a Company that is global in scope and operations. For us at Sagicor, a company is acquired because it offers us an opportunity to achieve our stated objectives in fulﬁ lment of our Vision. This is achieved through a careful blending of people, systems and procedures with those already existing within our Group. The intention is not to dominate, but to create a larger more focused group of talented individuals with the skills, systems and resources to move our Sagicor family forward. Again and again we have demonstrated this with the many companies that have joined our Group over the years, and we, like them, have beneﬁ ted from this approach. Using this philosophy over the years, our acquisitions have brought us closer to achieving our goal of a company that is global in scope and operations and at the same time, spurred our company’s diversity, capabilities and growth. Even as we consciously set out to build a world-class organisation that is global in scope and operation, we recognise that Sagicor is now part of a new ﬁ nancial services environment which demands a market driven approach to business. We will therefore continue our commitment to creating value for our Shareholders, Policyholders, Customers, Employees and Advisors. We will continue to measure that value when a shareholder continues to receive increasing dividends over the years; when a family can achieve their ﬁ nancial goals; when a couple can enjoy retirement free of ﬁ nancial worry; when our Employees and Financial Advisors experience the highest quality of work life throughout our entire organisation. 17 Sagicor Financial Corporation Chairman’s Report One of the hallmarks of Sagicor is the many wise sayings and quotations, which form part of our new brand. In keeping with this tradition I wish to quote some famous lines from Shakespeare’s Julius Caesar. “There is a tide in the affairs of men, which taken at the ﬂ ood, leads on to fortune. On such a full sea we are now aﬂ oat, and we must take the current when it serves, or lose our ventures”. This quotation appropriately describes where we are at this stage of our journey to becoming a great Caribbean company. I also see it as a challenge to all of us to celebrate our achievements to date and at the same time, continue to maximise every opportunity to propel the Sagicor Group into the premiere position in the ﬁ nancial services industry in the Caribbean and a world class organisation in the global arena. I would like to thank my fellow Board members for the unstinting support and cooperation they have given during the start of my tenure as Chairman. On their behalf and that of the Executive Management, Staff and Advisors, I would like to place on record our thanks to Mr. Colin Goddard, former Chairman, and Mr. Krishna Narinesingh, former Vice Chairman, for their sterling service to the Sagicor Group. It was under their incumbency that we made the momentous change from a mutual to a publicly held company and thus the foundation for our new company, Sagicor, was laid. Mrs. Anne Gittens has advised the Board that, due to work commitments, she will not be seeking re- election at the forthcoming Annual Meeting. I wish to place on record the Board’s and Management’s appreciation of Mrs. Gittens’ service to our organisation over the last 17 years. She was the ﬁ rst female to serve as a director of Sagicor Life Inc and joined the Board at an important time when, as a mutual company, policyholders were demanding wider representation at the board level. Mrs. Gittens has given of her ﬁ nancial expertise and has seen the Group through its conversion from a mutual company to a publicly listed company. She has passionately shared in the vision for Sagicor’s growth and expansion. I extend our sincere thanks to her for her role at this critical time in our history, and wish her well. I also wish to place on record the Board’s thanks to the Executive Management, Staff and Advisors who have all contributed to making 2005 the most proﬁ table year of our organisation. And special thanks are also due to our Shareholders, Policyholders and Customers for their contribution to the continued development of our Company. We remain conﬁ dent about the future. J. Arthur L. Bethell Chairman 18 Sagicor Financial Corporation Management Discussion & Analysis Mr. Dodridge D. Miller President and Chief Executive Ofﬁ cer OVERVIEW Sagicor has evolved into one of the leading publicly-listed ﬁ nancial services companies in the Caribbean, with core markets in Barbados, Eastern Caribbean, Jamaica and Trinidad. 2005 was the most successful year in our 165-year history, with net earnings of Bds $199.6 million being recorded. This represents our best result and highest proﬁ t ever, and compared to Bds $73.0 million for 2004, an increase of 173%. Return on Shareholder’s Equity was 19.0% and Earnings per Share amounted to 52 cents, compared to 26 cents for the previous year. This Net Income is allocated Bds $136.6 million to Shareholders, Bds $25.5 million to Participating Policyholders and Bds $37.5 million to Minority Interest. Total Revenue of the Group for the year was Bds $1.2 billion, compared to Bds $835 million, an increase of 40.6% over 2004. We beneﬁ ted from an unusual gain arising from the dilution of our equity interest in Life of Jamaica Limited (LOJ) on the acquisition of Pan Caribbean Financial Services Limited (PCFS). Prior to that acquisition, we held 78% of LOJ, and after the acquisition, our interest was reduced to 60%. This unusual gain ﬂ owed directly through to Net Income for the year and contributed to our good performance. Beneﬁ ts amounted to Bds $595.6 million compared to Bds $481.2 million, while Total Group Expenses moved from Bds $273.9 million to Bds $354.7 million. Both our Revenue and Expenses were signiﬁ cantly inﬂ uenced by our acquisitions during the year. Net Income from Ordinary Activities amounted to Bds $223.6 million and, after deducting Income Taxes of Bds $24.0 million, produced Net Income of Bds $199.6 million. Total Assets of the Group stood at Bds $6.4 billion, compared to Bds $3.1 billion at the end of 2004. This represents an increase of 105%, again reﬂ ecting the impact of the acquisitions made during the year. Total Equity stood at Bds $993.6 million compared to Bds $759.8 million at the end of 2004, of which Bds $747.5 million represented Total Shareholders Equity (Bds $693.3 in 2004). STRATEGY In 2005 we continued to execute on our business strategy of: Expanding internationally and in the Caribbean; • • Diversifying our product offerings and cross-selling our products;- • • Continuing to improve the efﬁ ciency of our operations. Effectively using our balance sheet; and 19 Sagicor Financial Corporation Management Discussion & Analysis We intend to maintain our current market position, while building on our competitive strengths to expand our operations, improve our ﬁ nancial performance and maximise shareholder value. We attribute our position and performance to the following competitive strengths: • Dominant market position in major markets; • • • • Efﬁ cient and effective distribution network of dedicated advisors; Strong operating performance; Strong capitalisation and conservative risk proﬁ le and policies; and The signiﬁ cant experience of our management team in the insurance business. ACQUISITIONS Following our corporate reorganisation through demutualisation and raising additional capital from our initial public offering in December 2002, we now enjoy favorable liquidity and ﬁ nancial resources to support our new opportunities beyond our core Caribbean markets. Operating in a number of Caribbean markets for over 160 years, our strong market presence and historically proﬁ table operations have fueled our growth and enabled us to maintain our favorable capitalisation. In addition, we offer a broad portfolio of products which reduce a reliance on any one business segment. Our range of products and services includes life and health insurance, annuities and pensions, property and casualty insurance, asset management, investment and merchant banking, securities brokerage, mutual funds and real estate development. We operate our insurance business primarily through Sagicor Life Inc, which has insurance operations in Barbados, Trinidad and Tobago and the Eastern Caribbean countries, and through LOJ, majority-owned by Sagicor, with the public owning the remainder. Our merchant banking business is operated primarily out of Jamaica through PCFS, which is also majority-owned, with the public owning the remainder. Since there is limited organic growth potential in the mature markets in which we operate, we continue to seek new growth opportunities through acquisitions and expanding presence in new geographic regions. The most signiﬁ cant factors inﬂ uencing our 2005 results were the ﬁ ve acquisitions the Group made during the year. These acquisitions require efﬁ cient integration. On September 30, 2005, we acquired for US $58.8 million (Bds $117.6 million) a 100% interest in Laurel Life Insurance Company and its wholly owned subsidiary, American Founders Life Insurance Company, now the rebranded Sagicor Life Insurance Company (SLIC). This acquisition was ﬁ nanced by a US dollar denominated bank loan. The results of operations from Laurel Life and SLIC since the acquisition have been included in our 2005 ﬁ nancial statements. When we acquired SLIC on September 30, 2005, it had approximately US $2.0 billion (face value) of life and annuity products in force and approximately US $559.4 million in ﬁ nancial investments. Laurel Life and SLIC are life insurance entities operating in the United States. With its insurance licenses in forty-one states and in the District of Columbia, SLIC will be the platform for the growth and development of our operations in the United States. SLIC’s business has been driven primarily by the acquisitions of closed blocks of life insurance policies and, to a lesser extent, by marketing and distributing its ﬁ xed annuity products. Life insurance products are sold through marketing ﬁ rms, ﬁ nancial institutions and 400 independent agents located throughout 41 states and the District of Columbia. In January, 2005, LOJ acquired for J $3.3 billion (Bds $108.1 million) a 42.2% interest in PCFS, thereby increasing its total ownership interest in PCFS to 49%. On May 6, 2005, Sagicor Financial Corporation and LOJ acquired for J $2.5 billion (Bds $79.0 million) a further 37% interest in PCFS. Currently, Sagicor has an equity interest of 66% in PCFS. PCFS is a publicly-listed company on the 20 Sagicor Financial Corporation Management Discussion & Analysis Jamaica Stock Exchange. For the year ended December 31, 2005, PCFS’s net income was J $1.0 billion (Bds $33.2 million) and total assets stood at J$39.9 billion (Bds $1.2 billion). PCFS is a diversiﬁ ed ﬁ nancial services group, with its operations based in Jamaica. It has ﬁ ve principal lines of business. These include (i) investment and cash management services, (ii) foreign exchange and ﬁ xed income trading, (iii) corporate credit, merchant banking and investment banking, (iv) asset management, mutual fund management, stock brokerage and equities trading, and (v) trust and custody services. On April 1, 2005, LOJ also purchased from its joint venture partner, First Life Insurance Company Limited, the remaining 50% interest in EBA Limited, a joint venture which managed employee beneﬁ ts insurance business in Jamaica. LOJ also purchased the remaining insurance business of First Life. On November 30, 2005 Sagicor Life of the Cayman Islands Limited, a wholly owned subsidiary of LOJ, acquired for US $10.0 million (Bds $20.0 million) a 51% interest in Cayman General Insurance Company Limited (CGI). CGI markets group health, as well as property and casualty insurance. At that date, Cayman General had total assets of US $44.7 million (Bds $89.5 million). Finally, on December 28, 2005, we acquired a 20% interest in FamGuard Corporation Limited, the parent company of a leading Bahamian insurance provider, Family Guardian Insurance Company Limited. This acquisition is in keeping with our strategy of geographic expansion, and gives the Sagicor Group a stronger position in the lucrative Bahamian ﬁ nancial services market. ECONOMIC CONDITIONS Seventy-nine percent of our operations in terms of revenue for the year ended December 31, 2005 were in Barbados, Jamaica and Trinidad and Tobago. As a result, our business, results of operations, ﬁ nancial condition and prospects are materially dependent upon economic, political and other conditions and developments in those countries. Our future ﬁ nancial performance will be linked to economic conditions in these countries. Key to the economic conditions in each of these countries are interest rates, inﬂ ation, foreign direct investment and general economic stability. Barbados The Barbados economy expanded at 4.1% in 2005 following the rate of 4.8% recorded in 2004. The manufacturing sector and construction industry grew by 2.8% and 17.6%, respectively. However, the tourism sector as a whole fell by 4.2%, in 2005, compared to 2004, due to decreases in long-stay and cruise ship arrivals. Inﬂ ation for 2005 is likely to exceed 4.0%, up from 1.4% in 2004. This increase resulted from rising energy prices. Interest rates have closely followed the pattern of interest rate movement in the United States over the past three years and have been trending up moderately in 2005 and 2006. Jamaica In recent years, Jamaica’s economy has experienced some expansion after several years of negative or minimal growth. Exchange rate and ﬁ nancial sector liberalisation in the early 1990’s and a ﬁ nancial crisis in the mid to late 1990’s have had a negative impact on Jamaica’s GDP growth. Total external debt was US $5.3 billion in 2005 (US $5.1 billion in 2004). Falling inﬂ ation, lower interest rates and the ability to access international markets have strengthened the country’s net international reserves, and improving ﬁ scal discipline has led to higher levels of conﬁ dence. The economy has been in transition away from manufacturing and agriculture, into areas where the country can compete more effectively. Areas of expansion have been in tourism, services, transportation, mining and telecommunications. GDP growth is estimated at 1.5% for 2005, compared to 1.2% in 2004. The inﬂ ation rate for 2005 was 21 Sagicor Financial Corporation Management Discussion & Analysis 12.9%, compared to 13.7% in 2004. The currency exchange rate of Jamaican dollars and United States dollars at April 28, 2006 was at J $65.51 per US$1.00 or Bds $2.00. Trinidad and Tobago In 2005, Trinidad and Tobago registered estimated GDP growth of 7.0%, principally due to the oil and gas industries production. The percentage contribution of agriculture, industry, and services to the GDP was approximately 0.7%, 57.0% and 42.3%, respectively. In 2005, the energy sector grew by approximately 11.0% and the non-energy sector grew by approximately 4.0%. GDP growth was 6.5% in 2004. During 2005, inﬂ ation increased by an estimated 6.8%, mainly because of an increase in food prices, compared to 3.7% in 2004. For the last four years, the value of the Trinidad and Tobago dollar has been relatively stable. RESULTS OF OPERATIONS Geographic Segments We have signiﬁ cant concentrations of our business in Barbados, Jamaica and Trinidad and Tobago, where our operations are primarily managed by a subsidiary or branch. Geographic segments are deﬁ ned accordingly. The following table presents, for the periods indicated, the total revenues for signiﬁ cant segments as a percentage of total revenue: Year Ended December 31 (in millions of Bds $, except percentages) Barbados Jamaica Trinidad and Tobago United States OECS and Other Caribbean Not allocated to segments Total Bds $220.8 513.9 191.6 46.0 160.9 40.8 Bds $1,174.0 2005 18.8% 43.8 16.3 3.9 13.7 3.5 100.0% Bds $214.3 292.3 160.8 24.3 143.0 0.3 Bds $835.0 2004 25.7% 35.0 19.3 2.9 17.1 0 100.0% Total revenue from our Barbados operations increased by 3.0% in 2005 from 2004, primarily as a result of organic growth of our insurance operations. The total revenue from our Jamaican operations increased by 75.8% in 2005 from 2004, primarily as a result of our acquisition of PCFS, together with organic growth of our existing business. The total revenue from our Trinidad and Tobago operations increased by 19.2% in 2005 from 2004, primarily as a result of a signiﬁ cant increase in investment income reﬂ ecting the gains from the sale of equities as we sought to rebalance our equities investment. The total revenue from our United States operations increased by 89.3% in 2005 from 2004, primarily as a result of our acquisition of SLIC. The total revenue from our other Caribbean operations increased by 12.5% in 2005 from 2004, primarily as a result of the expansion of our existing business operations. For 2005, amounts not allocated to segments include gains from business combinations and acquisitions of Bds $38.9 million. Product Segments Our business segments are deﬁ ned by the grouping of products and services of a similar nature. The following table presents, for the periods indicated, the total revenues for signiﬁ cant product segments as a percentage of total revenue: 22 Sagicor Financial Corporation Management Discussion & Analysis Year Ended December 31 (in millions of Bds $) 2005 Life insurance, health insurance and annuities issued to individuals Bds $609.4 279.1 Life insurance, health insurance and annuities issued to groups 47.0 Property and casualty insurance 197.7 Banking and other ﬁ nancial services 40.8 Not allocated to segments Bds $1,174.0 Total 2004 Bds $533.2 240.4 32.3 28.8 0.3 Bds $835.0 The growth in 2005 in our life insurance, health insurance and annuities issued to individuals and to groups is mostly attributable to the acquisition of the remaining 50% of EBA in Jamaica. The property and casualty insurance growth in 2005 is mainly driven by the expansion of this product segment in Trinidad and Tobago. The growth in 2005 in banking and other ﬁ nancial services largely reﬂ ects our acquisition of PCFS. Revenue Total revenue is composed of net premium revenue, net investment income, our share of operating income from our associated companies, fees and other revenue, and gains on business combinations and acquisitions. The following table shows revenue information for the years ended December 31, 2005 and December 31, 2004: Year Ended December 31 (in millions of Bds $) Net premium revenue Net investment income Share of operating income of associated companies Fees and other revenue Gains on business combinations and acquisitions Total revenue 2005 Bds $639.2 415.4 3.5 77.0 38.9 Bds $1,174.0 2004 Bds $537.5 242.9 9.3 45.3 – Bds $835.0 Our total revenue grew in 2005 compared to 2004, primarily as a result of increases in net investment income, net premium revenue and fees and other revenue, as explained below. This increase was partially offset by a decrease in share of operating income of associated companies, as further explained below. Net Premium Revenue The following table shows information on our net premium for the years ended December 31, 2005 and December 31, 2004: Year Ended December 31 (in millions of Bds $) Life insurance Health insurance Property and casualty insurance Annuities and pensions Premiums and contributions Reinsurance premiums Net premium revenue 2005 Bds $392.3 197.0 74.1 85.3 748.7 (109.5) Bds $639.2 2004 Bds $324.5 159.1 56.3 81.7 621.6 (84.1) Bds $537.5 23 Sagicor Financial Corporation Management Discussion & Analysis Net premium revenue increased by 18.9 % in 2005 compared to 2004. Our net premium revenue derived from life insurance grew in 2005 compared to 2004 mainly as a result of growth in the number of policies. Our net premium revenue derived from health insurance grew in 2005 compared to 2004 mainly as a result of the purchase by LOJ of the remaining 50% of EBA. Our net premium revenue derived from property and casualty insurance grew in 2005 compared to 2004 mainly by our expansion in the Trinidad and Tobago market and rate increases in, and the acquisition in the Cayman Islands. Reinsurance premiums increased in 2005 compared to 2004 primarily as a result of a general increase in our insurance businesses and the increase in the amount of reinsurance that we purchased. Net Investment Income Net investment income increased 71.0% to Bds $415.4 million in 2005 from Bds $242.9 million in 2004. The signiﬁ cant increase in net investment income was primarily a result of the acquisitions and recognised gains on sales of securities resulting from our strategy to rebalance our investment portfolio. These gains were somewhat offset by allowances for impairment losses. Our return on invested assets in 2005 was 11.9% compared to 10.9% in 2004. Share of Operating Income from Associated Companies In 2005, the share of operating income from associated companies decreased 62.5% to Bds $3.5 million compared to Bds $9.3 million in 2004. This decrease resulted from the disposition of our credit card operation, CariCard, which generated a gain on the disposal in 2004. This gain was recorded in operating income from associated companies in the amount of Bds $5.2 million, but no similar event occurred in 2005. Fees and Other Revenue Fees and other revenue increased 70.1% in 2005 to Bds $77.0 million from Bds $45.3 million, primarily as a result of the acquisition of PCFS, which generated signiﬁ cant fee income through its asset management operations. Gains on Business Combinations and Acquisitions Gains on business combinations and acquisitions were Bds $38.9 million in 2005. This mainly reﬂ ects the reduction in interest in LOJ, from 78.0% to 60.0%, and the amount by which the value of our share of net identiﬁ able assets acquired exceeded the consideration we paid for the acquisition of a 37.0% interest in PCFS. Beneﬁ ts The following table shows information on beneﬁ ts expensed for the years ended December 31, 2005 and December 31, 2004: Year Ended December 31 (in millions of Bds $) Net policy beneﬁ ts Net increase in actuarial liabilities Interest expense Total beneﬁ ts 2005 Bds $389.0 58.7 147.9 Bds $595.6 2004 Bds $333.1 109.1 39.0 Bds $481.2 Total beneﬁ ts increased in 2005, mainly as a result of the large increase in interest expense and the increase in net policy beneﬁ ts. However, offsetting these increases was the decline in actuarial 24 Sagicor Financial Corporation Management Discussion & Analysis liabilities reﬂ ecting the change in interest rate assumptions to reﬂ ect interest rate increases, a reduction in unit maintenance expenses, changes in lapse rate assumptions and an improvement in mortality assumptions. The increase in interest expense was mainly as a result of acquired liabilities on other funding instruments, such as customer deposits, repurchase liabilities of our PCFS operation and SLIC’s obligations under the Federal Home Loan Bank of Dallas (FHLB) loan program. The increase in net policy beneﬁ ts paid in 2005 reﬂ ects the growth in the number of policies. Expenses The following table shows information for our expenses for the years ended December 31, 2005 and 2004: Year Ended December 31 (in millions of Bds $) Administrative Commissions and related compensation Premium taxes Finance costs Depreciation and Amortisation Total 2005 Bds $214.5 95.0 15.3 4.4 25.5 Bds $354.7 2004 Bds $154.3 85.4 11.7 0.7 21.8 Bds $273.9 Expenses increased in 2005, primarily driven by increased headcount of approximately 300 new employees as a result of the acquisition of PCFS and SLIC. Commission and related compensation increased in 2005, mainly as a result of the increase in the variable compensation of our advisors and brokers, which reﬂ ects the growth of our business and the addition of SLIC brokers and general agents. The increase in ﬁ nance costs reﬂ ects interest expense of the loans used to ﬁ nance our acquisitions. Income taxes We are taxed in the countries in which our operations are carried out. Taxes are based on income in each country according to the tax regulations of that country. Our income tax expense is composed of current taxes, deferred taxes, plus our share of the taxes of associated companies. Income taxes increased 248.0% to Bds $24.0 million in 2005 from Bds $6.9 million in 2004. This was primarily a result of an increase in income from new businesses, most signiﬁ cantly PCFS. Net Income Our net income totaled Bds $199.6 million in 2005, an increase of 173% from Bds $73.0 million in 2004. This increase was primarily driven by the growth of our existing business and the acquisition of PCFS. Year Ended December 31 (in millions of Bds $) Net income (loss) attributable to: Shareholders Participating policyholders Minority interest Total net income 2005 2004 Bds $136.6 25.5 37.5 Bds $199.6 Bds $67.7 (2.0) 7.3 Bds $73.0 The net income attributed to participating policyholders is inﬂ uenced by the underlying performance of the assets allocated to such policyholders, while the net income attributable to minority interest reﬂ ects the allocation of net income to other shareholders in our non-wholly owned consolidated 25 Sagicor Financial Corporation Management Discussion & Analysis subsidiaries. Participating policyholders’ amount in 2004 was a net loss because the cost related to new participating policies was higher than the related premium income. In 2005, the participating policyholder amount was positive because, with the amalgamation of Life of Barbados Limited’s participating policies, the participating business generated enough proﬁ tability to offset new participating policy expenses. Our return on average equity in 2005 was 22.8% compared to 10.7% in 2004. Liquidity and Capital Resources Cash Flow In 2005, our net cash from operating activities was Bds $313.9 million, our net cash used in investing activities was Bds $261.6 million, our net cash from ﬁ nancing activities was Bds $109.6 million, and our net cash decreased Bds $23.2 million from effects of exchange rates. These produced a net increase in cash and cash equivalents of Bds $138.7 million for 2005. In 2004, our net cash from operating activities was Bds $22.5 million, our net cash used in investing activities was Bds $14.6 million, and our net cash used in ﬁ nancing activities was Bds $34.1 million. Our principal liabilities include customer deposits, the FHLB program, debt for acquisitions, repurchase agreements and insurance policies. The insurance policies we underwrite are mostly long-term in nature. Our policy is to invest in assets to produce cash ﬂ ows that are synchronised with the timing and the amounts of payments that must be paid to policyholders, while also managing reinvestment risks by reducing the need for reinvestment. Debt Funding and Liquidity Loans Payable We had a Debt to Shareholders’ Equity ratio of 21.5% at December 31, 2005, compared to 2.3% at December 31, 2004. Historically, we have not borrowed from banks or the capital markets for ongoing operations. However, we have borrowed in connection with acquisitions. These borrowings have typically been in US dollars and from local branches of international banks. At December 31, 2005, we had Bds $160.7 million in borrowings compared to Bds $15.9 million at December 31, 2004. At December 31, 2005, we had short-term liabilities of Bds $132.2 million, of which Bds $116.4 million was a US dollar-denominated bank loan incurred in connection with the acquisition of Laurel Life. Deposit and Security Liabilities Deposit and security liabilities represent sources of funds for on-lending, leasing and portfolio investments. These liabilities comprised other funding instruments, which as of December 31, 2005 and 2004, were Bds $296.2 million and Bds $1.5 million, respectively customer deposits, which as of December 31, 2005 and 2004 were Bds $227.5 million and Bds $74.1 million, respectively securities sold under agreements to repurchase, which as of December 31, 2005 and 2004 were Bds $908.0 million and nil respectively; and bank overdrafts, which as of December 31, 2005 and 2004 were Bds $8.7 million and Bds $10.3 million, respectively. The increases in 2005, compared to 2004 in other funding instruments, were primarily a result of our acquisition of SLIC and PCFS and the increase in securities sold under agreements to repurchase was a result of our acquisition of PCFS. Within other funding instruments is SLIC’s funding arrangement with FHLB, of which SLIC is a member. This membership provides SLIC with the capability to take short-term advances from the FHLB at rates linked to the Federal Funds rate or to take long-term advances. SLIC periodically utilises the short-term capacity to fund modest operating cash needs, rather than sell securities and incur transaction costs. In 2002, SLIC agreed with the Texas Department of Insurance (DOI) to stop drawing on the long-term part of this facility as a result of Texas regulatory requirements. At December 31, 2005, the aggregate outstanding amount was US $126.3 million (Bds $252.7 million). 26 Sagicor Financial Corporation Management Discussion & Analysis At December 31, 2005, there was capacity to borrow an additional US $2.1 million (Bds $4.2 million) within the DOI limits. As of December 31, 2005, these loans were collateralised by an equity holding in FHLB equal to Bds $12.0 million, and mortgages and mortgage-backed securities having a total market value of Bds $255.6 million. Capital Adequacy We manage capital adequacy at the country level and operating company level. This capital adequacy is calculated by our Appointed Actuaries and reviewed frequently by our Executive Management, various operating subsidiaries’ audit committees on a quarterly basis and our Board of Directors annually. In addition to such review, we have hired an external independent Actuary who also reviews our capital adequacy. We seek to maintain internal capital adequacy at levels higher than the regulatory requirements. To assist us in evaluating our current business and strategy opportunities, we utilise a risk-based capital approach as one of our core measures of ﬁ nancial performance. The risk-based assessment measure, which we have adopted in all our operations other than the United States, is the Canadian Minimum Continuing Surplus and Capital Requirement (MCCSR) standard. It should be noted that many of the jurisdictions in which we operate have no capital adequacy requirements. In 2005, Sagicor’s MCCSR ratio was 256%, compared to 238% and 212% in 2004 and 2003 respectively. The standard recommended by the Canadian regulators for Canadian companies is 150%. In 2005, we also introduced a capital allocation model where capital is speciﬁ cally applied to each business through our Enterprise Risk Management function. This approach helps us to better measure the relative proﬁ tability of our component businesses, and to set clear performance targets across our operations, so that we can quickly identify those operations that are contributing meaningfully and those that are not. This approach also helps us to make speciﬁ c investment management decisions. Our Enterprise Risk Management is expected to develop a more sophisticated and structured approach to risk-based capital during 2006. In this regard, we have recruited a senior executive to spearhead this effort, together with a consultant, who would provide expertise in building a model for ﬁ nancial and operational risks across Sagicor and its group of subsidiaries. This model will be linked to our corporate governance architecture and reporting philosophy. SLIC In order to enhance the regulation of insurer solvency, a risk-based capital (RBC) formula and model were adopted by the National Association of Insurance Commissioners (NAIC) of the U.S. RBC is designed to assess minimum capital requirements and raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for life insurance companies measures four major areas of risk: (i) underwriting, which encompasses the risk of adverse loss developments and property and casualty insurance product mix; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks, including concentrations; and (iv) off- balance sheet risk arising from adverse experience from non-controlled assets such as reinsurance guarantees for afﬁ liates or other contingent liabilities and reserve and premium growth. If an insurer’s statutory surplus is lower than required by the RBC calculation, it will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC methodology provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the ratio of surplus to RBC falls. The “Company Action Level” (as deﬁ ned by the NAIC) requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. The “Regulatory Action Level” (as deﬁ ned by the NAIC) requires an insurer to submit a plan containing corrective actions and permits the relevant insurance commissioner to perform an examination or other analysis and issue a corrective order if surplus falls below 150% of the RBC amount. The “Authorised Control Level” (as deﬁ ned by the NAIC) allows the relevant insurance commissioner to rehabilitate or liquidate an insurer in addition to the aforementioned actions if surplus falls below 100% of the RBC amount. The “Mandatory 27 Sagicor Financial Corporation Management Discussion & Analysis Control Level” (as deﬁ ned by the NAIC) requires the relevant insurance commissioner to rehabilitate or liquidate the insurer if surplus falls below 70% of the RBC amount. SLIC looks to maintain at least 250% of the Company Action Level, allowing it ﬂ exibility in its asset and product mix. The following table presents the RBC ratios for the past three years for SLIC: % of Company Action Level 2005 438% 2004 320% 2003 361% The decrease between 2003 and 2004 is a result of SLIC’s decision to put excess capital to work through the acquisition of a block of business. The increase between 2004 and 2005 is attributable principally to additional capital contributed to SLIC of US $10.5 million by Sagicor shortly after the acquisition. PCFS Under the Bank of Jamaica (BOJ) and the Financial Services Commission (FSC) regulations, PCFS and its wholly owned subsidiary, Pan Caribbean Merchant Bank Limited (PCMB), are both required to separately maintain qualifying capital of at least 10% of their respective risk-weighted assets. The FSC’s early warning benchmark is 14%, while the BOJ’s trigger is 12%. Therefore, if PCFS’ risk adjusted ratio of capital to asset falls below 14%, then the FSC would inspect and warn the company. BOJ would intervene if the ratio fell below 12%. We currently have capital substantially above the minimum capital adequacy requirements. Compliance is calculated based upon the unconsolidated ﬁ nancial statements of each regulated entity. The following table presents the capital adequacy ratios (deﬁ ned as qualifying capital divided by risk weighted assets) for the last three years: PCFS PCMB SUBSEQUENT EVENT Bond Offering 2005 62% 27% 2004 114% 31% 2003 58% 68% Subsequent to year-end, on May 12, 2006, Sagicor Finance Limited, a special purpose vehicle incorporated in the Cayman Islands, and a wholly owned subsidiary of Sagicor Financial Corporation, issued Senior Notes bearing interest at the rate of 7.5% due 2016 with an aggregate maturity value of US $150.0 million. The Notes were unconditionally guaranteed by Sagicor Financial Corporation and Sagicor Life Inc. The Notes were fully underwritten by Morgan Stanley & Co Incorporated and were oversubscribed. Application is to be made to list the Notes on the Luxembourg Stock Exchange and to trade on the Euro MTF Market, the alternative market of the Luxembourg Stock Exchange. Out of the net proceeds of the Notes, we reﬁ nanced bank loans totalling Bds $150.7 million. RATINGS Sagicor Life Inc, along with its wholly-owned life insurance subsidiaries, has consistently maintained its “A” (Excellent) rating originally received in 1999. This rating was afﬁ rmed in May 2006, and LOJ received an “A” (Excellent) rating for the ﬁ rst time. Our property and casualty insurance subsidiary, Sagicor General Life Insurance Company, has a rating of “A-” (Excellent) and SLIC, has a rating of “B++” (Very Good). These ratings are ﬁ nancial strength ratings awarded by A.M. Best Company. 28 Sagicor Financial Corporation Management Discussion & Analysis Subsequent to year-end, our Group applied to Standard and Poor’s (S&P) for a ﬁ nancial strength rating. We are pleased to report that S&P gave Sagicor Life Inc, our principal operating company, a ﬁ nancial strength rating of “BBB+”. This is an excellent rating, and demonstrates the ﬁ nancial strength and operating capability of the Sagicor Group. HUMAN RESOURCES Our human resource strategy focuses on the development of a strong customer service culture, ﬁ rmly supported by systems that recognise and reward performance. We will continue to work towards achieving the international benchmarks as an employer of choice in the Caribbean and elsewhere, working to improve employee morale, productivity and retention. In both 2004 and 2005, LOJ was listed among the 20 most admired companies in the inaugural Jamaica Employers Federation- Employer of Choice Awards. In 2005, Sagicor Life Inc and Sagicor Capital Life Insurance Company Limited initiated a job evaluation initiative that adjusted compensation to be competitive with the market. We also introduced a performance management programme and training programmes, with the goal of building a performance-based culture. As of December 31, 2005, we had a total workforce of 2,337 people, which number includes our advisors. The following table shows the breakdown of our workforce by geographic segment as of December 31, 2005: Workforce % of Sagicor Workforce Barbados Employees Advisors Jamaica Employees Advisors Trinidad and Tobago Employees Advisors Eastern Caribbean Employees Advisors Other Caribbean Employees Advisors United States Employees Advisors Total 464 114 689 367 170 144 79 70 71 66 103 — 2,337 19.9% 4.9 29.4 15.7 7.3 6.2 3.4 3.0 3.0 2.8 4.4 — 100% 29 Sagicor Financial Corporation Management Discussion & Analysis Training and Development We provide structured industry training for all staff, and they are encouraged to achieve professional insurance designations. Considerable support is offered to students pursuing professional designations in Accounting, Actuarial Science, Investments and Information Technology through grants, loans, study-leave programmes and facilitating attendance at the annual Life Ofﬁ ce Management Association (LOMA) and The Life Insurance Marketing and Research Association (LIMRA) conferences, where attendees beneﬁ t from presentations and discussions on a number of insurance industry issues. Share Incentive Plans On December 19, 2005, we obtained shareholder approval to implement an executive long-term incentive plan (LTI Plan) and a share ownership plan for employees and advisors (ESOP). Both these plans became effective on December 31, 2005. A total of 26,555,274 common shares, which represents 10% of the common shares outstanding at December 31, 2005, have been reserved for the plans and are expected to be sufﬁ cient for the ten-year duration of both plans. Both the LTI and ESOP Plans are stock-based incentives for Employees and Advisors of Sagicor Financial Corporation, Sagicor Life Inc and Sagicor Capital Life Insurance Company Limited to acquire a proprietary interest in our growth and performance and to have an increased incentive in contributing to our future success and prosperity. The LTI Plan was developed after taking into consideration international and regional best practices and comprises share options and restricted share grants. The ESOP provides for an annual allocation of a portion of our proﬁ t to acquire shares to be held for ESOP participants, who are at the level of Assistant Vice President and below, and Advisors. The ESOP has been established as a discretionary trust and is administered by trustees appointed by the Board. CONCLUSION The year 2005 was a watershed year for us in many respects, both in terms of our expansion and our decision to establish a footprint in the international capital markets. We intend to build on this foundation and continue our prudent management of our business. I welcome the management and staff of PCFS and Sagicor USA Groups to the Sagicor family, and extend my personal thanks to the entire management team, staff and advisors across the Group for an excellent performance. Dodridge D. Miller President and Chief Executive Ofﬁ cer 30 “CHERISH YOUR VISION AND YOUR DREAMS, AS THEY ARE THE CHILDREN OF YOUR SOUL; THE BLUEPRINTS OF YOUR ULTIMATE ACHIEVEMENTS” – Napoleon Hill Sagicor Financial Corporation CONSOLIDATED BALANCE SHEET As of December 31, 2005 Amounts expressed in Barbados $000 Notes 2005 2004 ASSETS Investment property Property, plant and equipment Investment in associated companies Intangible assets Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Total assets LIABILITIES Policy liabilities Actuarial liabilities Deposit administration liabilities Other policy liabilities Other liabilities Loans payable Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total liabilities EQUITY Share capital Reserves Retained earnings Total shareholders’ equity Participating accounts Minority interest in subsidiaries Total equity Total equity and liabilities 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 181,586 148,248 50,251 250,505 4,732,425 696,188 35,711 203,416 118,863 6,417,193 2,777,231 346,229 364,331 3,487,791 160,728 1,440,445 32,360 30,958 271,304 5,423,586 458,451 100,794 188,304 747,549 34,647 211,411 993,607 179,015 131,562 24,276 103,345 2,311,519 109,200 20,596 139,237 119,137 3,137,887 1,485,042 305,464 333,367 2,123,873 15,912 85,838 28,147 18,073 106,256 2,378,099 432,495 167,694 93,079 693,268 1,388 65,132 759,788 6,417,193 3,137,887 These financial statements have been approved for issue by the Board of Directors on April 27, 2006. Director Director 34 Sagicor Financial Corporation CONSOLIDATED INCOME STATEMENT Year ended December 31, 2005 Amounts expressed in Barbados $000 Notes 2005 2004 REVENUE Premium revenue Reinsurance premium expense Net premium revenue Net investment income Share of operating income of associated companies Fees and other revenue Gains arising on business combinations and aquisitions Total revenue BENEFITS Policy benefits incurred Policy benefits reinsured Net policy benefits incurred Net increase in actuarial liabilities Interest expense Total benefits EXPENSES Administrative expenses Commissions and related compensation Premium taxes Finance costs Depreciation and amortisation Total expenses INCOME FROM ORDINARY ACTIVITIES Income taxes NET INCOME FOR THE YEAR NET INCOME ATTRIBUTABLE TO: Shareholders Participating policyholders Minority interest Earnings per common share – basic and diluted 27 28 9 29 38 30 16 31 33 35 748,707 (109,511) 639,196 415,415 3,473 76,951 38,946 1,173,981 432,380 (43,340) 389,040 58,680 147,869 595,589 214,544 94,961 15,308 4,426 25,498 354,737 223,655 (24,046) 199,609 136,562 25,522 37,525 199,609 52 cents 621,669 (84,131) 537,538 242,928 9,269 45,237 - 834,972 501,053 (167,965) 333,088 109,115 39,006 481,209 154,262 85,405 11,653 743 21,801 273,864 79,899 (6,916) 72,983 67,690 (1,983) 7,276 72,983 26 cents 35 Sagicor Financial Corporation CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2005 Amounts expressed in Barbados $000 Balance, beginning of year As previously reported Prior year adjustments (note 2.1 (a) (v)) As restated Net gains / (losses) recognised directly in equity Net income for the year Total recognised gains and income for the year Issue of shares Dividends declared (note 35) Acquisition of subsidiary and insurance business Transfers Year ended December 31, 2005 Share capital Note 24 Reserves Note 25 Retained Participating accounts earnings Note 26 Minority interest Total 432,495 181,513 89,049 1,388 67,858 772,303 - - - - - - - 432,495 25,956 25,956 (13,819) 167,694 4,030 93,079 - 1,388 (2,726) 65,132 (12,515) 759,788 (69,135) - (69,135) - - - 2,235 (66,900) - 136,562 136,562 - (31,600) - (9,737) 95,225 235 25,522 25,757 - - - 7,502 33,259 (23,469) 37,525 14,056 88,200 (9,026) 53,049 - 146,279 (92,369) 199,609 107,240 114,156 (40,626) 53,049 - 233,819 Balance, end of year 458,451 100,794 188,304 34,647 211,411 993,607 Balance, beginning of year As previously reported Prior year adjustments (note 2.1 (a) (v)) As restated Net gains / (losses) recognised directly in equity Net income for the year Total recognised gains and income for the year Dividends declared (note 35) Transfers Year ended December 31, 2004 Share capital Note 24 Reserves Note 25 Retained Participating accounts earnings Note 26 Minority interest Total 432,495 98,323 43,317 1,222 56,289 631,646 432,495 - - - - - - - (20,743) 77,580 4,030 47,347 - 1,222 (4,654) 51,635 (21,367) 610,279 89,358 - 89,358 - 756 90,114 - 67,690 67,690 (18,202) (3,756) 45,732 (851) (1,983) (2,834) - 3,000 166 14,632 7,276 21,908 (8,411) - 13,497 103,139 72,983 176,122 (26,613) - 149,509 Balance, end of year 432,495 167,694 93,079 1,388 65,132 759,788 36 Sagicor Financial Corporation CONSOLIDATED CASH FLOW STATEMENT Year ended December 31, 2005 Amounts expressed in Barbados $000 Notes 2005 2004 Cash flows from operating activities Income from ordinary activities Adjustments for non-cash items, interest and dividends Interest and dividends received Interest paid Income taxes paid Changes in operating assets Changes in operating liabilities Net cash from operating activities Cash flows from investing activities Property, plant and equipment Investment in associated companies, net Intangible assets Acquisition of subsidiaries and insurance businesses, net of cash and cash equivalents Net cash used in investing activities Cash flows from financing activities Dividends paid to shareholders Shares issued to minority interest Dividends paid to minority interest Loans payable Net cash from / (used in) financing activities Effects of exchange rate changes Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 36 36 36 36 36 36 223,655 (206,466) 296,905 (151,634) (29,690) 214,384 (33,210) 313,944 (18,295) (22,232) (6,117) (214,939) (261,583) (31,435) 5,554 (8,542) 143,994 109,571 (23,198) 138,734 135,608 274,342 79,899 (71,116) 170,590 (40,874) (10,330) (238,278) 132,598 22,489 (20,629) 6,481 (466) - (14,614) (18,202) 2,170 (8,411) (9,633) (34,076) 13 (26,188) 161,796 135,608 37 Sagicor Financial Corporation INDEX TO THE NOTES TO THE FINANCIAL STATEMENTS INCORPORATION AND PRINCIPAL ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 RISK MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 STATUTORY RESTRICTIONS ON ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 SEGMENTED INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 INVESTMENT PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 INVESTMENT IN ASSOCIATED COMPANIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 FINANCIAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 REINSURANCE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 INCOME TAX ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 MISCELLANEOUS ASSETS AND RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 CASH RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 ACTUARIAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 DEPOSIT ADMINISTRATION LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 OTHER POLICYHOLDER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 LOANS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 DEPOSIT AND SECURITY LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 INCOME TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 SHARE CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 RESERVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 PARTICIPATING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 NET PREMIUM REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 FEES AND OTHER REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 NET POLICY BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 EARNINGS AND DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 ASSETS AND LIABILITIES BY CURRENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 CONTINGENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 SUBSEQUENT EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 38 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 1. INCORPORATION AND PRINCIPAL ACTIVITIES Sagicor Financial Corporation was incorporated on December 6, 2002 under the Companies Act of Barbados as a public limited liability holding company. On December 6, 2002, Sagicor Life Inc was formed following its conversion from The Barbados Mutual Life Assurance Society (The Society). On December 30, 2002, Sagicor Financial Corporation allotted common shares to the eligible policyholders of The Society and became the holding company of Sagicor Life Inc. The principal activities of the Sagicor Group are as follows: • Insurance • Annuities • Pensions • Pension fund management • Mutual fund management • Corporate trust services • Securities dealing • Currency dealing • Merchant banking • Loan finance and deposit taking The Group operates across the Caribbean and in the United States of America (USA). The table below identifies the principal operating subsidiaries in the Group, their principal activities, their country of incorporation and the effective equity interest held by the shareholders of Sagicor. Subsidiary Companies Principal Activities Sagicor Life Inc Life of Barbados Limited (1) Life of Jamaica Limited American Founders Life Insurance Company (3) Sagicor Capital Life Insurance Company Limited Capital Life Insurance Company Bahamas Limited Capital de Seguros, SA Life and health insurance, annuities and pensions Life and health insurance, annuities and pensions Life and health insurance, annuities and pensions Life insurance, annuities and pensions Life and health insurance, annuities and pensions Life and health insurance, annuities and pensions Life and health insurance Nationwide Insurance Company Limited Life insurance Country of Incorporation Effective Shareholders’ Interest Barbados Barbados 100% 100% Jamaica 60%(2) Texas, USA 100% The Bahamas 100% The Bahamas Panama Trinidad & Tobago 100% 100% 100% 39 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) Subsidiary Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor Life of the Cayman Islands Limited Life insurance Laurel Life Insurance Company (3) Life insurance Sagicor Allnation Insurance Company Health insurance Cayman General Insurance Company Limited (4) Property, casualty, health and life insurance The Cayman Islands Texas, USA Delaware, USA The Cayman Islands Sagicor General Insurance Inc Property and casualty insurance Barbados Sagicor Re Insurance Limited Property and casualty insurance LOJ Holdings Limited Sagicor USA Inc LTE Limited (5) Pan Caribbean Financial Services Limited (6) Pan Caribbean Merchant Bank Limited (6) Insurance holding company Insurance holding company Holding company Development banking, investment and fund management services Merchant banking Sagicor Merchant Limited (8) Merchant banking GlobE Finance Inc Loan and lease financing, and deposit taking Sagicor Finance Inc (formerly The Mutual Finance Inc) Loan and lease financing, and deposit taking The Cayman Islands Jamaica Delaware, USA Barbados Jamaica Jamaica Trinidad & Tobago Barbados St. Lucia 60%(2) 100% 100% 31% 53% 60%(2) 100% 100% 100% 66%(7) 66%(7) 73% 51% 70% Pan Caribbean Asset Management Limited (6) Sagicor Asset Management Inc The Mutual Financial Services Inc Sagicor Funds Incorporated LOJ Pooled Investment Funds Limited LOJ Property Management Limited Sagicor International Management Services, Inc (formerly Capital International Management Services, Inc) Investment and fund management Investment management and advisory services Financial services holding company Mutual fund holding company Pension fund management Property management Management and business development services Jamaica 66%(7) Barbados 100% Barbados Barbados Jamaica Jamaica 73% 100% 60%(2) 60%(2) Florida, USA 100% Cayman National Insurance Managers Limited (4) Captive insurance management services The Cayman Islands 31% 40 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) (1) Amalgamated with Sagicor Life Inc on February 1, 2005. (2) An equity interest of 78% until April 1, 2005. (3) Acquired September 30, 2005. (4) Acquired by Life of Jamaica Limited on November 30, 2005. Through control of Life of Jamaica Limited, the (5) Group has a 51% voting interest in Cayman General Insurance Company Limited. Incorporated as a special purpose vehicle to temporarily hold the Company’s direct 34% interest in Pan Caribbean Financial Services Limited. (6) Acquired January 7, 2005. (7) An equity interest of 38% from January 7, 2005 to May 5, 2005. Between May 6 and September 1, interests totalling 28% were acquired. Through control of Life of Jamaica Limited, the Group held a 49% voting interest from January 7 to May 5, which increased to 87% effective September 1. Incorporated on August 11, 2005 and commenced trading October 13, 2005. (8) The associated companies of the Group are as follows: Associated Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest RGM Limited Caribbean CariCard Services Inc (9) Manufacturers Credit and Information Services Limited (6) Property ownership and management Bank card processing, ATM and point-of-sale handling services Trinidad & Tobago Barbados 33% 37% Provision of fleet advance cards Jamaica 16%(10) FamGuard Corporation Limited (11) Investment holding company Bahamas Family Guardian Insurance Company Limited (11) Life and health insurance and annuities Bahamas FG General Insurance Agency Limited (11) General insurance brokerage Bahamas BahamaHealth Insurance Brokers and Benefit Consultants Limited (11) Insurance brokers and benefit consultants Bahamas 20% 20% 20% 20% (9) Caribbean CariCard Services Inc sold its operations effective July 31, 2004. (10) A fully owned subsidiary of Pan Caribbean Financial Services Limited (PCFS) until May 31, when 75% of its interest was disposed. Through PCFS, the Group has a 25% voting interest in Manufacturers Credit and Information Services Limited. (11) Acquired December 28, 2005. For ease of reference, when the term “insurer” is used in the following notes, it refers to either one or more Group subsidiaries that engage in insurance. 41 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. 2.1 Basis of preparation These consolidated financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The Group had adopted accounting policies for the computation of actuarial liabilities on life insurance and annuity contracts which comply with the Canadian Asset Liability Method (CALM). As no specific guidance is provided by IFRS for computing actuarial liabilities, management has judged that CALM should continue to be applied. The adoption of IFRS 4 – insurance contracts, permits the Group to continue with this accounting policy, with the modification required by IFRS 4 that rights under reinsurance contracts are measured separately. The consolidated financial statements are prepared under the historical cost convention except as modified by the revaluation of investment property, owner-occupied property, available for sale investment securities and financial assets held at fair value through income. 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 Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3. All amounts in these financial statements are shown in thousands of Barbados dollars, unless otherwise stated. (a) Changes in IFRS The introduction of new IFRSs and revisions to IASs affects the Group from the 2005 reporting year. These changes affect how items are presented in the financial statements, the disclosures made in the notes to the financial statements, and how certain items are accounted. The new standards introduced are: IFRS 2 Share-based Payment IFRS 3 Business Combinations IFRS 4 Insurance Contracts IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 42 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The standards revised are as follows: Inventories IAS 1 Presentation of Financial Statements IAS 2 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Balance Sheet Date IAS 16 Property, Plant and Equipment IAS 17 Leases IAS 19 Employee Benefits IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 24 Related Party Disclosures IAS 27 Consolidated and Separate Financial Statements IAS 28 Investments in Associates IAS 31 Interests in Joint Ventures IAS 32 Financial Instruments: Disclosure and Presentation IAS 33 Earnings per Share IAS 36 Impairment of Assets IAS 38 Intangible Assets IAS 39 Financial Instruments: Recognition and Measurement IAS 40 Investment Property These and other changes have resulted in several overall changes in presentation and in the consequential restatement of 2004 comparative amounts. A summary of the changes significantly affecting the Group is set out below. (i) IFRS 3 – Business Combinations, IAS 36 – Impairment of Assets, and IAS 38 – Intangible assets The changes introduced affect the quantification of assets and liabilities acquired in a business combination, and affect the subsequent accounting for goodwill and other intangible assets. The definition of intangible assets, other than goodwill, has been amended with the result that such assets are more readily recognised in a business combination. The impact of the change is that the recognition of separate intangible assets reduce the amount of goodwill that would hitherto have been recognised. Intangible assets are subject to either amortisation or to an annual impairment test. Contingent liabilities are included in liabilities acquired. The impact of this change, is that the recognition of contingent liabilities will increase the amount of goodwill that would hitherto have been recognised. Once a business combination has occurred, any subsequent increases in ownership are accounted for as a purchase of minority interest, and the excess of the consideration over the book value of the share of net assets acquired is recorded as goodwill. Goodwill is allocated to cash generating units of the Group expected to benefit from that goodwill, it is not amortised, and it is tested annually for impairment. The impact of the change is that there is no goodwill amortisation expense in the income statement, but there is potentially an impairment expense. 43 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) (ii) Introduction of IFRS 4 – Insurance Contracts The changes introduced by IFRS 4 affected the Group’s financial statement presentation, disclosure and measurement in the following ways: • The effect of reinsurance on all insurance assets, insurance liabilities, insurance income and insurance benefits are either presented separately or disclosed in the notes to the financial statements. Up to December 2004, the Group did not present separately or disclose effects of reinsurance on actuarial liabilities, on the benefit for the increase in actuarial liabilities, and on the provision for unearned premiums. This change affects the reported amounts for assets and liabilities respectively. The accounting policies for insurance contracts are more fully described in note 2.11. The Group has made no significant change in the measurement of its issued insurance policies. The insurance risks of the Group are more fully described in note 4. The techniques used to value actuarial liabilities are more fully described in notes 3.4 and 16.2, the analysis of components in the actuarial liabilities is provided in note 16, and sensitivity analysis on the actuarial liabilities is provided in note 16. • • • (iii) Changes to IAS 1 – Presentation of Financial Statements and IAS 27 – Consolidated and Separate Financial Statements The revisions to these standards affected the Group’s financial statement presentation and disclosure in the following ways: • Minority interest on the balance sheet is presented within equity, and the income attributable to minority interest in the income statement is presented as an allocation of net income. A note entitled “critical accounting estimates and judgements” is included. • (iv) Changes to IAS 24 – Related party disclosures The revisions to this standard have affected the identification of related parties, namely key management, and consequently the disclosures made. (v) Changes to IAS 39 – Financial Instruments: Recognition and Measurement Up to December 2004, the Group classified certain investments as “originated loans” (carried at amortised cost). The changes to IAS 39 have resulted in the Group reclassifying these investments as either “loans and receivables” (carried at amortised cost) or as “available for sale financial assets” (carried at fair value). In accordance with the IFRS, the change from amortised cost to fair value has been recorded retrospectively, and its effects are disclosed in the statement of equity, resulting in a reduction in the carrying values and fair value reserves at the beginning of the year of $12,515 (2004 - $21,367). Arising from a change in the definition of “held to maturity investments”, most of the Group’s investments which were in this category have been reclassified as “loans and receivables”. This reclassification has resulted in no change in measurement of the affected investments. 44 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) (vi) IAS 38 – Intangible assets The Group has reclassified software as an intangible asset. Formerly, software was included within property, plant and equipment. (vii) IAS 19 – Employee Benefits An amendment to IAS 19 now allows the option of recognising actuarial gains and losses in full in the period in which they occur, outside of the income statement, in the statement of equity. The Group does not intend to adopt this option. 2.2. Basis of consolidation (a) Subsidiaries Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a majority voting interest. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are de-consolidated from the date on which control ceases. All material intra-group balances, transactions and gains are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. Minority interest balances represent the interest of minority shareholders in subsidiaries not wholly owned by the Group. The Group uses the purchase method of accounting for the acquisitions of subsidiaries and insurance businesses. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the net assets acquired is recorded as goodwill. If, after reassessment of the net assets acquired, the cost of the acquisition is less than the Group’s share of net assets acquired, the difference is recognised in income. 45 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.2. Basis of consolidation (continued) (b) Investment in associated companies The investments in associated companies, which are not majority owned or controlled but where significant influence exists, are included in these consolidated financial statements under the equity method of accounting. Investments are originally recorded at cost and may include goodwill identified on acquisition, less any impairment loss. The Group’s share of its associates’ post acquisition income and reserve movements are recognised in the consolidated income statement and consolidated statement of changes in equity respectively. Unrealised gains or losses on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Accounting policies of associates have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. (c) Joint Ventures Interests in the assets, liabilities and earnings of jointly controlled ventures are included in these consolidated financial statements using the proportionate consolidation method, eliminating all material related party balances. (d) Divestitures Realised gains on the disposal of subsidiaries, operations, associates and joint ventures are included in revenue. (e) Pension and investment funds Insurers have issued deposit administration and unit linked contracts in which the full return of the assets supporting these contracts accrue directly to the contract-holders. As these contracts are not operated under legal trusts, they have been consolidated in these financial statements. The Group manages a number of segregated pension funds and mutual funds. These funds are legally segregated and investment returns on these funds accrue directly to unit-holders. Consequently the assets, liabilities and activity of these funds are not included in these consolidated financial statements. 46 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (a) Functional and presentational currency Items included in the financial statements of each consolidated entity of the Group 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 thousands of Barbados dollars, which is the Group’s presentational currency. (b) Group Entities The results and financial position of all Group entities that have a functional currency other than the presentational currency are translated into the presentational currency as follows: (i) Income statements, movements in equity and cash flows are translated at average exchange rates for the year. (ii) Balance sheets are translated at the exchange rates ruling on December 31. (iii) Resulting exchange differences are recognised in the equity reserve for currency translation. Currency exchange rates are determined by reference to the respective central banks. Currencies which are fixed to the United States dollar are converted into Barbados dollars at the equivalent fixed rates. Currencies which float are converted to the Barbados dollar by reference to the average of buying and selling rates quoted by the respective central banks. Exchange rates of the other principal operating currencies to the Barbados dollar were as follows: December 2005 closing rate 2005 average rate December 2004 closing rate 2004 average rate Bahamas dollar Belize dollar Cayman Islands dollar Eastern Caribbean dollar Jamaica dollar Netherlands Antillean guilder Trinidad & Tobago dollar United States dollar 0.50 1.00 0.4175 1.35 32.1903 0.90 3.1493 0.50 0.50 1.00 0.4175 1.35 31.1218 0.90 3.1332 0.50 0.50 1.00 0.4175 1.35 30.7250 0.90 3.1444 0.50 0.50 1.00 0.4175 1.35 30.5794 0.90 3.1373 0.50 On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to the equity reserve for currency translation. When a foreign entity is sold, such exchange differences are recognised in the consolidated income statement as part of the gain or loss on sale. Goodwill and other purchase accounting adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated at the rate ruling on December 31. 47 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (continued) (c) Transactions and balances Foreign currency transactions are translated into the functional currency at 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 of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Translation differences on debt securities and other monetary financial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary items such as equities held at fair value through income are reported as part of the fair value gain or loss. Translation differences on non-monetary items such as equities held available for sale are included in the fair value reserve in equity. 2.4 Investment property Investment property is recorded initially at cost. At subsequent balance sheet dates, investment property is recorded at fair values determined by independent valuers, with the appreciation or depreciation in value being taken to investment income. Investment property includes property held under partnership and joint venture arrangements with third parties. These are accounted for under the proportionate consolidation method. Transfers to or from investment property are recorded when there is a change in use of the property. Transfers to owner-occupied property or to real estate developed for resale are recorded at the fair value at the date of change in use. Transfers from owner-occupied property are recorded at their fair value and any difference with carrying value at the date of change in use is dealt with in accordance with note 2.5. Investment property may include property of which a portion is held for rental to third parties and another portion is occupied by the Group for administrative purposes. This type of property is accounted for as an investment property if the Group’s occupancy level is 25% or less of the total available occupancy. In other instances, this type of property is accounted for as an owner-occupied property. Rental income is recognised on an accruals basis. 48 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.5 Property, plant and equipment Property, plant and equipment are recorded initially at cost. Owner-occupied property is re-valued at least every three years to its fair value as determined by independent valuers. Movements in fair value are taken to the fair value reserve in equity, unless there is a net depreciation in respect of an individual property, which is then recorded in the income statement. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset. On disposal of owner-occupied property, the amount included in the reserve is transferred to retained earnings. Any gain or loss on disposal included in income is determined by comparing proceeds to the asset’s carrying value at the time of disposal. The Group, as lessor, enters into operating leases with third parties to lease assets. Operating leases are leases in which the Group maintains substantially the risks of ownership and the associated assets are recorded as property, plant and equipment. Income from operating leases is recognised on the straight-line basis over the term of the lease. Depreciation is calculated on the straight-line method to write down the cost of assets to their residual values over their estimated useful lives. The carrying amount of an asset is written down immediately through the depreciation account if the carrying amount is greater than its estimated recoverable amount. The estimated useful lives of property, plant and equipment are as follows: Asset Buildings Furnishings and leasehold improvements Computer and office equipment Vehicles Leased equipment and vehicles Estimated useful life 20 to 50 years 10 years or lease term 3 to 10 years 5 to 6 years 3 to 6 years 2.6 Intangible assets (a) Goodwill Goodwill (defined in note 2.2(a)) arising from an acquisition of a subsidiary or insurance business is allocated to appropriate cash generating units. A cash generating unit is determined to be the relevant subsidiary’s operations in a geographical segment. Goodwill arising from an investment in an associate is included in the carrying value of the investment in associate. From 2005, goodwill is tested annually for impairment and is carried at cost less accumulated impairment. In response to the change in accounting for goodwill, (in prior years goodwill was amortised over its estimated useful life and only tested for impairment when there was evidence of impairment), the net carrying value of goodwill at the end of 2004 is now deemed to be the cost. 49 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.6 Intangible assets (continued) (b) Other intangible assets Other intangible assets arising on acquisitions occurring on or after March 31, 2004 are recognised only if future economic benefits attributable to the asset will flow to the Group and if the fair value of the asset can be measured reliably. In addition for the purposes of recognition, the intangible asset must be separable from the business being acquired or must arise from contractual or legal rights. Intangible assets acquired in a business combination are initially recognised at their fair value. Other intangible assets which have been acquired directly, are recorded initially at cost. On acquisition the useful life of the asset is estimated. If the estimated useful life is definite, then the cost of the asset is amortised over its life, and is tested for impairment when there is evidence of same. If the estimated useful life is indefinite, the asset is tested annually for impairment. The estimated useful lives of recognised intangible assets are as follows: Asset Customer relationships and contracts Trade names Software Estimated useful life 2 – 20 years 4 years, indefinite 2 – 6 years 2.7 Financial assets The Group classifies its financial assets into four categories: • held to maturity financial assets; • available for sale financial assets; • • financial assets at fair value through income; and loans and receivables. Management determines the appropriate classification of these assets at initial recognition. Financial assets with fixed maturities and for which management has both the intent and ability to hold to maturity are classified as held to maturity. These assets are carried at amortised cost less provision for impairment. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. These assets are carried at amortised cost less provision for impairment. Financial assets in the category at fair value through income include held for trading securities. An asset is classified in this category at inception if acquired principally for the purpose of selling in the short-term, if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking or if so designated by management. These investments are measured initially at cost and are subsequently re-measured at their fair value based on quoted prices or internal valuation techniques. Realised and unrealised gains and losses are recorded as investment income. 50 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.7 Financial assets (continued) Other financial assets are classified as available for sale. These assets are measured initially at cost and are subsequently re-measured at their fair value based on quoted prices or internal valuation techniques. Unrealised gains and losses, net of deferred income taxes, are recorded in the fair value reserve. Either on the disposal of the asset or if the asset is determined to be impaired, the previously recorded unrealised gain or loss is transferred to investment income. Discounts and premiums on available for sale securities are amortised using the effective yield method. Purchases and sales of these investments are recognised on the trade date. Cost of purchases includes transaction costs. Interest income arising on investments is accrued using the effective yield method. Dividends are recorded in revenue when due. A financial asset is considered impaired if its carrying amount exceeds its estimated recoverable amount. The impairment loss for assets carried at amortised cost is calculated as the difference between the carrying amount and the present value of expected cash flows discounted at the original effective interest rate. The recoverable amount for assets carried at fair value is the present value of expected future cash flows discounted at the current market interest rate for a similar financial asset. 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 recognised, the previously recognised impairment loss is reversed, and the amount of the reversal is recognised in revenue. (a) Securities purchased under agreements to resell Securities purchased under agreements to resell are treated as collateralised financing transactions. The difference between the purchase and resale price is treated as interest and is accrued over the life of the agreements using the effective yield method. (b) Finance leases The Group, as lessor, enters into finance leases with third parties to lease assets. Finance leases are leases in which the Group has transferred substantially the risks of ownership to the lessee. The finance lease, net of unearned finance income, is recorded as a receivable and the finance income is recognised over the term of the lease using the effective yield method. (c) Derivative financial instruments The Group holds certain bonds and preferred equity securities that contain options to convert into common shares of the issuer. These options are considered embedded derivatives. If the measurement of an embedded derivative can be separated from its host contract, the embedded derivative is carried at current market value and is presented with its related host contract. Unrealised gains and losses are recorded as investment income. If the measurement of an embedded derivative cannot be separated from its host contract, the full contract is accounted for as a held for trading security. 51 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.7 Financial assets (continued) (d) Financial assets held in trust under modified coinsurance arrangements These assets are held in trust for the insurer and are in respect of policy liabilities ceded to reinsurers. These assets are classified as available for sale. 2.8 Real estate developed or held for resale Lands being made ready for resale along with the cost of infrastructural works are classified as real estate held for resale and are valued at the lower of cost and net realisable value. Real estate acquired through foreclosure is classified as real estate held for resale and is valued at the lower of cost and net realisable value. Gains and losses realised on the sale of real estate are included in revenue at the time of sale. 2.9 Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. 2.10 Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, call deposits, other liquid balances with original maturities of ninety days or less, and bank overdrafts. Cash and cash equivalents do not include balances principally of an investment nature or funds held to meet statutory requirements. 52 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (a) Classification The Group issues contracts that transfer insurance risk, financial risk or both. Insurance contracts transfer insurance risk and may also transfer financial risk. The Group defines insurance risk if an insured event could cause an insurer to pay significant additional benefits in a scenario that has a discernable effect on the economics of the transaction. Investment contracts are those contracts that transfer financial risk and no insurance risk (as defined above). A number of insurance contracts contain a discretionary participation feature. A discretionary participation feature entitles the holder to receive, supplementary to the main benefit, additional benefits or bonuses: that are likely to be a significant portion of the total contractual benefits; • • whose amount or timing is contractually at the discretion of management; and • that are contractually based on º º º the performance of a specified pool of contracts; investment returns on a specified pool of assets held by the insurer; or the profit or loss of a fund or insurer issuing the contract. Policy bonuses and policy dividends constitute discretionary participation features which the Group classifies as liabilities. Residual gains in the participating accounts constitute discretionary participation features which the Group classifies as equity. 53 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (continued) (b) Recognition and measurement The main insurance and investment contracts issued by the Group are summarised below. (i) Property and casualty insurance contracts Property and casualty insurance contracts are generally one year renewable contracts issued by the insurer covering insurance risks over property, motor, accident and marine. Premium revenue is recognised as earned on a pro-rated basis over the term of the respective policy coverage. The provision for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. Claims and loss adjustment expenses are recorded as incurred. Claim reserves represent estimates of future payments of reported and unreported claims and related expenses with respect to insured events that have occurred up to the balance sheet date. Reserving involves uncertainty and the use of informed estimates and judgements. The Group does not discount its loss reserve. The claim reserve is included in policy benefits in the course of settlement. The Group obtains reinsurance coverage for its property and casualty insurance risks. The reinsurance ceded premium is expensed on a pro-rata basis over the term of the respective policy coverage. Reinsurance claim recoveries are established at the time of the recording of the claim liability. Profit sharing commission due to the Group is recognised only when there is reasonable certainty of collectibility, at which time it is recorded as commission income. Commissions and premium taxes payable are recognised on the same basis as premiums written. (ii) Health insurance contracts Health insurance contracts are generally one year renewable contracts issued by the insurer covering insurance risks for medical expenses of insured persons. Premium revenue is recognised when due for contracts where the premium is billed monthly. For contracts where the premium is billed annually or semi-annually, premium revenue is recognised as earned on a pro- rated basis over the term of the respective policy coverage. The provision for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. Claims are recorded on settlement. Reserves are recorded as described in note 2.12. The Group may obtain reinsurance coverage for its health insurance risks. The reinsurance premium is expensed over the coverage period of respective policies. Reinsurance claims recoveries are established at the time of claim settlement. Commissions and premium taxes payable are recognised on the same basis as earned premiums. 54 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (continued) (iii) Long-term traditional insurance contracts Long-term traditional insurance contracts are generally issued for fixed terms of five years or more, or for the remaining life of the insured. Benefits are typically a death or critical illness benefit, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneficiaries with a proviso for a minimum number of payments. Some of these contracts have a discretionary participation feature in the form of regular bonuses or dividends. Other benefits such as disability or waiver of premium on disability may also be included in these contracts. Some contracts may allow for the advance of policy loans to the policyholder and may also allow for dividend withdrawals by the policyholder during the life of the contract. Premium revenue is recognised when due. Typically, premiums are fixed and are required to be paid within the due period for payment. If premiums are unpaid, the contract will terminate unless an automatic premium loan is available to settle the premium. Policy benefits are recognised on notification of death, receipt of surrender request, on the maturity date of endowment policies, on the declaration of a cash bonus or dividend or on the annuity payment date. Policy loans advanced are recorded as loans and receivables in the balance sheet and are secured by the cash values of the respective policies. Policy bonuses may be “non-cash” and utilised to purchase additional amounts of insurance coverage. Accumulated cash bonuses and dividends are recorded as interest bearing policy funds on deposit. Reserves for future policy liabilities are recorded as described in note 2.12. The Group may obtain reinsurance coverage for death benefit insurance risks. Typically, coverage is obtained for individual coverage exceeding prescribed limits. The reinsurance premium is expensed when due, which generally coincides with when the policy premium is due. Reinsurance claims recoveries are established at the time of claim notification. Commissions and premium taxes payable are recognised on the same basis as earned premiums. 55 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (continued) (iv) Long-term – universal life and unit linked insurance contracts Universal life and unit linked insurance contracts are generally issued for fixed terms or for the remaining life of the insured. Benefits are typically a death or critical illness benefit, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneficiaries with a proviso for a minimum number of payments. Benefits may include amounts for disability or waiver of premium on disability. Universal life and unit linked contracts have either an interest bearing investment account or unit linked investment accounts. Either gross premiums or gross premiums net of allowances are deposited to the investment accounts. Investment returns are credited to the investment accounts and expenses, not included in the aforementioned allowances, are debited to the investment accounts. Allowances and expense charges are in respect of applicable commissions, cost of insurance, administrative expenses and premium taxes. Fund withdrawals may be permitted. Premium revenue is recognised when received and consists of all monies received from the policyholders. Typically, premiums are fixed at the inception of the contract or periodically thereafter but additional non- recurring premiums may be paid. Death benefits are recognised in policy benefits on notification. Fund withdrawals are recognised in policy benefits on receipt of the withdrawal request. Reserves for future policy liabilities are recorded as described in note 2.12. The Group may obtain reinsurance coverage for death benefit insurance risks. Typically, coverage is obtained for individual coverage exceeding prescribed limits. The reinsurance premium is expensed when due. Reinsurance claims recoveries are established at the time of claim notification. Commissions and premium taxes payable are generally recognised only on settlement of premiums. (v) Reinsurance contracts assumed Reinsurance contracts assumed by an insurer are accounted for in a similar manner as if the insurer has issued the risk. Reinsurance contracts assumed include blocks of life and annuity policies assumed from third party insurers. In some instances, the Group also administers these policies. 56 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (continued) (vi) Reinsurance contracts held As noted in sections (i) to (iv) above, an insurer may obtain reinsurance coverage for insurance risks underwritten. The Group cedes insurance premiums and risk in the normal course of business in order to limit the potential for losses arising from its exposures. Reinsurance does not relieve the originating insurer of its liability. Reinsurance contracts held include blocks of life and annuity policies ceded to reinsurers on coinsurance or modified coinsurance bases. The Group records as a receivable the reinsurer’s share of the actuarial liabilities on these policies. The benefits to which an insurer is entitled under its reinsurance contracts held are recognised as reinsurance assets or receivables. Reinsurance assets and receivables are assessed for impairment. If there is evidence that the asset or receivable is impaired, the impairment is recorded in the statement of income. The obligations of an insurer under reinsurance contracts held are recognised as reinsurance liabilities or payables. Reinsurance balances are measured consistently with the insurance liabilities to which they relate. (vii) Investment contracts – deposit administration and other investor contracts Deposit administration contracts are issued by an insurer to registered pension schemes which deposit the pension plan assets with the insurer. The insurer is obligated to provide investment returns to the pension scheme in the form of interest or in direct proportion to the investment returns on specified blocks of assets. Deposit administration contributions are recorded directly as liabilities. Withdrawals are deducted directly from the liability. The interest or investment return provided is recorded as an interest expense. In addition, the Group may provide pension administration services to the pension schemes. The Group earns fee income for both pension administration and investment services. Interest guarantees which may adversely affect the Group are recorded in actuarial liabilities. Other investor contracts are valued at amortised cost and are otherwise accounted in a manner similar to deposit administration contracts. The liability in respect of other investor contracts is included under policy funds on deposit. 57 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.11 Insurance and investment contracts (continued) (viii) Investment contracts – securities sold under agreements to repurchase Securities sold under agreements to repurchase are treated as collateralised financing transactions. The difference between the sale and repurchase price is treated as interest and is accrued over the life of the agreements using the effective yield method. (ix) Investment contracts – deposit liabilities Deposits are recognised initially at fair value and are subsequently stated at amortised cost using the effective yield method. (c) Liability adequacy tests At balance sheet date, liability adequacy tests are performed to ensure the adequacy of insurance contract liabilities, using current estimates of the related expected future cash flows. If a test indicates that the carrying value of insurance contract liabilities is inadequate, then the liabilities are adjusted to correct the deficiency. The deficiency is included in the income statement under benefits. 2.12 Actuarial liabilities The Canadian Asset Liability Method (CALM) is used for the determination of actuarial liabilities of long-term insurance contracts. These liabilities consist of amounts that, together with future premiums and investment income, are required to provide for future policy benefits, expenses and taxes on insurance and annuity contracts. The process of calculating life insurance and annuity actuarial liabilities for future policy benefits necessarily involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and persistency, including reasonable margins for adverse deviations. As experience unfolds, these provisions for adverse deviations will be included in future income to the extent they are no longer required to cover adverse experience. Assumptions used to project benefits, expenses and taxes are based on company and industry experience and are updated annually. CALM is based on an explicit projection of cash flows using best estimate assumptions for each material cash flow item and contingency. Investment returns are based on projected investment income using the current asset portfolios and projected re-investment strategies. Each assumption is adjusted by a margin for adverse deviation. Certain life insurance policies issued by the insurer contain equity linked policy side funds. The investment returns on these unitised funds accrue directly to the policies with the insurer assuming no credit risk. Investments held in these side funds are accounted for as financial assets at fair value through income and unit values of each fund are determined by dividing the value of the assets in the fund at balance sheet date by the number of units in the fund. The resulting liability is included in actuarial liabilities. The actuarial liabilities of health insurance policies are estimated in respect of claims that have been incurred but not yet reported and claims that have been reported but not yet paid, due to the time taken to process the claim. 58 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.13 Participating Accounts (a) “Closed” participating fund For participating policies of Sagicor Life Inc in force at demutualisation, Sagicor Life Inc established a closed participating fund in order to protect the guaranteed benefits and future policy dividends, bonuses and other non-guaranteed benefits of the afore-mentioned policies. The rules of this fund require that premiums, benefits, actuarial reserve movements, investment returns, expenses and taxes, attributable to the said policies, are recorded in a ‘closed’ participating account. Policy dividends and bonuses of the said policies are paid from the participating account on a basis substantially the same as prior to demutualisation. The fund also includes the required provisions for adverse deviations as determined in the computation of actuarial liabilities of the said policies. Changes in the provision for adverse deviations are not recorded in the participating account, but are borne by the general operations of Sagicor Life Inc. (b) “Open” participating fund Sagicor Life Inc also established an open participating fund for participating policies it issues after demutualisation. The rules of this fund require that premiums, benefits, actuarial reserve movements, investment returns, expenses and taxes, attributable to the said policies are recorded in an ‘open’ participating account. The open participating fund was established at demutualisation. In 2003 and 2004, transfers were made from retained earnings to the fund as initial seed capital to support the issue of new participating policies. On February 1, 2005, Sagicor Life Inc amalgamated with Life of Barbados Limited, and participating policies of the latter were transferred to the open participating fund. Accordingly, the liabilities of these participating policies and matching assets were transferred to the open participating fund. The liabilities transferred included provisions for adverse deviations on the transferred policies, which are accounted for in the same way as the corresponding provisions in the closed participating fund. Additional assets to support the profit distribution to shareholders (see below) were also transferred into the fund. Effective June 30, 2005, on the recommendation of the Appointed Actuary of Sagicor Life Inc, the open participating fund had reached a size at which capital self sufficiency had been attained, and the seed capital was returned to retained earnings. A return on the seed capital, as determined by the Appointed Actuary, has been charged to the participating account. Distributable profits of the open participating account are shared between participating polices and shareholders in a ratio of 90:10. Profits are distributed to the participating policies in the form of declared bonuses and dividends. Profits which are distributed to shareholders are included in the allocation of Group net income to shareholders. Undistributed profits remain in the participating account. 59 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.13 Participating Accounts (continued) (c) Financial statement presentation The assets and liabilities of the participating funds are not presented separately in the financial statements. The revenues, benefits and expenses of the participating accounts are also not presented separately in the financial statements. However, the overall surplus of assets held in the participating funds over the associated liabilities is presented in equity as the participating accounts. The overall Group net income that is attributable to the participating funds is disclosed as an allocation of net income. Movements in reserves attributable to the participating funds are presented in equity under the participating accounts. The allocation of additional assets to the participating funds is recognised in equity as a transfer from retained earnings to the participating accounts. 2.14 Borrowings Borrowings are recognised initially at fair value, being their issue proceeds, net of transaction costs incurred. Subsequently, borrowings are stated at amortised cost and any difference between net proceeds and the redemption value is recognised in the income statement over the period of the borrowings using the investment yield method. Borrowings undertaken for the purposes of Group expansion are classified as loans payable and the associated cost is classified as finance cost. Borrowings undertaken for the purposes of providing funds for on-lending, leasing or portfolio investments are classified as other funding instruments and are included in deposit and security liabilities and the associated cost is included in interest expense. 2.15 Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, if it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. 2.16 Interest income and expenses Interest income and expenses are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. Interest income includes coupons earned on fixed income investment securities, loans and deposits and accrued discount and premium on discounted instruments. 2.17 Fees and other revenue Fees and other revenue are recognised on an accrual basis when the related service has been provided. 60 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (a) Pension benefits Group companies have various pension schemes in place for their employees. Some schemes are defined benefit plans and others are defined contribution plans. The liability in respect of defined benefit plans is the present value of the defined benefit obligation at December 31 minus the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is computed using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using appropriate interest rates for the maturity dates and location of the related liability. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions, and amendments to pension plans are charged or credited to the income statement over the average service lives of the related employees. Past service costs are charged to the income statement on a straight line basis over the average period until the benefits become vested. Past service costs are recognised immediately if the benefits vest immediately. For defined contribution plans, the Group pays contributions to the pension schemes on a mandatory or contractual basis. Once paid, the Group has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in expenses in the income statement. (b) Other retirement benefits Certain Group subsidiaries provide supplementary health, dental and life insurance benefits to qualifying employees upon retirement. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. (c) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on various profit and other objectives of the Group as a whole or of individual subsidiaries. A provision is recognised where there are contractual obligations or where past practice has created a constructive obligation. 61 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (continued) (d) Equity compensation benefits The Company and certain Group subsidiaries have in place equity-settled share-based compensation plans for their administrative, sales and managerial staff. For equity-settled share-based compensation plans, the fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non- market vesting conditions (for example, net profit growth target). Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. At each balance sheet date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the statement of income, and a corresponding adjustment to equity over the remaining vesting period. The proceeds received net of any directly attributable transaction costs are credited to share capital or minority interests when the options are exercised. A subsidiary has in place a share purchase plan which enables its administrative and sales staff to purchase new shares of that subsidiary at a discount. (e) Termination benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without the possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than twelve (12) months after the balance sheet date are discounted to present value. 2.19 Deferred income taxes The Group uses the balance sheet liability method of accounting for income tax. Deferred tax assets and liabilities resulting from temporary differences are computed at tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax assets are only recognised when it is probable that taxable profits will be available against which the asset may be utilised. Provision for taxes, which could arise on the remittance of retained earnings from subsidiaries, is only made where there is a current intention to remit such earnings. 2.20 Dividend distributions Dividend distributions on the Company’s common shares are recorded in the period during which the dividend declaration has been approved by the directors. 62 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.21 Statutory reserves Statutory reserves are established when regulatory accounting requirements result in lower distributable profits or when an appropriation of retained earnings is required or permitted by law to protect policyholders, insureds or depositors. 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The development of estimates and the exercise of judgment in applying accounting polices may have a material impact on the Group’s reported assets, liabilities, revenues, benefits and expenses. The items which may have the most effect on the Group’s financial statements are set out below. 3.1 Impairment of financial assets An available for sale debt security, a loan or a receivable is considered impaired when management determines that it is probable that all amounts due according to the original contract terms will not be collected. This determination is made after considering the payment history of the borrower, the discounted value of collateral and guarantees, and the financial condition and financial viability of the borrower. An available for sale equity investment is considered impaired when there is a significant or prolonged decline in the fair value below cost. Determination of what is significant or prolonged requires judgement which includes consideration of the volatility of the fair value, and the financial condition and viability of the investee. The determination of impairment may either be considered by individual asset or by a grouping of assets with similar relevant characteristics. 3.2 Recognition and measurement of intangible assets The recognition and measurement of intangible assets, other than goodwill, in a business combination involve the utilisation of valuation techniques which may be very sensitive to the underlying assumptions utilised. These intangibles may be marketing related, consumer related, contract based or technology based. For significant amounts of intangibles arising from a business combination, the Group utilises independent professional advisors to assist management in determining the recognition and measurement of these assets. 3.3 Impairment of intangible assets (a) Goodwill The assessment of goodwill impairment involves the determination of the fair value of the cash generating business units to which the goodwill has been allocated. Determination of fair value involves the estimation of future net income of these business units and the expected returns to providers of capital to the business units and / or to the Group as a whole. The Group updates its business unit financial projections annually and applies discounted cash flow models on these projections to determine if there is any impairment of goodwill. 63 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.3 Impairment of intangible assets (continued) (b) Other intangible assets The assessment of impairment of other intangible assets involves the determination of the intangible’s fair value or value in use. In the absence of an active market for an intangible, its fair value may need to be estimated. In determining an intangible’s value in use, estimates are required of future cash flows generated as a result of holding the asset. 3.4 Actuarial liabilities (a) Canadian asset liability method (CALM) The objective of the valuation of policy liabilities is to determine the amount of the insurer’s assets that, in the opinion of the Appointed Actuary (AA) and taking into account the other pertinent items on the balance sheet, will be sufficient without being excessive to provide for the policy liabilities over their respective terms. The amounts set aside for future benefits are dependent on the asset and liability cash flows, as well as any mismatch during the valuation period. The actuarial liabilities are determined by the amount of assets required to ensure that sufficient monies are available to meet the policy liabilities as they become due, even under adverse economic circumstances. The AA identifies the current economic scenario and the existing investment portfolio as at the date of the actuarial valuation. The investments required to support the policy liabilities are then determined under a variety of future interest rate environments using scenario testing. The total policy liability is determined as the amount of assets required in order that sufficient monies are available to meet the liabilities as they become due under the “worst case” economic scenario, that is, the scenario that produces the highest investment requirement. The CALM methodology produces the total reserve requirement for each CALM fund. In general, the CALM methodology is used to determine the net overall actuarial liabilities required by the insurer. Policy premium method (PPM) equivalents are used to determine the amount of reinsurance balances in the reserve, the distribution of the total reserve by country (for statutory reporting), and the distribution of the reserve by policy (for MCCSR negative reserves). PPM equivalents and other approximations to CALM have also been used in calculating certain components in the actuarial liabilities. 64 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.4 Actuarial liabilities (continued) (b) Best estimate reserve assumptions & provisions for adverse deviations Actuarial liabilities include two major components: a best estimate reserve and a provision for adverse deviations. This latter provision is established in recognition of the uncertainty in computing best estimate reserves, to allow for possible deterioration in experience and to provide greater comfort that reserves are adequate to pay future benefits. For the respective reserve assumptions for mortality and morbidity, lapse, future investment yields, operating expenses and taxes, best estimate reserve assumptions are determined where appropriate for each major geographical segment, namely Barbados, Jamaica, Trinidad & Tobago, USA and other Caribbean. Provisions for adverse deviations are established in accordance with the risk profiles of the business, and are, as far as is practicable, standardized across the major geographical segments. Provisions are determined within a specific range established by the Canadian Standards of Practice. 4. RISK MANAGEMENT The Group’s activities are related principally to the use of financial instruments and insurance contracts. As such, the Group is exposed to financial and insurance risks and the principles utilised by management in dealing with these risks are set out below. 4.1 Credit risk The Group takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. Credit risks are primarily associated with financial investments and reinsurance contracts held. Credit risk from financial investments is minimised through holding a diversified portfolio of investments, purchasing securities and advancing loans only after careful assessment of the borrower, and placing deposits with financial institutions with a strong capital base. Limits may be placed on the amount of risk accepted in relation to one borrower. Exposure to credit risk is also managed in part by obtaining collateral and guarantees. Significant concentrations of credit risk associated with financial investments are set out in notes 11.3 and 15. The risks associated with reinsurance contracts held are set out in note 4.9. 65 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 4.2 Foreign exchange risk The Group is exposed to foreign exchange risk as a result of fluctuations in exchange rates since its financial assets and liabilities are denominated in a number of different currencies. In order to manage the risk associated with movements in currency exchange rates, the Group seeks to maintain investments and cash in each operating currency, which are sufficient to match liabilities denominated in the same currency. Exceptions are made to invest limited proportions in United States dollar assets which are held to back liabilities in operating currencies. Management considers that these assets diversify the range of investments available, and in the long-term are likely to either maintain capital value and/or provide satisfactory returns. Assets and liabilities by currency are set out in note 37. 4.3 Interest rate risk The Group is exposed to interest rate risk, which arises when the returns earned from invested assets are insufficient either to maintain returns or to fulfil the minimum returns within insurance and investment contract liabilities. The return on investments may be variable, fixed for a term or fixed to maturity. On reinvestment of a matured investment, the returns available on the new investment may be significantly different from the returns formerly achieved. Guaranteed minimum returns exist within cash values of long term traditional insurance contracts, long term universal life insurance contracts, annuity options, deposit administration liabilities and policy funds on deposit. For other investment contract liabilities, returns are usually contractual. The Group is therefore exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase or decrease as a result of such changes. Interest rate changes may also result in losses if asset and liability cash flows are not closely matched with respect to timing and amount. The Group is exposed to risk under embedded derivatives contained in a host insurance contract. These risks include exposures to investment returns which may produce losses to the insurer arising from the following contract features: • minimum annuity rates which are guaranteed to be applied at some future date; • minimum guaranteed death benefits which are applicable when the performance of an interest bearing or unit linked fund falls below expectations; • minimum guaranteed returns in respect of cash values and universal life investment accounts. The Group manages its interest rate risk by a number of measures, including where feasible the selection of assets which best match the maturity of liabilities, the offering of investment contracts which match the maturity profile of assets, the re-pricing of interest rates on loans receivable, insurance contracts and investment contracts in response to market changes. In the Caribbean region, where availability of suitable investments is often a challenge, the Group holds many of its fixed rate debt securities to maturity and therefore mitigates the transient interest rate changes in the markets. The effective interest rates of the Group’s financial assets and financial liabilities are set out in the notes 11, 18, 19 and 20. 66 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 4.4 Liquidity risk In order to manage liquidity risks, management seeks to maintain levels of cash and short-term deposits in each of its operating currencies, which are sufficient to meet reasonable expectations of its short-term obligations. The Group is exposed to daily calls on its available cash resources for policy benefits and withdrawals, operating expenses and taxes, loan draw-downs, repayment of borrowings, maturing deposit liabilities and other security obligations. The Group does not maintain cash resources to meet all these needs as experience shows that a minimum level of revenue flows and maturing investments can be predicted with a high level of certainty. Certain investment portfolios within the Group contain securities which can only be disposed of over a period of time. In such instances, the Group generally maintains higher levels of short-term instruments to compensate for the relative illiquidity of the aforementioned securities. The maturity profiles of the Group’s financial assets and liabilities are disclosed in notes 11, 18, 19 and 20. 4.5 Fair values of financial assets and financial liabilities Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who are under no compulsion to act and is best evidenced by a quoted market value, if one exists. The estimated fair values of financial assets and financial liabilities are based on market values of quoted securities as at December 31 where available. In assessing the fair value of non-traded financial assets and financial liabilities, the Group uses a variety of methods including obtaining dealer quotes for specific or similar instruments and the use of internally developed pricing models. The Group’s financial assets and financial liabilities as disclosed in the balance sheet approximate their fair value, except as disclosed in notes 11 and 20. 4.6 Insurance risk - short term insurance contracts Short-term contracts are typically for one year’s coverage, with an option to renew under terms that may be amended by the insurer. In determining the premium payable under the contract, the insurer considers the nature and amount of the risk assumed, and recent experience and industry statistics of the benefits payable. This is the process of underwriting, which establishes appropriate pricing guidelines, and may include specific tests and enquiries which determine the insurer’s assessment of the risk. Insurers may also establish deductibles to limit amounts of potential losses incurred. Policy benefits payable under short-term contracts are generally triggered by an insurable event, i.e a property or casualty claim, a medical expense or a death claim. Settlement of these benefits is expected generally within six months. However, some benefits are settled over a longer duration. For the Group’s property and casualty insurance contracts, significant risk exposures arise from low frequency high severity events such as hurricanes. Single events, such as major fires and accidents may also generate significant claims. For the Group’s health insurance contracts, significant risk exposures arise from mortality and morbidity experience. 67 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 4.7 Insurance risks - long-term insurance contracts Long-term contracts are typically for a minimum period of 5 years and a maximum period which is determined by the remaining life of the insured. In addition to the estimated benefits which may be payable under the contract, the insurer has to assess the cash flows which may be attributable to the contract. The process of underwriting may also be undertaken and may include specific medical tests and other enquiries which affect the insurer’s assessment of the risk. The insurer assesses the likely benefits and cash flows both in establishing the amount of premium payable under the contract and in estimating the balance sheet liability arising from the contract. For long-term contracts inforce, the Group has adopted a policy of investing in assets with cash flow characteristics that closely match the cash flow characteristics of its policy liabilities. The primary purpose of this matching is to ensure that cash flows from these assets are synchronised with the timing and the amounts of payments that must be paid to policyholders. Policy benefits payable under long-term contracts may be triggered: • by an insurable event, i.e. a death, disability or critical illness claim; • at a specified time, i.e. an annuity settlement or a policy maturity; and • on the exercise of a surrender or withdrawal request by the policyholder. Settlement of these benefits is therefore expected over a wide time span, extending over the remaining lives of the insureds and annuitants. Industry and Group experience do suggest that settlement will in fact occur over this time period, but does not remove the uncertainty which exists over the timing of future benefit cash outflows. Significant risks arise from mortality and morbidity experience. Worsening mortality and morbidity will increase the incidence of death and disability claims. Improving mortality will lengthen the payout period of annuities. 4.8 Concentrations of insurance risk The Group carries significant insurance risks concentrated in certain countries within the Caribbean. In these countries, the Group carries a notable proportion of the insured population (life, annuity health) or insured assets or casualty risk (property and casualty) of the country as a whole. Significant concentration of life insurance, annuity, and health risks occurs in Antigua, Barbados, Cayman Islands, Jamaica, Netherland Antilles, St Lucia and Trinidad and Tobago. Significant concentration of property and casualty risks occurs in Barbados and Cayman Islands. Total insurance coverage on insurance policies quantify some of the risk exposures. Typically, claims arising in any one year are a very small proportion in relation to the total insurance coverage provided. The total sums assured at December 31, 2005, gross and net of reinsurance on life and property and casualty risks are summarised below. Contracts issued to individuals – life insurance Contracts issued to groups – life insurance Property and casualty Gross 24,110,493 8,548,240 7,893,760 Net 19,631,953 7,127,969 3,268,676 68 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 4.9 Reinsurance risk To limit its exposure of potential loss on an insurance policy, the insurer may cede certain levels of risk to a reinsurer. The Group selects reinsurers which have well established capability to meet their contractual obligations and which generally have high credit ratings. The credit ratings of reinsurers are monitored. Retention limits represent the level of risk retained by the insurer. Coverage in excess of these limits is ceded to reinsurers. The retention programs used by insurers are summarised below: Type of insurance contract Property and casualty insurance Retention by insurers Property risks • maximum retention of $20,000 for a single event; • maximum retention of $10,000 for a catastrophic event; • quota share retention to maximum of 60% in respect of the treaty limits; quota share retention is further reduced to a maximum of $1,000 per event. • Motor and liability risks Miscellaneous accident risks • maximum retention of $1,000 for a single event; • treaty limits apply. • maximum retention of $180 for a single event; • treaty limits apply. Engineering business risks • maximum retention of $300 • treaty limits apply for material damage and for liability claims. Marine risks • maximum retention of $150 for a single event; • treaty limits apply. Property, motor, liability, and engineering risk • • catastrophic excess of loss reinsurance cover is available per event for amounts in excess of treaty limits; treaty limits apply to catastrophic excess of loss coverage. Health insurance contracts with individuals Health insurance contracts with groups Life insurance contracts with individuals Retention per individual to a maximum of $785 Retention per individual to a maximum of $200 Retention per individual life to a maximum of $700 Life insurance contracts with groups Retention per individual life to a maximum of $200 Life insurance and annuity blocks of contracts 0% to 37.5% retention on policy liabilities 69 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 4.9 Reinsurance risk (continued) Certain insurers of the Group have ceded to a re-insurer further amounts representing 50% of the retentions for individual life contracts. Insurers may also have catastrophic reinsurance coverage in place whereby reinsurance coverage is obtained for multiple claims arising from one event or occurring within a specified time period. Reinsurance ceded does not discharge the insurer’s liability and failure by a reinsurer to honour its commitments could result in losses to the Group. Reinsurance balances and the effects of reinsurance ceded on income are disclosed in the notes 12, 16, 18, 27 and 30. 4.10 Fiduciary activities The Group provides investment management, administration and corporate trust services to pension and mutual funds and other corporate entities which involve the Group making allocation, purchase and sale decisions in relation to a wide range of investments. Those assets are held in a fiduciary capacity and are not included in these financial statements. These services give rise to fiduciary risk that may expose the Group to claims for mal-administration or under-performance of these funds. As of December 31, the Group administered approximately $2.4 billion (2004 - $1.5 billion) in assets on behalf of these funds. 5. STATUTORY RESTRICTIONS ON ASSETS Insurers are registered to conduct insurance business under legislation in place in each relevant jurisdiction. This legislation may prescribe a number of requirements with respect to deposits, investment of funds and solvency for the protection of policyholders. Banking subsidiaries may also be required to hold deposits with Central Banks which regulate the conduct of banking operations. To satisfy the above requirements, invested assets and cash totalling $1,271 million (2004 - $1,076 million) have been deposited with or are held in trust to the order of the insurance regulators. In some countries where the Group operates, there are exchange control or other restrictions on the remittance of funds out of those countries. 70 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 6. SEGMENTED INFORMATION 6.1 Geographical Segments The Group’s operations are primarily segregated by the location of the subsidiary or branch initiating the business. Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments Year ended December 31, 2005 Total assets Total liabilities Total revenue Income from ordinary activities Total cash flows 1,169,324 2,001,138 734,358 1,782,293 729,676 404 6,417,193 1,011,566 1,561,793 536,615 1,646,972 490,947 175,693 5,423,586 220,830 513,850 191,558 46,012 160,892 40,839 1,173,981 18,610 92,408 64,341 (9,970) 40,939 17,327 223,655 (9,114) 71,340 25,104 5,588 54,998 (9,182) 138,734 Year ended December 31, 2004 Total assets Total liabilities Total revenue Income from ordinary activities Total cash flows 1,113,345 523,925 712,922 21,784 620,959 144,952 3,137,887 934,325 399,133 490,424 15,740 515,570 22,907 2,378,099 214,313 292,267 160,750 24,341 142,993 308 834,972 28,929 46,627 58,202 (3,607) (34,676) (15,576) 79,899 (33,986) 13,517 5,049 (2,012) 13,115 (21,871) (26,188) Items not allocated to segments include balances relating to goodwill (in 2004 only), loans received to finance acquisitions and gains arising on business combinations. 71 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 6. SEGMENTED INFORMATION (continued) 6.1 Geographical Segments (continued) Significant non-cash expenses charged to income from ordinary activities comprise: Year ended Dec. 31,2005 Depreciation and Amortisation Increase in Depreciation actuarial and liabilities Amortisation Year ended Dec.31,2004 Increase in actuarial liabilities Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments Other significant cash expenditures comprise: Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments 10,041 12,334 1,106 608 1,409 - 25,498 24,713 7,807 38,575 (1,972) (10,443) - 58,680 8,530 2,006 1,256 966 466 8,577 21,801 20,516 16,722 28,758 25,504 17,615 - 109,115 Year ended Dec. 31, 2005 Year ended Dec. 31, 2004 Property, plant and equipment Intangible assets Property, plant and equipment Intangible assets 17,002 3,819 666 668 1,710 - 23,865 2,539 3,578 - - - - 6,117 16,348 3,636 7,011 - 1,918 - 28,913 420 46 - - - - 466 Included in the first two tables above are amounts relating to associated companies which each conduct business primarily in one geographical segment. Total assets and income for the associates consolidated in these financial statements are as follows: Year ended Dec. 31, 2005 Income from ordinary activities Total assets Year ended Dec. 31, 2004 Income from ordinary activities Total assets 253 507 24,775 24,716 50,251 40 68 3,365 - 3,473 2,113 133 22,030 - 24,276 5,525 - 3,744 - 9,269 Barbados Jamaica Trinidad & Tobago Other Caribbean 72 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 6. SEGMENTED INFORMATION (continued) 6.2 Business segments The Group’s business segments are defined by the grouping of products and services of a similar nature. Total assets and total revenue for the principal business segments are as follows: Life insurance, health insurance and annuities business from contracts issued to individuals Life insurance, health insurance and pensions business from contracts issued to groups Property and casualty insurance Banking and other financial services Not allocated to segments Life insurance, health insurance and annuities business from contracts issued to individuals Life insurance, health insurance and pensions business from contracts issued to groups Property and casualty insurance Banking and other financial services Not allocated to segments Year ended December 31, 2005 Total revenue Total assets 4,009,674 609,367 787,811 198,343 1,420,961 404 6,417,193 279,147 46,963 197,665 40,839 1,173,981 Year ended December 31, 2004 Total revenue Total assets 2,097,416 533,182 556,164 195,109 144,246 144,952 3,137,887 240,369 32,344 28,769 308 834,972 73 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 7. INVESTMENT PROPERTY The movement in investment property for the year is as follows: Balance, beginning of year Additions at cost Transfer to real estate developed for resale Transfer from property, plant & equipment Disposals Appreciation in fair values Effects of exchange rate changes Balance, end of year 2005 2004 179,015 8,873 (5,849) - (336) 1,710 (1,827) 181,586 151,523 15,605 - 7,258 (1,824) 6,892 (439) 179,015 Investment property includes $43,552 (2004 - $43,977) which represents the Group’s proportionate interest in the partnerships and joint ventures set out below. Description of property Barbados: Land at Fort George Heights, Upton, St Michael Land at Plum Tree, St Thomas Trident House Properties, Lower Broad Street, Bridgetown Financial Services Centre, Bishop’s Court Hill, St Michael United Nations House, Marine Gardens, Christ Church BET Building, Wildey, St Michael Belize: Belize Insurance Centre, North Front Street, Belize City Grenada: The Mutual/Trans-Nemwil Office Complex, The Villa, St George’s Trinidad & Tobago: Ernst & Young Building, Sweet Briar Road, Port-of-Spain Percentage owned by the Group 50% 50% 33% 50% 25% 10% 50% 50% 60% Pension Funds managed by the Group own a 50% interest in Fort George Heights and Plum Tree respectively, a 33% interest in Trident House Properties and a 25% interest in United Nations House. Other balances included in the financial statements in respect of the above partnerships and joint ventures are as follows: Cash, miscellaneous assets and receivables Other funding instruments, accounts payable and accrued liabilities Revenue Expenses 74 2005 4,830 553 3,588 221 2004 5,304 1,647 4,737 1,586 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 8. PROPERTY, PLANT AND EQUIPMENT Net book value, beginning of year Additions at cost Additions arising from acquisitions Disposals Appreciation in fair values Depreciation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost or valuation Accumulated depreciation Net book value, beginning of year Additions at cost Additions arising from acquisitions Disposals Appreciation in fair values Depreciation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost or valuation Accumulated depreciation Year ended December 31, 2005 Owner- Furnishings occupied & leasehold properties improvements Computer & Office equipment Total assets for internal use Vehicles 88,270 539 - (819) 4,896 (1,380) (243) 91,263 91,980 (717) 91,263 6,939 5,333 2,113 (2,349) - (1,886) (114) 10,036 15,688 6,339 7,216 (191) - (5,413) (553) 23,086 4,576 1,332 281 (270) - (1,749) (32) 4,138 115,473 13,543 9,610 (3,629) 4,896 (10,428) (942) 128,523 31,629 (21,593) 10,036 67,914 (44,828) 23,086 9,347 (5,209) 4,138 200,870 (72,347) 128,523 Year ended December 31, 2005 Leased vehicles & equipment Total assets for internal use Total 16,089 10,322 - (2,094) - (4,592) - 19,725 115,473 13,543 9,610 (3,629) 4,896 (10,428) (942) 128,523 131,562 23,865 9,610 (5,723) 4,896 (15,020) (942) 148,248 28,318 (8,593) 19,725 200,870 (72,347) 128,523 229,188 (80,940) 148,248 75 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 8. PROPERTY, PLANT AND EQUIPMENT (continued) Year ended December 31, 2004 Owner- Furnishings occupied & leasehold properties improvements Computer & Office equipment Total assets for internal use Vehicles 89,574 7,167 (5,758) - 6,492 (7,258) (1,688) (259) 88,270 89,254 (984) 88,270 7,359 1,373 (8) (10) - - (1,693) (82) 6,939 12,333 7,635 (179) (12) 269 - (4,351) (7) 15,688 3,972 2,179 (113) - - - (1,449) (13) 4,576 113, 238 18,354 (6,058) (22) 6,761 (7,258) (9,181) (361) 115,473 26,163 (19,224) 6,939 52,250 (36,562) 15,688 8,796 (4,220) 4,576 176,463 (60,990) 115,473 Year ended December 31, 2004 Leased vehicles & equipment Total assets for internal use Total 10,482 10,559 (1,532) - - - (3,420) - 16,089 113,238 18,354 (6,058) (22) 6,761 (7,258) (9,181) (361) 115,473 123,720 28,913 (7,590) (22) 6,761 (7,258) (12,601) (361) 131,562 21,644 (5,555) 16,089 176,463 (60,990) 115,473 198,107 (66,545) 131,562 Net book value, beginning of year Additions at cost Disposals Disposals arising from divestitures Appreciation in fair values Transfer to investment properties Depreciation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost or valuation Accumulated depreciation Net book value, beginning of year Additions at cost Disposals Disposals arising from divestitures Appreciation in fair values Transfer to investment properties Depreciation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost or valuation Accumulated depreciation 76 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 9. INVESTMENT IN ASSOCIATED COMPANIES Investment, beginning of year Additions Operating income (see below) Income taxes Dividends paid Effects of exchange rate changes Investment, end of year 2005 24,276 25,702 3,473 (16) (3,102) (82) 50,251 2004 21,414 - 9,269 159 (6,481) (85) 24,276 The Group’s associated company, Caribbean CariCard Services Inc (CariCard) sold its operations effective July 31, 2004. The net assets sold, consideration received and gain are as follows: Net assets sold Consideration received Total gain on sale Gain included in operating income above $1,404 of the above gain is attributable to the minority interest. 2004 2,547 12,947 10,400 5,200 The aggregate balances and results in respect of associated companies for the period are set out below. For associates acquired during 2005, the full year’s revenue and net income are included. Total assets Total liabilities Total revenue Net income for the year 2005 2004 447,823 284,502 34,099 10,321 145,638 108,246 47,972 22,580 77 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 Year ended December 31, 2005 Customer relationships Trade names Software Goodwill 100,124 - 5,814 12,770 - 1,965 1,478 - - (1,801) 120,350 - - 63,798 37,418 3,856 724 9,394 - (4,625) (3,673) 106,892 Total 103,345 834 84,824 50,294 3,856 2,689 15,215 6,117 (10,478) (6,191) 250,505 3,221 834 - 106 - - 2,250 6,117 (2,050) (264) 10,214 - - 15,212 - - - 2,093 - (3,803) (453) 13,049 16,726 (3,677) 13,049 Year ended December 31, 2004 Goodwill Software Total 109,259 - (8,554) (581) 100,124 3,428 466 (645) (28) 3,221 112,687 466 (9,199) (609) 103,345 170,521 (70,397) 100,124 5,007 (1,786) 3,221 175,528 (72,183) 103,345 120,350 - 120,350 111,366 (4,474) 106,892 15,041 (4,827) 10,214 263,483 (12,978) 250,505 10. INTANGIBLE ASSETS Net book value, beginning of year Assumed on acquisitions Additions: PCFS (note 38.1) EBA (note 38.2) First Life (note 38.3) Laurel Life (note 38.4) Cayman General (note 38.5) Other Amortisation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost: Accumulated amortisation Net book value, beginning of year Additions Amortisation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost: Accumulated amortisation 78 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 10. INTANGIBLE ASSETS (continued) Goodwill has been allocated to the following geographical segments. Barbados Jamaica Trinidad & Tobago USA Other Caribbean Goodwill Allocation, beginning of year Effects of exchange rate changes Balance, end of year Additions 45,266 23,355 9,840 - 21,663 100,124 - 18,584 - 1,965 1,478 22,027 - (1,704) - - (97) (1,801) 45,266 40,235 9,840 1,965 23,044 120,350 The recoverable amount of a cash generating unit is based on its value in use. These calculations use income projections prepared by management for the next three years. Projections beyond three years are extrapolated using the estimated discount factors and growth rates set out below. Barbados Jamaica Trinidad & Tobago USA Other Caribbean 2005 Discount factor Residual growth rate 12.00% 21.00% 12.00% 8.91% 6.00% 8.00% 6.00% 5.00% 10.00%, 12.00% 4.00%, 6.00% 79 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS 11.1 Analysis of financial investments Held to maturity securities: Debt securities Available for sale securities: Debt securities Equity securities Securities at fair value through income: Debt securities Equity securities Loans and receivables: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits 2005 Carrying Value 2005 Fair Value 2004 Carrying Value 2004 Fair Value 43,260 47,215 50,080 50,221 2,308,667 396,752 2,705,419 2,308,667 396,752 2,705,419 150,884 43,261 194,145 150,884 43,261 194,145 293,292 453,456 746,748 130,380 38,922 169,302 637,886 420,600 254,993 235,133 69,029 171,960 1,789,601 668,822 419,406 254,993 235,133 69,029 171,960 1,819,343 582,946 355,050 143,639 61,549 30,179 172,026 1,345,389 293,292 453,456 746,748 130,380 38,922 169,302 584,983 355,050 143,639 61,549 30,179 172,026 1,347,426 Total financial investments 4,732,425 4,766,122 2,311,519 2,313,697 Debt securities comprise: Government debt securities Corporate debt securities Collateralised mortgage obligations Other securities 2005 1,943,775 612,692 475,636 108,594 3,140,697 2004 841,893 200,662 - 14,143 1,056,698 Debt securities include $12,733 (2004 - $8,285) that contain options to convert to common shares of the issuer. Corporate debt securities include: (i) convertible loans totalling $1,548 (2004 - $1,718) issued to the Group by an associated company. These loans can be converted into equity or bonds issued by the associated company. (ii) $25,598 (2004 - $21,884) in bonds issued by an associated company. Equity securities include $12,526 (2004 - $11,834) in mutual funds managed by the Group. Policy loans include $89,900 (2004 – nil) in assets held as reinsurers’ share of actuarial liabilities. The Group earns no income on these assets. 80 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 11.2 Pledged assets Debt securities include $82,330 (2004 – nil) held in trust supporting reinsurance liabilities assumed. The Group manages these investments and bears the investment risk. Debt and equity securities include $55,749 (2004 - $45,875) as collateral for loans payable. The collateral for other funding instruments – loans for mortgage funding – from the Federal Home Loan Bank (FHLB), consists of an equity holding in the FHLB (market value $12,026), and mortgages and mortgage backed securities having a total market value of $255,554. Debt securities are pledged as collateral under repurchase agreements with customers and other financial institutions and for security relating to overdraft and other facilities with other financial institutions. As of December 31, 2005, these pledged assets totalled $904,302 (2004 - $309). Of these assets pledged as security $394,706 (2004 – nil) represent collateral for securities sold under agreements to repurchase in instances when the transferee has the right by contract or by custom to sell or re-pledge the collateral. 11.3 Significant concentrations Debt securities: Government of Jamaica Federal government of USA and its agencies Government of Barbados Government of Trinidad & Tobago Equity securities: RBTT Financial Holdings Limited Securities purchased under agreements to resell: Government of Jamaica 11.4 Effective interest rates Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits 2005 2004 1,322,041 576,354 208,154 86,086 351,707 5,864 161,241 125,022 42,081 122,336 68,863 30,127 2005 8.7% 7.1% 11.0% 12.9% 7.3% 7.2% 2004 11.5% 8.9% 10.2% 11.9% 10.9% 5.3% 81 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 11.5 Maturity profiles Debt securities Mortgage loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Debt securities Mortgage loans Finance loans and finance leases Securities purchased under agreements to resell Deposits December 31, 2005 Repayable between one and five years Repayable after five years 479,804 36,115 94,870 - 11,067 621,856 2,425,118 376,520 59,100 - 26,567 2,887,305 December 31, 2004 Repayable between one and five years Repayable after five years 247,280 44,004 43,118 - 17,123 351,525 659,803 296,057 13,467 - 2,055 971,382 Repayable within one year 235,775 7,965 81,163 69,029 134,326 528,258 Repayable within one year 149,615 14,989 4,964 30,179 152,848 352,595 Total 3,140,697 420,600 235,133 69,029 171,960 4,037,419 Total 1,056,698 355,050 61,549 30,179 172,026 1,675,502 Policy loans are repayable either at the discretion of the policyholder or on termination of the policy. 11.6 Returns accruing to the benefit of contract-holders Financial investments include the following amounts for which the full income and capital returns accrue to the holders of unit linked contracts, certain deposit administration contracts and “closed” participating policies. Debt securities Equity securities Mortgage loans Securities purchased under agreements to resell Deposits 82 2005 2004 393,382 35,520 224,806 6,706 45,660 706,074 149,234 29,579 82,074 7,003 959 268,849 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 11.7 Allowances for impairment losses Mortgage loans Debt securities Finance loans and finance leases 2005 2004 5,222 14,826 5,710 25,758 7,839 8,530 3,009 19,378 Interest of $3,645 (2004 - $3,481) has been accrued on impaired financial investments. 12. REINSURANCE ASSETS Reinsurers’ share of actuarial liabilities (note 16.1) Claim recoveries from reinsurers (note 18.2) Unearned premiums ceded to reinsurers (note 18.3) Other 2005 605,995 44,396 33,289 12,508 696,188 2004 2,889 92,912 13,399 - 109,200 The reinsurers’ share of actuarial liabilities represent balances which are long term in nature, and for which, most are expected to be settled after one year. Reinsurers’ share of actuarial liabilities and claim recoveries from reinsurers include the following significant balances: Scottish Re (U.S.) Inc (rated A-Excellent by A.M. Best) Washington National Insurance Company (rated B++ Very Good by A.M. Best) AON Re 13. INCOME TAX ASSETS Deferred income tax assets (note 34) Income and withholding taxes recoverable 2005 2004 366,900 - 211,532 6,783 - 74,265 2005 8,226 27,485 35,711 2004 8,037 12,559 20,596 83 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 14. MISCELLANEOUS ASSETS AND RECEIVABLES Pension plan assets (note 32.2) Real estate developed or held for resale Premiums in the course of collection Amounts due from managed funds Other accounts receivable 2005 2,723 23,498 52,517 10,722 113,956 203,416 2004 2,191 15,293 32,770 1,680 87,303 139,237 Real estate developed for resale includes $8,611 which is expected to be realised after one year. Real estate developed for resale includes $4,628 (2004 - $8,268) which represents the Group’s proportionate interest in the joint ventures set out below. Description of property Barbados: Land at Fort George Heights, Upton, St Michael Rolling Hills Development, Byde Mill, St George 15. CASH RESOURCES Percentage owned by the Group 50% 81% Significant concentrations of cash resources at December 31 are as follows: FirstCaribbean International Bank 2005 72,440 2004 45,209 84 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES 16.1 Analysis of actuarial liabilities (a) Contracts issued to individuals: Life - participating policies Life and annuity - non-participating policies Health Unit linked funds Reinsurance contracts held (b) Contracts issued to groups: Life Annuities Health Total actuarial liabilities The following notes are in respect of the above: 2005 2004 539,382 1,673,880 7,192 169,151 18,910 2,408,515 450,120 675,174 5,988 174,102 9,451 1,314,835 54,704 282,565 31,447 368,716 8,383 139,200 22,624 170,207 2,777,231 1,485,042 • Life includes insurance coverage for disability and critical illness. • Actuarial liabilities include $368,271 (2004 - $6,472) in assumed reinsurance. • Liabilities for reinsurance contracts held occur because the reinsurance premium costs exceed the mortality costs assumed in determining the gross liability of the policy. The above liabilities include the following amounts which are recoverable from reinsurers: (a) Contracts issued to individuals: Life - participating policies Life and annuity - non-participating policies Health (b) Contracts issued to groups: Life Annuities Health Total reinsurers’ share of actuarial liabilities (note 12) 2005 2004 6,302 483,188 2,666 492,156 7,157 106,428 254 113,839 605,995 - - 344 344 2,138 - 407 2,545 2,889 85 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.2 Assumptions (a) Process used to set actuarial assumptions and margins for adverse deviations At each date for valuation of actuarial liabilities, the Appointed Actuary (AA) of each insurer reviews the assumptions made at the last valuation date. The AA tests the validity of each assumption by reference to current data, and where appropriate, changes the assumptions for the current valuation. A similar process of review and assessment is conducted in the determination of margins for adverse deviations. Recent changes in actuarial standards and practice are also incorporated in the current valuation. (b) Assumptions for mortality and morbidity For the 2005 valuation, insurers (with the exception of American Founders Life Insurance Company) conducted studies of their own recent mortality experience. Studies were conducted by combining data in some geographic segments to create a credible mortality table. The combined experience was measured against an industry standard (CIA 86-92) and the combined experience resulted in a modification of the probabilities of death by policy duration. Appropriate modification factors were selected and applied to underwritten and non- underwritten business respectively in the actuarial valuation. Annuitant mortality was determined by reference to established scales. American Founders Life Insurance Company has relied upon industry studies and other sources to develop its mortality assumptions for its life insurance and annuity contracts. Assumptions for morbidity are determined after taking into account insurer and industry experience. (c) Assumptions for lapse Lapse studies were performed by insurers for the 2005 valuation, to determine the most recent experience of persistency. Appropriate rates of termination by policy duration were determined and applied in the actuarial valuation. 86 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.2 Assumptions (continued) (d) Assumptions for investment yields Returns on existing variable rate securities, shares, investment property and policy loans are linked to the current economic scenario. Yields on reinvested assets are also tied to the current economic scenario. Returns are however assumed to decrease and it is assumed that at the end of twenty years from valuation date, all investments, except policy loans, are reinvested in long-term, default free government bonds. In accordance with revisions in actuarial practice standards, for the 2005 valuation, policy loans are assumed to be held beyond twenty years, as long as the current level of policy loans is in line with investment strategy. The ultimate rate of return (URR) is the assumed rate that will ultimately be earned on government bonds and is as follows: Geographical segment Barbados Jamaica Trinidad & Tobago USA Other Caribbean URR 4.75% 7.00% 5.75% 4.00 – 4.25% 4.75 - 5.25% (e) Assumptions for operating expenses and taxes New business and maintenance expense costs for long-term business are measured and monitored by each insurer. These costs were updated for the 2005 valuation, were computed on a per policy basis, and were reflected in the actuarial valuation after adjusting for expected inflation. (f) Asset defaults The AA of each insurer includes a provision for asset default in the modelling of the cash flows. The provision is based on industry and Group experience and includes a specific margin for equity securities and a combined margin for debt securities, mortgage loans and deposits. (g) Margins for adverse deviations Margins for adverse deviations are determined for the assumptions in the actuarial valuation. The application of these margins resulted in the following provisions for adverse deviations being included in the actuarial liabilities: Provisions for adverse deviations Mortality and morbidity Lapse Investment yields and asset default Operating expenses and taxes 2005 48,536 34,406 136,517 25,969 245,428 2004 37,927 24,021 41,627 18,955 122,530 87 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.2 Assumptions (continued) (h) Supplemental benefits Further harmonisation between insurers in the valuation of supplemental benefits has been effected in 2005. The valuation is based on the specific cash flows associated with these benefits. (i) Health insurance The outstanding liabilities for health insurance claims incurred but not yet reported and for claims reported but not yet paid are determined by statistical methods using expected loss ratios which have been derived from recent historical data. No material claim settlements are anticipated after one year of balance sheet date. 16.3 Movement in actuarial liabilities and changes in assumptions The movement in actuarial liabilities for the year is as follows: Balance, beginning of year Liabilities assumed on acquisitions Changes in net inforce, assumptions and actuarial modelling Changes in provisions for adverse deviations Effect of exchange rate changes Balance, end of year 2005 1,485,042 1,254,825 (57,472) 109,885 (15,049) 2,777,231 2004 1,380,741 - 88,103 21,360 (5,162) 1,485,042 The movement in actuarial liabilities includes the following amounts which are recoverable from reinsurers: Balance, beginning of year Liabilities assumed on acquisitions Change during the year Balance, end of year (note 12) The net increase in actuarial liabilities charged to income is as follows: Changes in net inforce, assumptions and actuarial modelling Change in reinsurance recoverable Changes in provisions for adverse deviations 2005 2,889 609,373 (6,267) 605,995 2005 (57,472) 6,267 109,885 58,680 2004 2,541 - 348 2,889 2004 88,103 (348) 21,360 109,115 88 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.3 Movement in actuarial liabilities and changes in assumptions (continued) Components of the net increase in actuarial liabilities have been estimated using Policy Premium Method equivalents. Because the process of changes in assumptions is applied to all affected insurance contracts, changes in assumptions and in actuarial modelling may have a significant effect in the period in which they are recorded. The introduction of a margin on equity securities and real estate supporting policy liabilities was the only change in assumptions and actuarial modelling which represented more than 5% of actuarial liabilities at the beginning of the year. The impact of this change on the actuarial liabilities was an approximate increase of $76,400 but was offset by other changes in assumptions and actuarial modelling. In summary, the components of the net change in actuarial liabilities are as follows: 2005 141,223 (82,543) 58,680 Normal increase in liabilities Effect of changes in assumptions and actuarial modelling 16.4 Sensitivity analysis (a) Sensitivity arising from the valuation of actuarial liabilities The valuation of actuarial liabilities is sensitive to: • the economic scenario used in CALM; • the investments allocated to back the liabilities; • the underlying assumptions used; and • the margins for adverse deviations. Under the CALM methodology, the AA is required to test the actuarial liability under 7 economic scenarios. These tests have been done and the results of the valuation provide adequately for liabilities derived from the worst of these different scenarios. The assumption for future investment yields has a significant impact on actuarial liabilities. The different scenarios tested under CALM reflect the impact of different yields. The other assumptions which are most sensitive in determining the actuarial liabilities of the Group, are in descending order of impact: • Operating expenses and taxes • Lapse • Mortality and morbidity 89 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.4 Sensitivity analysis (continued) (b) Dynamic capital adequacy testing (DCAT) DCAT is a technique used by the Group to assess the adequacy of the insurer’s financial position and financial condition in the light of different future economic and policy experience scenarios. DCAT assesses the impact over the next 5 years on the insurer’s financial position and financial condition under specific scenarios. The financial position of an insurer is reflected by the amounts of assets, liabilities and equity in the balance sheet at a given date. The financial condition of an insurer at a particular date is its prospective ability at that date to meet its future obligations, especially obligations to policyholders, those to whom it owes benefits and to its shareholders. The purpose of the DCAT is: • to develop an understanding of the sensitivity of the total equity of the insurer and future financial condition to changes in various experience factors and management policies; • to alert management to material, plausible and imminent threats to the insurer’s solvency; • and to describe possible courses of action to address these threats. Specific scenarios tested and the resulting impact on insurers are as follows. (i) Worsening rate of lapse. For products which produce higher valuation reserves with an increase in lapse rates, the scenario lapse rates were increased. For products which produce higher valuation reserves with a decrease in lapse rates, the scenario lapse rates were reduced. Overall, this scenario produces adverse results. (ii) High interest rate. An assumed increase in portfolio rate of 1% per year for 5 years (LOJ - 0.5% per year for ten years) was tested in this scenario. Overall, this scenario produces favourable results. (iii) Low interest rate. An assumed decrease in portfolio rate of 0.25% for 5 years (LOJ -1% per year for 5 years) was tested in this scenario. Overall, this scenario produces adverse results. (iv) Worsening mortality and morbidity. To test this scenario, mortality and morbidity rates were increased for insurance and critical illness products and decreased for annuity products. For insurance and critical illness products, rates were increased by 3% of the base rate per year for 5 years. For annuity products, rates were decreased by 3% of the base rate for 5 years. Overall, this scenario produces adverse results. (v) Higher expenses. Higher unit maintenance expenses were tested by setting the unit expense rate for each projection year 5% greater than the unit expense rate assumed in the base scenario. Overall, this scenario produces adverse results. 90 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.4 Sensitivity analysis (continued) The DCAT conducted has not tested any correlation that may exist between assumptions. The use of differing sensitivity rates by insurers reflects differences in the insurers’ environment. Certain insurers in the Group conducted DCAT as of December 31, 2005. In each instance, the AA concluded that the financial condition of the insurer is satisfactory under the DCAT procedures. The insurers were as follows: • Sagicor Life Inc; • Life of Jamaica Limited; • Sagicor Capital Life Insurance Company Limited; • Capital Life Insurance Company Bahamas Limited; • Nationwide Insurance Company Limited. These insurers have net actuarial liabilities totalling $1,520,235 or 70% of the Group total. The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities one year from balance sheet date. (i) (ii) (iii) (iv) (v) Scenario Worsening rate of lapse High interest rate Low interest rate Worsening mortality / morbidity Higher expenses (Increase) / decrease in liability (38,033) 328,625 (176,423) (63,408) (54,397) 17. DEPOSIT ADMINISTRATION LIABILITIES The movement in deposit administration liabilities for the year is as follows: Balance, beginning of year Liabilities assumed on acquisition Contributions received Interest expense Payments and withdrawals Expenses Effects of exchange rate changes Balance, end of year 2005 305,464 25,458 28,376 24,617 (32,541) (2,014) (3,131) 346,229 2004 292,217 - 28,904 22,569 (35,369) (2,232) (625) 305,464 Deposit administration liabilities represent balances which are long term in nature and for which, most are expected to be settled after one year. 91 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 The effective interest rate and contractual maturity profile of policy funds on deposit are as follows: 18. OTHER POLICYHOLDER LIABILITIES Policy funds on deposit Policy benefits in the course of settlement Provision for unearned premiums Unearned reinsurance commissions 18.1 Policy funds on deposit Policy funds on deposit comprise: Investment contracts Dividends on deposit – participating policies Other policy balances Effective interest rate Contractual maturity profile: Repayable on demand or within one year Repayable between one and five years Repayable after five years 18.2 Policy benefits in the course of settlement (a) Analysis of policy benefits in the course of settlement Policy benefits in the course of settlement comprise: Death and disability claims Maturities Health claims Property and casualty claims Other 92 2005 202,231 102,547 56,967 2,586 364,331 2004 153,645 144,086 35,636 - 333,367 2005 85,546 108,283 8,402 202,231 2005 5.3% 163,047 20,201 18,983 202,231 2004 61,127 85,427 7,091 153,645 2004 8.0% 132,414 18,461 2,770 153,645 2005 52,137 8,258 1,140 36,581 4,431 102,547 2004 40,483 7,290 1,683 91,066 3,564 144,086 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 18. OTHER POLICYHOLDER LIABILITIES (continued) 18.2 Policy benefits in the course of settlement (continued) Health claims include $315 (2004 – $922) in provisions for claims incurred but not yet reported. Property and casualty claims include $1,695 (2004 – $1,984) in provisions for claims incurred but not yet reported. The associated reinsurance recoveries from benefits in the course of settlement are in respect of: Death and disability claims Health claims Property and casualty claims Other Total (note 12) 2005 20,283 851 23,168 94 44,396 2004 16,451 640 75,821 - 92,912 (b) Movement in policy benefits in the course of settlement The movement in policy benefits in the course of settlement for the year is as follows: Balance, beginning of year Balance assumed on acquisitions Policy benefits incurred Policy benefits paid Effect of exchange rate changes Balance, end of year 2005 144,086 33,022 432,380 (505,028) (1,913) 102,547 2004 58,972 - 492,219 (406,760) (345) 144,086 The movement in policy benefits in the course of settlement includes the following amounts which are recoverable from reinsurers. Balance, beginning of year Balance assumed on acquisitions Policy benefits reinsured Reinsurance claim recoveries Effect of exchange rate changes Balance, end of year (note 12) 2005 92,912 10,263 43,340 (101,238) (881) 44,396 2004 26,894 - 167,965 (101,909) (38) 92,912 93 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 18. OTHER POLICYHOLDER LIABILITIES (continued) 18.3 Provision for unearned premiums (a) Analysis of provision for unearned premiums The provision for unearned premiums arises from: Property and casualty insurance Health insurance The associated unearned premiums ceded to reinsurers are in respect of: Property and casualty insurance Total (note 12) (b) Movement in provision for unearned premiums The movement in the provision for unearned premium for the year is as follows: Balance, beginning of year Balance assumed on acquisitions Premiums written Premium revenue Effect of exchange rate changes Balance, end of year The movement in unearned premiums ceded to reinsurers is as follows: Balance, beginning of year Balance assumed on acquisitions Reinsurance on premiums written Reinsurance premium expense Effect of exchange rate changes Balance, end of year (note 12) 2005 53,857 3,110 56,967 2005 33,289 33,289 2005 35,636 21,131 99,869 (97,931) (1,738) 56,967 2005 13,399 15,003 38,207 (33,147) (173) 33,289 2004 25,940 9,696 35,636 2004 13,399 13,399 2004 28,246 - 90,028 (82,620) (18) 35,636 2004 10,699 - 31,248 (28,548) - 13,399 94 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 19. LOANS PAYABLE US$ bank loan secured by shares in certain subsidiaries and by the guarantee of another subsidiary, repayable 2006 US$ bank loan secured by portfolio of investment securities (note 11.2), repayable 2006 – 2010 US$ bank loan secured by portfolio of investment securities (note 11.2), repayable 2006 and bears interest at 6% US$ bank loan secured by bankers’ guarantee, repayable 2004 – 2005 US$ bank loan secured by portfolio of investment securities, repayable 2004 – 2005 2005 2004 116,427 34,268 10,000 - 33 160,728 - - - 10,714 5,198 15,912 Unless stated above, the interest rates on the above loans float based on either the 3 month or the 6 month LIBOR. The carrying value of these loans therefore approximates their fair value. The effective interest rate and maturity profile of loans payable are as follows: Effective interest rate Maturity profile: Repayable within one year Repayable between one and five years 20. DEPOSIT AND SECURITY LIABILITIES 2005 4.9% 132,168 28,560 160,728 Deposit and security liabilities represent sources of funds for on-lending, leasing and portfolio investments. Other funding instruments: Loans for mortgage financing (market value $250,792) Loans for development financing (market value $31,042) Loans from commercial banks (market value $12,496) Deposits: Customer deposits Securities: Securities sold under agreements to repurchase Bank overdrafts Total deposit and security liabilities The loans for mortgage financing have been obtained from the Federal Home Loan Bank (FHLB). 95 2004 3.4% 9,496 6,416 15,912 2004 - - 1,475 2005 252,704 31,042 12,496 227,504 74,064 907,987 8,712 1,440,445 - 10,299 85,838 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 20. DEPOSIT AND SECURITY LIABILITIES (continued) The collateral for loans for mortgage financing and securities sold under agreements to resell is set out in note 11.2. Un-disbursed facilities in respect of other funding instruments and bank overdrafts total approximately $6,054 (2004 – nil). (a) Effective interest rates Other funding instruments Deposits Securities (b) Maturity profiles Other funding instruments Deposits Securities Bank overdrafts Other funding instruments Deposits Bank overdrafts 2005 5.9% 7.3% 10.0% 2004 8.9% 5.8% - 2005 Repayable Repayable between one within one year and five years Repayable after five years 154,103 163,665 907,880 8,712 1,234,360 100,253 15,887 - - 116,140 41,886 47,952 107 - 89,945 2004 Repayable Repayable between one within one year and five years Repayable after five years 163 37,926 10,299 48,388 1,045 36,106 - 37,151 267 32 - 299 Total 296,242 227,504 907,987 8,712 1,440,445 Total 1,475 74,064 10,299 85,838 96 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 21. PROVISIONS Pension plans and other retirement benefits (note 32.2) Other 22. INCOME TAX LIABILITIES Deferred income tax liabilities (note 34) Income taxes payable 23. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Amounts due to policyholders Amounts due to reinsurers Amounts due to managed funds Other accounts payable and accrued liabilities 24. SHARE CAPITAL 2005 28,994 3,366 32,360 2005 10,938 20,020 30,958 2004 26,261 1,886 28,147 2004 3,852 14,221 18,073 2005 2,331 139,046 11,956 117,971 271,304 2004 4,692 42,970 6,242 52,352 106,256 The Company is authorised to issue an unlimited number of common shares issuable in series, and an unlimited number of preference shares issuable in series. Series A Common Shares have been issued and movements are summarised in the following table. Balance, beginning of year Allotment (note 38) Balance, end of year 2005 2004 Number of shares 260,029,748 5,523,000 265,552,748 Consideration (Barbados $000) 432,495 25,956 458,451 Number of shares 260,029,748 - 260,029,748 Consideration (Barbados $000) 432,495 - 432,495 At a special general meeting of shareholders held on December 19, 2005, approval was granted for the establishment of an executive long-term incentive plan (LTI) and an employee share ownership plan (ESOP). 26,555,274 Series A Common Shares have been reserved for these plans which become effective from December 31, 2005. 97 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 25. RESERVES Fair value reserve – available for sale investment securities: Balance, beginning of year as previously reported Prior year adjustments Balance, beginning of year as restated Unrealised gains arising on revaluation Gains transferred to income on disposal and impairment Balance, end of year Fair value reserve – owner occupied property: Balance, beginning of year Unrealised gains arising on revaluation Gains transferred to retained earnings on disposal Balance, end of year Currency translation: Balance, beginning of year Restatement of foreign branch operations Retranslation of foreign operations Balance, end of year Statutory reserves: Balance, beginning of year Net change for the year Balance, end of year Total reserves, end of year 2005 2004 186,739 (13,819) 172,920 4,967 (65,874) 112,013 12,971 4,896 (96) 17,771 (25,486) - (13,124) (38,610) 110,127 (20,743) 89,384 130,140 (46,604) 172,920 6,033 7,578 (640) 12,971 (23,730) (310) (1,446) (25,486) 7,289 2,331 9,620 5,893 1,396 7,289 100,794 167,694 98 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 26. PARTICIPATING ACCOUNTS 26.1 ‘Closed’ participating fund The movement in the closed participating account during the year was as follows: Balance, beginning of year Net unrealised gains / (losses) arising on available for sale investment securities Net income for the year Balance, end of year 2005 779 235 12,950 13,964 The amounts in the financial statements relating to closed participating funds are as follows: Assets Liabilities Revenues Benefits Expenses Income taxes 26.2 ‘Open’ participating fund The movement in the open participating account during the year was as follows: Balance, beginning of year Transfer from retained earnings to support the profit distribution to shareholders Return of transfer to support profit distribution to shareholders Transfer of seed capital from retained earnings Return of seed capital to retained earnings Net income / (loss) for the year Balance, end of year 2005 182,074 168,110 21,059 3,911 3,595 603 2005 609 13,500 (498) - (5,500) 12,572 20,683 The amounts in the financial statements relating to open participating funds are as follows: Assets Liabilities Revenues Benefits Expenses Income taxes 26.3 Total participating accounts Total participating accounts, end of year 2004 1,047 (851) 583 779 2004 170,449 169,670 22,040 18,004 2,924 529 2004 175 - - 3,000 - (2,566) 609 2004 896 287 3,745 (494) 6,805 - 2005 418,686 398,003 69,784 33,974 21,813 1,425 2005 34,647 2004 1,388 99 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 27. NET PREMIUM REVENUE Life insurance Health insurance Property and casualty insurance Annuities and pensions Year ended December 31, 2005 Reinsurance 2004 Premium revenue premium Net premium Net premium revenue revenue expense 392,303 197,039 74,063 85,302 748,707 (57,726) (8,452) (43,211) (122) (109,511) 334,577 188,587 30,852 85,180 639,196 281,300 151,650 22,892 81,696 537,538 Premium revenue includes $24,640 (2004 - $13,340) in reinsurance assumed. 28. NET INVESTMENT INCOME Income: Rental income from investment property Interest income: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Other balances Dividend income Net gains on financial investments Net fair value gains on investment property Foreign exchange translation and trading Other investment income Expenses Direct operating expenses of investment property Allowances for impairment losses Other direct investment expenses 2005 2004 11,179 11,176 242,360 28,071 14,184 25,431 10,735 8,619 509 12,432 78,189 1,710 4,461 1,825 439,705 2,430 15,608 6,252 24,290 108,767 29,284 13,459 6,398 2,883 8,168 263 11,047 63,748 6,892 3,140 - 265,225 2,101 14,243 5,953 22,297 Net investment income 415,415 242,928 Interest from debt securities includes $2,881 (2004 - $2,463) from an associated company. 100 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 29. FEES AND OTHER REVENUE Fee income - assets under administration Fee income - deposit administration and policy funds Commission income on insurance ceded to reinsurers Other fees and commission income Miscellaneous income 30. NET POLICY BENEFITS 2005 2004 19,792 5,762 16,687 17,038 17,672 76,951 13,976 6,653 13,740 1,544 9,324 45,237 Year ended December 31, 2005 Net policy benefits incurred Policy benefits reinsured Policy benefits incurred Death and disability Maturities Surrenders and withdrawals Annuities and pensions Policy dividends and bonuses Health insurance Property and casualty insurance Other benefits 64,853 18,809 111,533 58,676 15,204 134,128 19,788 9,389 432,380 (17,988) (52) (8,946) (2,634) (144) (8,782) (4,682) (112) (43,340) Policy benefits incurred include $23,085 (2004 - $5,782) in reinsurance assumed. 31. INTEREST EXPENSE Deposit administration and employee pension plan liabilities Policy funds on deposit Other funding instruments Deposits Securities Other Items 46,865 18,757 102,587 56,042 15,060 125,346 15,106 9,277 389,040 2005 26,338 11,829 5,801 14,598 87,418 1,885 147,869 2004 Net policy benefits incurred 33,937 32,337 69,086 46,373 14,007 97,720 27,217 12,411 333,088 2004 23,894 11,375 - 3,737 - - 39,006 101 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS Included in administrative expenses, commissions and related compensation are the following: Administrative staff salaries, directors’ fees and other short-term benefits Employer contributions to social security schemes Equity compensation benefits Employer contribution to defined contribution pension schemes Costs – defined benefit pension schemes Costs – other retirement benefits 2005 91,272 7,082 6,773 1,026 4,672 1,403 112,228 2004 65,360 4,987 - 686 3,061 1,429 75,523 The total number of administrative staff at December 31 was 1,627 persons (2004 – 1,251 persons). 32.1 Equity compensation benefits (a) The Company Effective December 31, 2005, the Company authorised compensation of $5,809 under the executive long-term incentive plan. The compensation awarded may, at the option of the recipient, be settled in cash, or shares issued by the Company, or by a combination of cash and shares. (b) Life of Jamaica Limited (LOJ) Share options in LOJ shares are granted to key management of LOJ who have completed the minimum eligibility period of one year. Options are granted at a 25% discount of the last sale price on the Jamaica Stock Exchange on the trading day prior to the grant date and are exercisable at that price. Options are exercisable beginning one year from the date of grant and have a contractual term of five years. The movement in share options was as follows: Balance, beginning of year Options granted Balance, end of year Exercisable at the end of the year 2005 2004 Number of options ‘000 14,959 4,086 19,045 3,739 Weighted average exercise price J$ 5.13 J$ 9.86 J$ 6.14 J$ 9.86 Number of options ‘000 11,665 3,294 14,959 2,916 Weighted average exercise price J$ 3.39 J$11.30 J$ 5.13 J$11.30 The proceeds from shares issued under the share purchase plan totalled $4,754 (2004 - $2,181) 102 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) 32.1 Equity compensation benefits (continued) (c) Pan Caribbean Financial Services Limited (PCFS) The directors of PCFS have granted options in PCFS shares as follows: (i) 450,000 share options on February 7, 2002. These expire on December 31, 2006. The shares in respect of these options have been issued by the company and are held in an Employee Share Option Trust. The exercise price for these options is J$4.55. (ii) 17,220,000 share options on March 8, 2004. The exercise price for these options is J$10. The options vest by December 31, 2006. 6,600,000 shares were allotted in the prior year. A further 900,000 vested options were exercised during the year. (iii) 816,800 share options on March 8, 2004. The exercise price for the options is J$10 less a 20% discount. These options vested and were fully exercised in March 2005. (iv) 1,200,000 share options on March 1, 2005. These options expire on December 31, 2008. The exercise price for the options is J$36.50. The options vest over four years – 25% on each anniversary date of the grant. The movement in share options was as follows: Assumed on acquisition Options granted Options exercised Options lapsed Balance, end of year Exercisable at the end of the year 2005 Number of options ‘000 11,887 1,200 (1,817) (60) 11,210 7,510 Weighted average exercise price J$9.80 J$36.50 J$10.00 J$4.55 J$12.70 J$10.20 For options outstanding at the end of the year, exercise prices range from J$4.55 to J$36.50. The weighted average remaining contractual term is two years. The weighted average share price at the date of exercise for options exercised during the year was J$37.20. J$20,420 (Barbados $656) was expensed during the year in respect of these share options. 103 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) 32.2 Employee retirement benefits Retirement benefits recognised in the balance sheet are as follows: Defined benefit pension schemes Other retirement benefits Net liability (a) Defined benefit pension schemes 2005 (19,983) (6,288) (26,271) 2004 (18,921) (5,149) (24,070) Certain Group subsidiaries have contributory defined benefit pension schemes in place for eligible administrative staff. The amounts recognised in the balance sheet are determined as follows: Fair value of pension plan assets Present value of pension obligations Unrecognised actuarial gains Amounts recognised in the balance sheet Represented by: Asset balances Liability balances 2005 2004 122,392 (137,745) (15,353) (4,630) (19,983) 104,550 (118,942) (14,392) (4,529) (18,921) 2,723 (22,706) (19,983) 2,191 (21,112) (18,921) Included in liability balances are interest bearing deposit administration fund balances totalling $25,536 (2004 - $23,383), representing employee pension plan funds on deposit with the Group. The amounts recognised in the income statement are determined as follows: Current service cost Interest cost Net actuarial losses recognised during the year Past service cost Expected return on pension plan assets Pension cost The actual return on plan assets was $10,573 (2004 – $28,240) 2005 2004 5,322 10,519 123 696 (11,988) 4,672 2,864 7,865 86 - (7,754) 3,061 104 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) 32.2 Employee retirement benefits (continued) The movement in the amounts recognised in the balance sheet is as follows: Amounts recognised, beginning of year Amounts recognised on subsidiaries acquired Pension cost Contributions made Effects of exchange rate changes Amounts recognised, end of year The principal actuarial assumptions used were as follows: 2005 2004 (18,921) 452 (4,672) 3,045 113 (19,983) (19,604) - (3,061) 3,675 69 (18,921) Discount rate Expected return on plan assets Future salary increases Future pension increases Portion of employees opting for early retirement Future changes in National Insurance Scheme Ceilings Trinidad & Tobago Barbados & other countries 6.0% - 7.0% 7.0% 7.0% 6.0% - 7.0% 5.5% 2.25% - 5.80% 0.0% - 2.5% 1.5% 0.0% 0.0% 2.5% - 4.0% 2.5% Jamaica 12.5% 12.5% 10.0% 3.5% 0.0% 0.0% 105 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) 32.2 Employee retirement benefits (continued) (b) Other retirement benefits Certain Group subsidiaries offer retiree medical and life insurance benefits that contribute to the health care and life insurance coverage of retirees and beneficiaries. The liability recognised in the balance sheet is determined as follows: Present value of obligations Unrecognised actuarial losses Liability recognised in the balance sheet The amounts recognised in the income statement are determined as follows: Current service cost Interest cost Net actuarial / (gains) losses recognised during the year Total cost The movement in the liability recognised in the balance sheet is as follows: Liability recognised, beginning of year Amounts recognised on subsidiaries acquired Total cost Contributions made Effects of exchange rate changes Liability recognised, end of year The principal actuarial assumptions used were as follows: Discount rate Expected return on plan assets Long term increase in health costs 2005 2004 (9,117) 2,829 (6,288) (5,534) 385 (5,149) 355 948 126 1,429 (4,030) - (1,429) 243 67 (5,149) 734 670 (1) 1,403 (5,149) (110) (1,403) 154 220 (6,288) Jamaica 12.5% 12.5% 10.5% 106 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 33. INCOME TAXES The Group is subject to taxation in the jurisdictions in which business operations are conducted. Rates of taxation in the principal jurisdictions for income year 2005 are as follows: Taxes on premium revenue: Barbados Jamaica Trinidad and Tobago United States of America Taxes on income: Barbados Jamaica Trinidad and Tobago United States of America Life insurance, non-registered annuities Registered annuities Health, property and casualty insurance 3% - 5% 3% Nil 0.75% - 3.5% Life insurance, non-registered annuities 5% of gross investment income 15% of investment income 15% of investment income Nil Nil Nil Nil 3.75% Nil 6% Nil Registered annuities All other lines of business Nil 15% of investment income 30% of net income 331/3 % of net income Nil 25% - 35% of net income 34%/35% of net income 34%/35% of net income 34%/35% of net income The income tax expense is comprised of: Current tax Deferred tax Share of tax of associated companies In summary, income tax is levied on the following sources of income: Investment income subject to direct taxation Income from ordinary activities subject to direct taxation Total income subject to taxation 2005 17,514 6,516 16 24,046 2005 66,083 9,804 75,887 2004 9,776 (2,701) (159) 6,916 2004 61,334 (16,793) 44,541 107 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 33. INCOME TAXES (continued) The income tax on the total income subject to taxation differs from the theoretical amount that would arise using the applicable tax rates as set out below: Income subject to tax Tax calculated at the applicable rates on income subject to tax Adjustments to current tax for items not subject to tax or not allowed for tax Other current tax adjustments Adjustments for current tax of prior periods Movement in unrecognised deferred tax asset Deferred tax expense / (income) relating to the origination / (reversal) of temporary differences Deferred tax expense / (income) relating to changes in tax rates and the imposition of new taxes Deferred tax expense / (income) that arises from the write down / (reversal of a write down) of a deferred tax asset Tax on distribution of profits from policyholder funds Other taxes 34. DEFERRED INCOME TAXES Deferred income tax assets and liabilities are attributable to the following items: Deferred income tax assets: Pensions and other retirement benefits Unused tax losses Other items Total (Note 13) Deferred income tax liabilities: Accelerated tax depreciation Policy reserves taxable in the future Pensions and other retirement benefits Accrued Interest Available for sale investments Other items Total (Note 22) 108 2005 75,887 11,864 (637) (689) (13) 8,418 161 969 (158) 3,526 605 24,046 2004 44,541 (28) 647 410 (721) 3,719 1,372 14 195 137 1,171 6,916 2005 2004 1,322 8,454 (1,550) 8,226 2,049 7,287 (1,299) 8,037 2005 2004 2,192 372 65 809 5,884 1,616 10,938 2,069 372 (9) 314 - 1,106 3,852 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 34. DEFERRED INCOME TAXES (continued) These balances include the following Deferred income tax assets to be settled after one year Deferred income tax liabilities to be settled after one year 2005 3,060 8,368 2004 2,323 1,545 The Group has not recognised potential deferred income tax assets of $26,209 (2004 – $7,660) arising from unrecognised tax losses of $82,370 (2004 - $24,924). Deferred income taxes have not been provided for income taxes that would be payable on the distribution of retained earnings of certain subsidiaries because there is no intention to distribute those earnings. These retained earnings totalled $52,855 at December 31, 2005 (2004 - $63,758) 35. EARNINGS AND DIVIDENDS PER COMMON SHARE 35.1 Earnings per common share Basic earnings per common share is calculated by dividing the net income for the year attributable to shareholders by the weighted average number of common shares in issue during the year. Net income for the year attributable to shareholders Weighted average number of shares in issue (in thousands) Basic and diluted earnings per common share 35.2 Dividends per common share 2005 136,562 263,937 52 cents 2004 67,690 260,030 26 cents In 2005, the Company declared dividends per common share of 12 cents, of which 6 cents was the final dividend for 2004 and 6 cents was the interim dividend for 2005. In 2004, the Company declared dividends per common share of 7 cents, of which 3 cents was the final dividend for 2003 and 4 cents was the interim dividend for 2004. On April 27, 2006, the Company declared a final dividend for 2005 of 6 cents per common share which will be recorded in the 2006 financial statements. 109 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 36. CASH FLOWS The components of certain items in the cash flow statement are as follows: OPERATING ACTIVITIES 2005 2004 Adjustments for non-cash items, interest and dividends Increase / (decrease) in provision for unearned premiums Interest income Dividend income Net gains on financial investments and investment property Interest expense Increase in provisions for impairment Share of operating income of associated companies Increase in actuarial liabilities Movement in recognised employee retirement benefits Depreciation Loss / (gain) on disposal of property, plant and equipment Amortisation of intangible assets Gain on business combinations and acquisitions Other items Changes in operating assets Investment property Debt securities Equity securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Reinsurance assets Other assets and receivables 3,006 (329,909) (12,432) (79,899) 153,140 17,557 (3,473) 58,680 3,030 15,020 154 10,478 (38,946) (2,872) (206,466) (2,688) (144,400) 78,181 (38,153) (303) (53,623) 272,529 42,623 (1,374) 61,592 214,384 4,708 (169,222) (11,047) (70,640) 40,734 14,243 (9,269) 109,115 815 12,601 (672) 9,199 - (1,681) (71,116) (13,846) (96,887) 47,431 (5,099) (1,563) (9,357) (4,566) (68,238) - (86,153) (238,278) 110 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 36. CASH FLOWS (continued) Investment property Disbursements Disposal proceeds Debt securities Purchases Proceeds on maturities and disposals Equity securities Purchases Disposal proceeds Changes in operating liabilities Deposit administration liabilities Policy funds on deposit Other funding instruments Customer deposits Securities sold under agreements to repurchase Other benefits and payables INVESTING ACTIVITIES Property, plant and equipment Purchases Disposal proceeds FINANCING ACTIVITIES Loans payable Proceeds Repayments CASH AND CASH EQUIVALENTS For the purposes of the cash flow statement, cash and cash equivalents comprise: Cash resources Financial investments with an initial term to maturity of 90 days or less Bank overdrafts 2005 2004 (8,873) 6,185 (2,688) (15,605) 1,759 (13,846) (675,475) 531,075 (144,400) (309,246) 212,359 (96,887) (171,860) 250,041 78,181 (45,772) 93,203 47,431 18,438 (14,578) (4,977) 48,674 6,740 (87,507) (33,210) 13,872 2,529 - 14,423 - 101,774 132,598 (23,865) 5,570 (18,295) (28,913) 8,284 (20,629) 162,905 (18,911) 143,994 - (9,633) (9,633) 117,105 165,949 (8,712) 274,342 119,137 26,770 (10,299) 135,608 111 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 37. ASSETS AND LIABILITIES BY CURRENCY Barbados $ Balances denominated in Trinidad $ Jamaica $ US Other $ currencies 2005 Total ASSETS Investment property Property, plant and equipment Investment in associated companies Intangible assets Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Total assets 98,699 78,663 253 48,507 700,281 16,041 5,907 33,678 18,782 507 166,583 1,003,320 4,247 22,083 38,641 20,790 24,775 9,847 484,632 10,004 300 7,191 5,369 - 3,447 2,164,149 623,564 5,690 3,377 24,644 24,716 22,121 380,043 42,332 1,731 181,586 148,248 50,251 250,505 4,732,425 696,188 35,711 37,169 29,920 1,015,440 64,534 12,389 1,326,123 14,363 6,120 609,472 45,800 44,666 2,899,876 41,550 25,768 566,282 203,416 118,863 6,417,193 LIABILITIES Policy liabilities Actuarial liabilities Deposit administration liabilities Other policy liabilities Other liabilities Loans payable Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total liabilities 661,046 263,537 355,736 1,304,632 192,280 2,777,231 98,342 106,090 865,478 - 85,571 12,851 3,098 69,392 79,767 412,696 - 513,912 8,938 18,080 121,318 28,801 505,855 2,932 78,372 1,385,936 54,245 71,301 317,826 346,229 364,331 3,487,791 - 861 5,851 4,579 160,728 817,406 1,226 2,516 - 22,695 3,494 2,685 160,728 1,440,445 32,360 30,958 25,549 992,547 49,490 1,003,116 7,916 525,062 191,898 2,559,710 (3,549) 343,151 271,304 5,423,586 Net position 22,893 323,007 84,410 340,166 223,131 993,607 112 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS During the year, the Group acquired control of: • The Pan Caribbean Financial Services Limited Group (PCFS); • The employee benefits insurance business of First Life Insurance Company Limited, hereinafter referred to as the EBA joint venture; • The individual life insurance business of First Life Insurance Company Limited; • Laurel Life Insurance Company (Laurel Life); • Cayman General Insurance Company Limited (Cayman General). In the acquisition of PCFS and EBA, the Company issued 5,523,000 new shares which were recorded at the prevailing listed price on the Barbados Stock Exchange. In the same transaction, LOJ issued 919,227,731 shares to the vendor, which were independently valued at J$3,493,065 for the purpose of the transaction. The prevailing listed price of J$12.50 for LOJ shares on the Jamaica Stock Exchange was not utilised since, because of the thinness of the market, this price was not an indicative fair value for a transaction of the size of shares involved. The independent valuation was conducted using the maintainable earnings approach and verified by comparable company and comparable transactions data. As a consequence of part of the consideration for the PCFS and EBA acquisitions being shares issued by LOJ, the Group reduced its interest in LOJ from 78% to 60% and recorded a gain of $26,769 arising from the difference between the net assets of LOJ attributable to minority interests after the acquisition and the value of shares issued by LOJ to the minority interests. The Group also acquired interests in two associated companies, Manufacturers’ Credit and Information Services (MCIS) and FamGuard Corporation Limited (Family Guardian). The Group has accounted for the above acquisitions provisionally because data is being gathered to support some of the underlying assumptions. Therefore, adjustments may result in the carrying amounts of the identifiable assets, liabilities and contingent liabilities acquired in the 2006 financial year. 38.1 PCFS (a) Details of acquisition On January 7, 2005, Life of Jamaica Limited (LOJ) acquired a 43% interest in PCFS. Combined with its previous 6% effective interest, LOJ increased its interest to 49%. Because of certain related party shareholdings in PCFS on January 7 and a definitive agreement to purchase a further 37% interest in the company, the Group recognised it effectively had a controlling interest from this date. Effective May 6, 2005, the Company and LOJ acquired a further 37% interest in PCFS. Between July 1 and September 1, 2005, LOJ acquired further shareholdings totalling 1%. PCFS is a listed company on the Jamaica Stock Exchange and is engaged in Jamaica in securities dealing, merchant banking, foreign exchange dealing, corporate trust services and mutual fund management. 113 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.1 PCFS (continued) The fair values of the net assets acquired, the purchase consideration and the goodwill arising on the January 7 acquisition are set out below. Net assets acquired: Property, plant and equipment Intangible assets (note 10) Financial investments Income tax assets Miscellaneous assets and receivables Cash resources Deposit and security liabilities Income tax liabilities Accounts payable and accrued liabilities Total net assets Share of net assets acquired by the Group Purchase consideration and related costs Cash Goodwill arising on acquisition Acquirees’ carrying value January 2005 2,920 25,227 1,237,064 5,069 17,086 24,898 (1,091,279) (16,838) (21,425) 182,722 Total fair value January 2005 2,920 79,844 1,237,064 5,069 17,086 24,898 (1,091,279) (16,838) (21,425) 237,339 116,249 118,160 1,911 The book values of the net assets acquired and the purchase consideration and gain arising on the May 6 acquisition are set out below. Share of net assets acquired by the Group Purchase consideration and related costs Cash Shares issued by the Company Shares to be issued by the Company Shares issued by LOJ Total purchase consideration Gain arising on the acquisition of minority interest 114 90,976 643 14,537 939 62,856 78,975 12,001 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.1 PCFS (continued) The gain arising on acquisition of minority interest has been included in revenue and arose when the PCFS interest was acquired in exchange for the issue of shares. The agreement to purchase these shares was negotiated in 2003 and the gain arising on the acquisition of the minority interest is partly as a result of a change in the relative values of the shares of the issuers and those of PCFS. Other shareholdings in PCFS were acquired for cash consideration of $8,324 and generated additional goodwill of $3,903. The total goodwill arising on the PCFS acquisition is as follows: Arising on acquisition of 49% interest Arising on acquisition of 1% interest Total goodwill arising (note 10) 1,911 3,903 5,814 In Jamaica, it is common for shares of listed financial services entities to trade above their related book values. The intangible assets recognised in these transactions and the resulting goodwill are reflections of the profitability of PCFS and the synergies and opportunities it brings to the Group. b) Details of acquiree’s net income Net income for the year per acquiree’s financial statements Amortisation of identified intangible assets Adjusted net income consolidated by the Group 2005 33,158 (7,028) 26,130 115 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.2 EBA joint venture (a) Details of acquisition Effective April 1, 2005, LOJ acquired the remaining 50% interest in the EBA joint venture. The Group previously held the other 50% interest in the EBA joint venture. Net assets acquired: Property, plant and equipment Intangible assets (note 10) Financial investments Reinsurance assets Miscellaneous assets and receivables Cash resources Actuarial liabilities Deposit administration liabilities Other policy liabilities Loans payable Income tax liabilities Accounts payable and accrued liabilities Total net assets acquired Purchase consideration and related costs Shares issued by the Company Shares to be issued by the Company Shares issued by LOJ Total purchase consideration Goodwill arising on acquisition (note 10) Total fair value Acquirees’ carrying value 167 - 63,065 338 9,297 4,713 (24,662) (25,458) (10,129) (1,767) (234) (3,898) 11,432 167 37,524 63,065 338 9,297 4,713 (24,662) (25,458) (10,129) (1,767) (234) (4,083) 48,771 11,419 739 49,383 61,541 12,770 In Jamaica, it is common for shares of listed financial services entities to trade above their related book values. The employee benefits business was acquired from a listed Jamaica company. The intangible assets recognised in these transactions and the resulting goodwill are therefore reflections of market conditions and the further synergies which the acquisition brings to the Group. 116 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.2 EBA joint venture (continued) (b) Details of acquirees’ net income Net income for the year per acquiree’s financial statements Amortisation of identified intangible assets Adjusted net income consolidated by the Group 38.3 First Life individual life insurance business (a) Details of acquisition 2005 12,708 (1,341) 11,367 Effective April 1, 2005, LOJ acquired the individual life insurance business of First Life Insurance Company Limited. Net assets acquired: Intangible assets Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Actuarial liabilities Other policy liabilities Accounts payable and accrued liabilities Total net assets acquired Purchase consideration and related costs Cash Goodwill arising on acquisition (b) Details of acquirees’ net income Total fair value Acquirees’ carrying value - 11,813 40 47 1,355 508 (9,045) (4,101) (617) - 3,856 11,813 40 47 1,355 508 (9,045) (4,101) (617) 3,856 3,856 - The acquired individual life insurance business has been integrated into the Group’s operations, and it is not possible to determine the net income arising from the acquired business. 117 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.4 Laurel Life (a) Details of acquisition On September 30, 2005, Sagicor USA Inc acquired a 100% interest in Laurel Life. American Founders Life Insurance Company is the operating subsidiary of Laurel Life and provides life insurance and annuity products in the USA. The fair values of the net assets acquired and the purchase consideration are set out below. Net assets acquired: Property, plant and equipment Intangible assets (note 10) Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Actuarial liabilities Other policy liabilities Deposit and security liabilities Income tax liabilities Accounts payable and accrued liabilities Total net assets acquired Purchase consideration and related costs Cash Goodwill arising on acquisition (note 10) Acquirees’ carrying value 1,734 62,192 1,120,394 647,894 2,854 11,178 2,632 (1,367,380) - (242,916) - (223,706) 14,876 Total fair value 3,908 724 1,118,800 625,064 - 14,704 2,632 (1,221,118) (45,978) (248,362) (2,902) (131,880) 115,592 117,557 1,965 The acquirees’ carrying value is stated in accordance with generally accepted accounting practice in the United States of America, since IFRS values were computed only in conjunction with the fair value restatement. (b) Details of acquiree’s net income Laurel Life’s net income from acquisition date to December 31, 2005 amounted to $2,734 which has been consolidated by the Group. Prior to acquisition, Laurel Life did not prepare financial statements conforming to IFRS and as a result its net income for 2005 is not available. 118 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.5 Cayman General (a) Details of acquisition On November 30, LOJ acquired a 51% interest in Cayman General. Cayman General is engaged in property, casualty, group health and group life insurance in the Cayman Islands. The fair values of the net assets acquired, the purchase consideration and the goodwill arising are set out below. Net assets acquired: Property, plant and equipment Intangible assets (note 10) Financial investments Reinsurance assets Miscellaneous assets and receivables Cash resources Other policy liabilities Accounts payable and accrued liabilities Total net assets Share of net assets acquired by the Group Purchase consideration and related costs Cash Goodwill arising on acquisition (note 10) (b) Details of acquiree’s net income Acquirees’ carrying value 2,622 - 103 33,489 16,254 23,291 (28,266) (24,830) 22,663 Total fair value 2,622 13,737 103 33,489 16,254 23,291 (28,266) (24,830) 36,400 18,565 20,043 1,478 Net income after acquisition and consolidated by the Group amounted to $692. In the opinion of management, it is impractical to derive the acquiree’s net income for the year ended December 31, 2005, as the acquiree’s year end is not coterminous with the Group and the information is not readily available. 119 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.6 MCIS (a) Details of acquisition MCIS was a wholly owned subsidiary of PCFS when the latter was acquired by the Group in January 2005. Effective May 31, 2005, PCFS disposed of a 75% interest in MCIS with the result that MCIS became an associated company. The gain realised by PCFS on the disposal amounted to $717. The net income of MCIS for the five month period to June 1, 2005 amounted to $261 and has been included in the Group’s net income. On May 31, 2005, the Group recorded its 25% interest in MCIS at a value of $368. (b) Details of acquiree’s net income The Group’s share of MCIS’s net income for the seven month period from May 31, 2005 to balance sheet date, amounted to $68. 38.7 Family Guardian (a) Details of acquisition On December 28, 2005, Sagicor Life Inc acquired a 20% shareholding in Family Guardian. Family Guardian is a listed company on the Bahamas International Securities Exchange and is engaged in life and health insurance and annuities. Group’s share of net assets acquired Cash consideration Goodwill 2005 13,618 24,716 11,098 The market value, as determined by the listed price of Family Guardian’s shares, of the Group’s shareholding amounted to $24,200 at balance sheet date. (b) Details of acquiree’s net income and fair value The Group has not recognised any net income or loss between the acquisition date and the balance sheet date. 39. COMMITMENTS Commitments entered into for which no provision has been made in these financial statements include the following: Loan advances Expenditure on real estate Operating lease agreements and rental payments Customer guarantees and letters of credit 2005 44,824 19,229 8,543 6,751 2004 30,182 - 1,716 - There are equal and offsetting claims against customers in the event of a call on the above commitments for customer guarantees and letters of credit. 120 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 40. CONTINGENT LIABILITIES (a) Legal proceedings During the normal course of business, the Group is subject to legal actions which may affect the reported amounts of liabilities, benefits and expenses. Management considers that any liability from these actions, for which provision has not been already made, will not be material. (b) Tax assessments The Group is also subject to tax assessments during the normal course of business. Adequate provision has been made for all assessments received to date and for tax liabilities accruing in accordance with management’s understanding of tax regulations. Potential tax assessments may be received by the Group which are in addition to accrued tax liabilities. No provisions have been made in these financial statements for such potential tax assessments. (c) Insurance contracts The Group develops and markets insurance products under various types of insurance contracts. The design of these products is consistent with international best practice and reflects the current thinking at the time of development. The Group keeps its products under review to ensure that they meet both policyholder and company expectations. One such insurance product is the universal life product which was developed and launched in 1987. The design of this product is based on the assumption that the fund value built-up from premiums paid and from investment earnings will be sufficient to cover future administrative costs and mortality charges. A review of the Group’s universal life policy portfolio in Jamaica revealed that many of these policies were affected by fund values which were insufficient to cover these costs through the life of the policies. Once the problem was recognized, discussions were initiated with the Jamaica Regulators, the Financial Services Commission (FSC), and affected policyholders. Affected policyholders were given the opportunity to reduce their existing coverage under the policies or to increase the premiums. Approximately 90% of these policyholders have agreed to adjustments to their policies. However, some affected policyholders, (less than 1%), have filed complaints with the FSC. The Group believes that it has acted properly and in the best interest of the policyholders. The matter is under review by the FSC. The cost, if any, of resolving this issue cannot be quantified at this time and no provision has been made in these financial statements. 121 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2005 Amounts expressed in Barbados $000 41. RELATED PARTY TRANSACTIONS (a) Key management Key management comprises directors and senior management of the Company and of Group subsidiaries. Key management includes those persons at or above the level of Vice President or its equivalent. Compensation of and loans to these individuals were as follows: Compensation Salaries, directors’ fees and other short-term benefits Equity compensation benefits Pension and other retirement benefits Loans Balance, beginning of year Advances Repayments Balance, end of year 2005 17,702 6,773 401 24,876 Mortgage loans Other loans 5,579 1,275 (589) 6,265 39 - (15) 24 2004 11,447 - 297 11,744 Total loans 5,618 1,275 (604) 6,289 The Company has not advanced any loans to key management. All loans have been advanced by Group subsidiaries. Mortgage loans bear interest at rates from 5.5% to 11%. Other loans bear interest at rates from 9% to 10%. (b) Employee pension plans Certain Group subsidiaries have employee pension plans which are administered by the Group as segregated pension plans. The assets of the segregated pension plans at December 31, 2005 amounted to $116,806 and are included in the assets under administration referred to in note 4.10. (c) First Jamaica Investment Limited (First Jamaica) The Group acquired a 37% shareholding in PCFS and the remaining 50% interest EBA (see note 38), from First Jamaica (formerly First Life Insurance Company Limited). As a result of these transactions, First Jamaica holds a 25% interest in LOJ. Because of the size of this shareholding, First Jamaica is considered to be a related party. Apart from the above-mentioned transactions during the year, other accounts receivable includes $7,856 (2004 - $ 3,301) and accounts payable includes $ 6,138 (2004 – nil) in balances with First Jamaica. 42. SUBSEQUENT EVENT On March 30, 2006, Sagicor Finance Limited was incorporated in the Cayman Islands as a wholly owned subsidiary of the Company for the purpose of raising finance for the Group. 122 Sagicor Financial Corporation Senior Management Executive Management Mr. Dodridge D. Miller, FCCA, MBA, LLM President & Chief Executive Ofﬁ cer, Sagicor Financial Corporation Mr. Dodridge Miller was appointed President & Chief Executive Officer of the Mutual Group, now Sagicor, on July 1, 2002, having held a number of senior managerial positions in Sagicor. He previously held the positions of Treasurer and Vice President, Finance and Investments and Deputy Chief Executive Officer and Chief Operating Officer. Mr. Miller is a U.K.-trained Chartered Certified Accountant and also holds an MBA in Finance from the University of Wales and Manchester Business School, and an LLM in Corporate and Commercial Law from the University of the West Indies. He has more than 25 years’ experience in the insurance and financial services industries, spanning auditing and accounting, banking, investments and insurance. Prior to joining Sagicor in 1989, Mr. Miller worked as Director of Finance for Trust House Forte Hotels Ltd. and Sandy Lane Hotel in Barbados for two years. Prior to joining Trust House Forte Hotels, Mr. Miller was Chief Accountant at Barbados National Bank for seven years. Dr. M. Patricia Downes-Grant, BA, MA, MBA, DBA Chief Operating Ofﬁ cer Dr. Patricia Downes-Grant was appointed as COO on July 1, 2002, and is responsible for our day-to-day operations. She joined Sagicor in 1991 and held several senior positions, including those of Vice President (Investments), and Treasurer and Executive Vice President (Finance and Investments) before being appointed COO. She holds an MBA in Finance from St. John’s University, United States, an MA in Economics from George Washington University, United States and a Doctorate in Business Administration (Finance) from the University of Bradford, United Kingdom. Prior to joining Sagicor, Dr. Downes-Grant was a Senior Manager in the Management, Business Consulting and Insolvency Division of Coopers & Lybrand (now PricewaterhouseCoopers). Dr. Downes-Grant has also had significant work experience in development banking. She is a Director of several companies within Sagicor and within the private sector of Barbados. Mr. Steve R. Stoute, SCM Senior Executive Vice President Mr. Steve Stoute, Senior Executive Vice President of Sagicor, has been responsible for Barbados Operations since April 5, 2004. Mr. Stoute, who joined Sagicor in 1960, has had extensive experience as an Underwriting Executive in Industrial and Group Life and Health insurance, and has held many senior positions in Sagicor Life. Mr. Stoute is active in several industry-related organisations and is a Director of the Insurance Association of the Caribbean. 123 Sagicor Financial Corporation Senior Management Executive Management Mr. Anthony Bowen, CLU, FLMI Executive Vice President, Eastern Caribbean Operations Mr. Anthony Bowen joined Sagicor Life Inc on February 1, 2005 as Executive Vice President, Eastern Caribbean Operations. Mr. Bowen brings a wealth of industry experience to this new position at Sagicor Life Inc, having previously worked with the Barbados Mutual Life Assurance Society for several years as Assistant Vice President, Sales, Barbados Branch, and Vice President, Barbados Operations. Prior to joining Sagicor, Mr. Bowen managed his own insurance brokerage company, Ultimate Insurance and Financial Solutions. Mr. Richard Byles, BSc, MSc President and Chief Executive Officer, LOJ Mr. Richard Byles is the President and CEO of Life of Jamaica Ltd. Mr. Byles is the Chairman of Pan Caribbean Financial Services Limited. During his tenure as CEO of the Pan Jam Group, Mr. Byles was responsible for a number of mergers, acquisitions and other strategic business initiatives which have had a profound and positive impact on the performance of that Group. Mr. Byles is a graduate of the University of the West Indies. He holds a BSc in Economics and an MSc in National Development from the University of Bradford, England. He is a Director of several companies within the public and private sector of Jamaica. Mr. George Estock, BSc, MBA President, Sagicor International Management Services Limited and President and CEO, Sagicor Allnation Insurance Company In 1996, Mr. George Estock joined the Barbados Mutual Life Assurance Society as President of the U.S.-based subsidiary, Sagicor International Management Services. He also holds the position of President and CEO of Sagicor Allnation Insurance Company. He has over 15 years’ experience in the Life Insurance and Property & Casualty business. Prior to joining Sagicor, Mr. Estock spent several years with CIGNA; the U.S.-based multinational insurance carrier, working in their U.S. domestic personal lines and Property & Casualty Division, and was Director of Planning and Control of CIGNA’s International Reinsurance Division. He was then appointed President of CIGNA Life and Health Operations for the United Kingdom and, on his return to the U.S., he served as Regional Vice President-Americas, for CIGNA’s Life and Health Operations for Canada, the Caribbean, and Latin America. Mr. Estock has a Degree in Political Economics from the University of Delaware and a Masters in Business Administration from Wilmington College. 124 Sagicor Financial Corporation Senior Management Executive Management Mr. J. Andrew Gallagher, FSA, FCIA, G.B. Chief Risk Ofﬁ cer Mr. Andrew Gallagher joined Sagicor in August 1997 as Resident Actuary. He holds a Bachelor of Mathematics degree from the University of Waterloo, and is both a Fellow of the Canadian Institute of Actuaries and a Fellow of the Society of Actuaries. Prior to joining Sagicor, Mr. Gallagher worked with Eckler Partners in Toronto in their financial institutions practice. He has over 20 years of experience in the industry. Mr. Keston Howell, BSc Executive Vice-President, Merchant Banking Mr. Keston Howell joined Sagicor in July 2005, with responsibility for the establishment of Sagicor Merchant Bank as well as the overall banking strategy for the Group. He has worked in the banking industry for 17 years, the last seven of which were at the senior executive level. He brings to Sagicor considerable knowledge and experience in Corporate and Investment Banking. Mr. Howell’s responsibilities over the years have included day-to-day banking operations, building and fostering relationships with institutional investors in the English and Dutch-speaking Caribbean. Other key areas in which he has had responsibility are asset/liability management, and ensuring regulatory compliance with securities laws in various jurisdictions. Mr. Howell holds a BSc (Hons) in Management Studies from the University of the West Indies. Mr. André Lafond, FSA, FCIA, Executive Vice President and Sagicor Chief Actuary Mr. André Lafond joined Life of Barbados as the Company’s Appointed Actuary and Vice President, Actuarial in September 1997, prior to becoming the Sagicor Chief Actuary in 2003. Mr. Lafond is an Actuary with over 20 years’ experience in both the life and general insurance industries, and is a Fellow of both the Canadian Institute of Actuaries and the Society of Actuaries. He attended Laval University in Quebec, obtaining a Bachelors in Administration and Actuarial Science. 125 Sagicor Financial Corporation Senior Management Executive Management Mr. Ken A. Marshall Executive Vice President & General Manager (Trinidad and Tobago) Mr. Kendrick (Ken) Marshall was formerly Executive Vice President responsible for Barbados and the Eastern Caribbean, and President and CEO of Capital Life Insurance Company Limited. He is currently the Executive Vice President of Sagicor Life Inc and General Manager of the Trinidad and Tobago Operations. Mr. Marshall has had extensive experience in the insurance field, both in sales and management. He has been with the company for over 30 years, and has held several senior positions within the Barbados, Eastern Caribbean and Capital Life operations. Mr. Marshall is also a former President and member of the Life Underwriters’ Association of Barbados. Ms. Maxine MacLure, BSc, MEd, MBA President and CEO, Sagicor USA Inc and President and CEO, Sagicor Life Insurance Company Ms. Maxine MacLure currently spearheads our U.S. business expansion strategy. Ms. MacLure joined Sagicor in December 2001 as President and CEO of Life of Jamaica. She effectively managed that company through its merger with Island Life Insurance Company. Prior to joining LOJ, Ms. MacLure led a two-year joint insurance reform project sponsored by the Inter-American Development Bank and the Jamaican Government, where she participated in the resolution of the financial sector crisis. Ms. MacLure also spent seven years as a Senior Government Financial Sector Regulator in Canada. Ms. MacLure has a Masters degree in Education from Western Washington University in the United States and a BSc from the University of Manitoba, Canada, with a major in Mathematics and an MBA from the Richard Ivey School of Business at the University of Western Ontario, Canada. Philip N. W. Osborne, BSc, FCA Chief Financial Ofﬁ cer Mr. Philip Osborne joined Life of Barbados in 1989 as Chief Accountant. He was appointed Assistant Vice President, Finance, in 1995 and in September 1996 he was appointed Vice President, Finance, and a Director of the Company. After qualifying as a Chartered Accountant in 1983, Mr. Osborne served in various supervisory and management positions in professional accounting firms in England and Barbados, namely Touche Ross in the United Kingdom and Pricewaterhouse in Barbados. Mr. Osborne is a graduate of the University of London, England where he earned a BSc in Mathematics with Computer Science in 1978. 126 Sagicor Financial Corporation Senior Management Executive Management Ms. Sandra Osborne, BSc, LLB, FCIS Executive Vice President, General Counsel and Secretary Ms. Sandra Osborne is an Attorney-at-Law and Chartered Secretary who joined Sagicor in 1989 as General Counsel and Corporate Secretary. She has over 27 years’ experience in the legal and corporate secretarial field, having previously practiced as a Crown Counsel and at the private Bar in civil practice in Barbados. Prior to joining Sagicor, Ms. Osborne worked in private practice at the Juris Chambers law firm in Barbados. Ms. Osborne holds a BSc (Hons), in Political Science from the University of the West Indies, Jamaica, a Bachelor of Laws (Hons) from the University of the West Indies, Barbados, and a Certificate in Legal Education, Hugh Wooding Law School, Council of Legal Education, Trinidad. She is also a Fellow of the Institute of Chartered Secretaries and Administrators in Canada, and holds an Executive Development Program Certificate from Kellogg Graduate School of Management, Northwestern University, United States. Mr. Ravi Rambarran, BSc, MSc, FIA Executive Vice President, Strategy Mr. Ravi Rambarran’s work experience includes Pensions Actuary of Life of Jamaica, Appointed Actuary of Global Life Bahamas and Global Life Cayman, Chief Financial & Investment Officer of LOJ, Managing Director of NCB Capital Markets and West Indian Trust Company, part-time Lecturer in Actuarial Science at the University of the West Indies and running his own actuarial practice. Prior to joining LOJ, Mr. Rambarran was a Consulting Actuary with the Aon Group and the HSBC Group in the United Kingdom. Mr. Rambarran has a BSc (Hons) in Actuarial Science from City University, London, and an MSc in Financial Economics from the University of London. Mr. Rambarran was awarded an Open Mathematics Scholarship by the Government of Trinidad and Tobago, and is also a Fellow of the Institute of Actuaries. Mr. Vincent Yearwood, FCCA, MBA Executive Vice President, Shared Services & Employee Benefits Mr. Vincent Yearwood was appointed as Executive Vice President of Sagicor Financial Corporation, with responsibility for the Shared Services Division, effective March 1, 2004. In 2005, he bacame responsible for Employee Benefits. Mr. Yearwood brought to Sagicor a broad spectrum of experience in the areas of strategic and change management, finance, marketing and planning and management of information systems. The former CEO of Cable and Wireless BET and, more recently, CEO of the Barbados Investment and Development Corporation, Mr. Yearwood is a Certified Chartered Accountant and has an MBA from the University of Wales and Manchester Business School. 127 Sagicor Financial Corporation Senior Management Vice Presidents Ms. Susan Boyea, BSc, MBA, FLMI Vice President, Shared Services, Information Technology Mrs. Susan Boyea joined Life of Barbados in 1989 and was Assistant Vice President in charge of Information Systems at the time of LOB’s acquisition by Sagicor. In April 2003 she was appointed Head, Shared Services Information Systems during the operational merger of Sagicor Life and Life of Barbados. She was appointed Vice President, IT, in February, 2004. A graduate of the University of the West Indies, Mrs Boyea has a BSc in Computer Science and Mathematics, and an Executive Masters in Business Administration. She is also a Fellow of the Life Management Institute (FLMI). Ms. Tammy-Anne Campbell, BSc, FSA, FCIA Vice President, Actuarial Ms. Tammy-Anne Campbell joined Life of Barbados in 2001 as Assistant Vice President, Actuarial. She was promoted to Vice President, Actuarial, of Sagicor Life Inc in April 2005. Ms. Campbell has a diverse background, having worked for 11 years with an actuarial consulting firm in Toronto, followed by two years with the Provincial Workers’ Compensation Board, before joining Life of Barbados. Ms. Campbell has expertise in several practice areas including pensions, life insurance, property and casualty insurance and investments, she has also been involved in over 2,000 litigation situations involving actuarial mathematics. Ms Campbell attended the University of Toronto where she earned a BSc in Mathematics, Statistics and Computer Science in 1988. She later received her fellowship from the Society of Actuaries and Canadian Institute of Actuaries in 2000. Mr. Anthony O. Chandler, CGA, MBA Vice President, Finance Mr. Anthony Chandler is Vice President, Finance of Sagicor Life Inc. He joined the company as Financial Accountant in 1995 until 2000, when he transferred to our subsidiary Island Life Insurance Company Ltd. In 2003, he joined the management of LOJ as Head of its Internal Audit Function. Mr. Chandler returned to Barbados in the position of Vice President, Finance, in 2003. He has been a member of the Institute of Chartered Accountants of Barbados since 1992 and a member of the Certified General Accountants Association of Canada since 1990. Mr. Chandler has over 15 years’ experience in the accounting profession. His experience includes the provision of accounting, audit and business advisory services. Mr. Chandler earned his MBA from the University of Wales and Manchester Business School in 2004. Mrs. Althea Hazzard, LLM, FCIS Vice President, Legal & Compliance Mrs. Althea Hazzard is an Attorney-at-Law with sixteen (16) years’ experience, with particular emphasis on Corporate Law as it relates to the international business and financial sectors in Barbados. She joined Life of Barbados in 1997 and holds a Master of Laws degree from the University of Cambridge and an International Diploma in Compliance from the International Compliance Association in the United Kingdom. Mrs. Hazzard is a Fellow of the Institute of Chartered Secretaries and Administrators. 128 Sagicor Financial Corporation Senior Management Vice Presidents Mr. Gregory Hinkson, BSc, FCGA Vice President, Investments Mr. Gregory Hinkson joined Sagicor in July, 2005, with responsibility for the Investments Department. He is a graduate of the University of the West Indies and holds a professional accounting designation and fellowship from the Certified General Accountants (CGA) Association of Canada. Mr. Hinkson is a Fellow of the Institute of Chartered Accountants of Barbados, a member of the CFA Institute and the Barbados Chapter of Investment Professionals, as well as a former President of the CGA Association of Barbados. Mr. Hinkson has brought a wealth of industry knowledge and experience, both public and private sector, to the Sagicor Group, and he has held several senior positions in local and off-shore banking and investments. Mr. Henry Inniss, LLIF, FLMI, MBA, BSc Vice President, Barbados Operations Mr. Henry Inniss joined Life of Barbados in 1990 as Manager, Marketing Support. He was promoted in 1995 to Assistant Vice President, Marketing, and in 1998 he became Vice President, Marketing. He is a Fellow of the LIMRA Leadership Institute and the Life Management Institute. He holds a Bachelor’s degree in Business Administration from the University of Puerto Rico and a Masters in Business Administration from Inter American University. Mr. Inniss also speaks Spanish. Mrs. Melba Smith, BA Vice President, Corporate Communications Mrs. Melba Smith is a Communications professional who joined Sagicor in 2002 as Vice President, Corporate Communications, and has over 25 years’ experience in Business Communication, Public Relations and Management. Prior to joining Sagicor Mrs. Smith was the General Manager of the Caribbean Broadcasting Corporation, a position she held for 7 years. She was also a Board member of the Caribbean Broadcasting Union and became that Institution’s first female President in 2000. Mrs. Smith, a graduate of the University of the West Indies, holds a BA (Hons), and a Post Graduate Diploma in Mass Communication, a Certificate in Privatisation from the Irish Management Institute and is a member of the International Association of Business Communicators. 129 Sagicor Financial Corporation Senior Management Vice Presidents Mr. Robert Trestrail, BA Vice President, Administration, Trinidad Operations Mr. Robert Trestrail joined Sagicor Life in 2001 as an Assistant Vice President, Administration. In 2004, he was promoted to Vice President, Administration, with responsibility for general branch administration and administration of the Investment Portfolio. He has been a member of the Trinidad Investment Committee, and brings several years of Commercial Banking experience to Sagicor. Mr Trestrail is an Economics major, with a Bachelor of Arts from the University of Ontario, Canada. Ms. Teri Townsend, MBA Vice President, Corporate Strategy, Information Systems Ms. Teri Townsend joined the Sagicor Group in 2000, after successfully managing the Company’s Y2K Project. Prior to joining Sagicor, Ms Townsend spent 15 years with a large computer manufacturer in Silicon Valley, California. On her return to Barbados she spent 5 years with Fujitsu Barbados in Services and then in General Management. She has managed many large information technology projects in the region, and has provided consulting services to Governments on education technology throughout the Caribbean. Ms. Townsend brings this international and regional expertise and knowledge in business and technology to the Sagicor Group. She holds an Executive Masters in Business Administration from the University of the West Indies. She is a member of the ICT Advisory Committee for the Government of Barbados and is a past President of the Information Society of Barbados. Mr. Gregory Whiby Vice President, Marketing and Deputy General Manager, Trinidad Operations Mr. Gregory Whiby is responsible for the Sales and Marketing functions of Sagicor Life in Trinidad. He was a successful salesman and agency manager before being promoted to lead the sales force. With over 30 years’ experience in sales and management in the insurance industry, Mr. Whiby started his career as an insurance agent and went on to win every major award that the Company and the insurance industry had to offer for sales producers. 130 Sagicor Financial Corporation Advisors and Bankers Appointed Actuary Sylvain Goulet, FCIA, FSA, MAAA, Affiliate Member of the (British) Institute of Actuaries Medical Consultants Dr Livingstone A Forde, MBBS, DM (Medicine) (UWI) Dr Oscar W Jordan, MB, ChB, FRCPE, DCH, Diabetologist Dental Consultant Dr Trevor E H Talma, BSc, DDS Auditors PricewaterhouseCoopers, Chartered Accountants Head Office Attorneys Edmund A Bayley Carrington & Sealy Patterson K H Cheltenham, QC, LLM (Lond) Clarke, Gittens & Farmer Cottle Catford & Company Hon Sir Henry de B Forde, K.A., QC, MA, LLM (Cantab) Barry L V Gale, QC, LLB (Hon) Sir Douglas P Lynch, K.A., CMG, QC Principal Bankers Butterfield Bank (Barbados) Limited Bank of Montreal Caribbean Mercantile Bank NV Citibank FirstCaribbean International Bank Limited First Union National Bank JP Morgan Chase Bank Maduro & Curiel’s Bank NV National Commercial Bank Jamaica Limited RBTT Bank Limited Republic Bank Limited Royal Bank of Canada The Bank of Nova Scotia 131 Sagicor Financial Corporation Offices Parent Company SAGICOR FINANCIAL CORPORATION Sagicor Corporate Centre Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com Website: www.sagicor.com Insurance Subsidiaries SAGICOR LIFE INC Sagicor Financial Centre Lower Collymore Rock St Michael, Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com SAGICOR LIFE INC BRANCH OFFICES Barbados 1st Avenue, Belleville St Michael Tel: (246) 467-7700 Fax: (246) 429-4148 Email: info@sagicor.com Antigua Sagicor Financial Centre #9 Factory Road, St John’s Tel: (268) 480-5550 Fax: (268) 480-5520 Email: bmlas_an@caribsurf.com Grenada The Mutual/Trans-Nemwil Office Complex The Villa, St George’s Tel: (473) 440-1223 Fax: (473) 440-4169 Email: bmlas_gre@caribsurf.com St Kitts Cnr Cayon and West Independence Square Sts Basseterre Tel: (869) 465-9476 Fax: (869) 465-6437 Email: bmlas_sk@caribsurf.com 132 St Lucia Sagicor Financial Centre Choc Estate, Castries Tel: (758) 452-3169 Fax: (758) 450-3787 Email: bmlas@candw.lc Trinidad and Tobago Sagicor Financial Centre 16 Queen’s Park West, Port of Spain Tel: (868) 628-1636/7/8 Fax: (868) 628-1639 Email: comments@sagicor.com SAGICOR LIFE INC AGENCIES Anguilla Malliouhana Insurance Co Ltd Caribbean Commercial Centre The Valley Tel: (264) 497-3712 Fax: (264) 497-3710 Dominica WillCher Services Inc 44 Hillsborough Street Corner Hillsborough & Independence Street Roseau Tel: (767) 440-2562 Fax: (767) 440-2563 Email: bmlas@cwdom.dm Guyana Hand-in-Hand Mutual Life Assurance Company Limited Lots 1, 2 and 3, Avenue of the Republic Georgetown Tel: (592) 251861 Fax: (592) 251867 Monserrat Administered by Antigua Branch St Vincent Incorporated Agencies Limited Kenmars Building, Halifax Street Kingstown Tel: (784) 456-1159 Fax: (784) 456-2232 Sagicor Financial Corporation Offices SAGICOR ALLNATION INSURANCE COMPANY 1201 North Orange Street Suite 716 Wilmington, Delaware 19801-1186 USA Tel: (302) 884-6770 Fax: (302) 884-6771 Website: www.allnation.com CAPITAL de SEGUROS, SA Ave Samuel Lewis y Calle Santa Rita Edificio Plaza Obarrio 3er Piso Oficina 201 Panama City, Panama Tel: (507) 223-1511 Fax: (507) 264-1949 Email: capital1@sinfo.net CAPITAL LIFE INSURANCE COMPANY BAHAMAS LIMITED C/o Colina Insurance Company Limited 56 Collins Avenue, P O Box 4937 Nassau, Bahamas Tel: (242) 393-9518 Fax: (242) 393-9523 SAGICOR CAPITAL LIFE INSURANCE COMPANY LIMITED Registered Office Grosvenor Close and Shirley Street Nassau, Bahamas CAPITAL LIFE BRANCH OFFICES Aruba Fergusonstraat #106 AHMO Plaza Building, Suites 1 and 2 Oranjestad Tel: (297) 823967 Fax: (297) 826004 Email: calico@setarnet.aw Belize The Insurance Centre 212 North Front Street Belize City Tel: (501) 223-3147 Fax: (501) 223-7390 Email: capitalbe@btl.net Curaçao Schottegatweg Oost #11 Tel: (599) 9 736-8558 Fax: (599) 9 736-8575 Email: capital.life@curinfo.an CAPITAL LIFE AGENCIES Haiti Cabinet d’Assurance Fritz de Catalogne Angles Rues de Peuple et des Miracles Port-au-Prince Tel: (509) 226695 Fax: (509) 230827 Email: capital@compa.net St Maarten C/o Charlisa NV, Walter Nisbeth Road #99B Phillipsburg Tel: (599) 542-2070 Fax: (599) 542-3079 Email: capital@sintmaarten.net LIFE OF JAMAICA LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.life-of-ja.com NATIONWIDE INSURANCE COMPANY LIMITED Sagicor Financial Centre 16 Queen’s Park West Port of Spain, Trinidad Tel: (868) 628-1636 Fax: (868) 628-1639 Email: comments@sagicor.com SAGICOR LIFE INSURANCE COMPANY 4343 N. Scottsdale Road, Suite 300 Scottsdale, Arizona 85251 Tel: 1-800-531-5067 Fax: (345) 949-8262 Email: info@sagicor.com 133 Sagicor Financial Corporation Offices SAGICOR LIFE OF THE CAYMAN ISLANDS LIMITED Global House, 198 North Church Street George Town, Grand Cayman Cayman Islands Tel: (345) 949-8211 Fax: (345) 949-8262 Email: global@candw.ky Trinidad and Tobago Sagicor Financial Centre 16 Queen’s Park West Port of Spain Tel: (868) 628-1636/7/8 Fax: (868) 628-1639 SAGICOR RE INSURANCE LIMITED Global House, 198 North Church Street George Town, Grand Cayman Cayman Islands Tel: (345) 949-8211 Fax: (345) 949-8262 Email: global@candw.ky General Insurance Subsidiaries CAYMAN GENERAL INSURANCE COMPANY LIMITED Harbour Place Box 2171 GT George Town , Grand Cayman Cayman Islands Tel: (345) 949 7028 Fax: (345) 949 7457 SAGICOR GENERAL INSURANCE INC Beckwith Place, Lower Broad Street Bridgetown, Barbados Tel: (246) 431-2800 Fax: (246) 426-0752 Email: barbadosfire@caribsurf.com Sagicor General Insurance Branch Offices Barbados Mall Internationale Haggatt Hall St Michael Tel: (246) 431-2886 Fax: (246) 426-8245 Barbados Sagicor Financial Centre Lower Collymore Rock St Michael Tel: (246) 467-7650 Fax: (246) 428-6269 134 Sagicor General Insurance Agencies HHV Whitchurch & Company Limited Old Street PO Box 771 Roseau Dominica Tel: (767) 448-2181 Fax: (767) 448-5787 WillCher Services Inc 44 Hillsborough Street Corner Hillsborough & Independence Street Roseau Dominica Tel: (767) 440-2562 Fax: (767) 440-2563 Email: bmlas@cwdom.dm Peter & Company Limited Vide Boutielle Castries St Lucia Tel: (758) 452 2771 Fax: (758) 457-7079 JE Maxwell & Company Limited PO Box GGM507 Bridge Street Castries St Lucia Tel: (758) 451-7829 Fax: (758) 451-7271 Derek Bogle & Assocaites Insurance Limited 34 Pasadora Place Smith Road Grand Cayman Cayman Islands Tel: (345) 949-0579 Sagicor Financial Corporation Offices SAGICOR ASSET MANAGEMENT INC Sagicor Corporate Centre Wildey, St Michael, Barbados Tel: (246) 467-7500 Fax: (246) 426-1153 Email: info@sagicor.com FAMGUARD CORPORATION LIMITED East Bay & Shirley Street PO Box SS-6232 Nassau, NP Bahamas Tel: (242) 396 4000 Fax: (242) 393 1100 Website: www.famguardbahamas.com BANKING AND OTHER FINANCIAL SERVICES SAGICOR MERCHANT LIMITED Sagicor Financial Centre 16 Queen’s Park West, Port of Spain Tel: (868) 628-1636/7/8 Fax: (868) 628-1639 PAN CARIBBEAN FINANCIAL SERVICES LIMITED Pan Caribbean Building 60 Knutsford Boulevard Kingston 5, Jamaica Tel: (876) 929-5583-4 Fax: (876) 926-4385 Website: www.gopancaribbean.com Email: options@gopancaribbean.com Finance Companies GLOBE FINANCE INC 6 Rendezvous Court, Rendezvous Main Road Christ Church, Barbados Tel: (246) 426-4755 Fax: (246) 426-4772 Website: www.globefinanceinc.com THE MUTUAL FINANCE INC Sagicor Financial Centre Choc Estate, Castries Tel: (758) 452-4272 Fax: (758) 452-4279 Other Subsidiaries/Associated Companies SAGICOR INTERNATIONAL MANAGEMENT SERVICES, INC (Capital Life’s GlobalSURE International Benefits) 1511 North West Shore Blvd, Suite 820 Tampa, Florida 33607-4543, USA Tel: (813) 287-1602 Fax: (813) 287-7420 Website: www.globalsure.com SAGICOR FUNDS INCORPORATED Sagicor Corporate Centre, Wildey St Michael, Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com 135 NOTICE OF MEETING NOTICE is hereby given that the Third Annual Meeting of Shareholders of Sagicor Financial Corporation (“the Company”) will be held at Hilton Barbados, Needham’s Point, St Michael, Barbados, on Wednesday June 28, 2006 at 5.00 pm to transact the following business:- 1. To receive and consider the Statement of Accounts and the Balance Sheet for the year ended December 31, 2005 and the Auditors’ Report thereon. 2. To elect Directors. 3. To re-appoint the incumbent Auditors for the ensuing year and to authorize the Directors to fix their remuneration. 4. To consider and if thought fit adopt the following Resolution as a Special Resolution: WHEREAS: (a) The Shares of the Company were cross-listed on the Trinidad and Tobago Stock Exchange on August 24, 2004. (b) The Trinidad and Tobago Securities and Exchange Commission has issued Guidelines relating to the listing on the Trinidad and Tobago Stock Exchange of demutualized companies with constrained share ownership provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares (“the Guidelines”). (c) Under the Guidelines, it is recommended that within two years of listing, a demutualized company seek the approval of shareholders for the retention of its constrained share ownership provisions. (d) Pursuant to the terms of the Demutualization Plan of its wholly owned subsidiary, Sagicor Life Inc, the Company was incorporated with constrained share ownership provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares for the first five years following incorporation and thereafter a maximum of 20% subject to certain conditions as stated in the Restated Articles of Incorporation of the Company. BE IT RESOLVED AS A SPECIAL RESOLUTION of the Shareholders of the Company that: (1) Pursuant to Section 197(1)(e) of the Companies Act, the Restated Articles of Incorporation of the Company be and are hereby amended to change or remove the rights, privileges, restrictions or conditions in respect of the Shares of the Company as follows: The restrictions, if any, on share holding and on share transfers are amended by: (a) the deletion of Article 3.1.5 of Schedule 2 of the Restated Articles of Incorporation and the substitution therefor of a new Article 3.1.5 as set out in the annexed Schedule 1 which is incorporated herein; (b) the deletion of Article 3.1.7 of Schedule 2 of the Restated Articles of Incorporation and the substitution therefor of a new Article 3.1.7 as set out in the annexed Schedule 2 which is incorporated herein. (2) The proper officers of the Company be and are hereby authorized to file and register all such documents and instruments and to take all such action as may be necessary or advisable to give effect to this Special Resolution. 5. To transact such other business as may properly come before the Meeting. By Order of the Board of Directors Sandra Osborne Corporate Secretary May 15, 2006. 136 PROXIES: Shareholders who are unable to attend the Meeting in person may complete and return the enclosed form of proxy to the Corporate Secretary, Sagicor Financial Corporation, Sagicor Corporate Centre, Wildey, St Michael, Barbados, at least 48 hours before the appointed time of the Meeting or adjourned Meeting. DOCUMENTS AVAILABLE FOR INSPECTION: 1 Copies of the Restated Articles of Incorporation of the Company dated December 6, 2002, are available for inspection at the following offices: • • Barbados - Sagicor Financial Corporation, Sagicor Corporate Centre, Wildey, St Michael Sagicor Life Inc Branch Offices/Agencies: o Trinidad - Sagicor Financial Centre, 16 Queen’s Park West, Port of Spain o Anguilla - Malliouhana Insurance Co Ltd, Caribbean Commercial Centre, The Valley o Antigua - Sagicor Financial Centre, 9 Factory Road, St John’s o Dominica – Willcher Services Inc, 44 Hillborough Street, Corner Hillsborough & Independent Street, Roseau o Grenada - The Mutual/Trans-Nemwil Office Complex, The Villa, St George’s o St Kitts - Corner Cayon and West independence Square Streets, Basseterre o St Lucia - Sagicor Financial Centre, Choc Estate, Castries o St Vincent - Incorporated Agencies Limited Kenmars Building, Halifax Street, Kingstown Jamaica - Life of Jamaica Limited, 28-48 Barbados Avenue, Kingston 5. • 2 There are no service contracts granted by the Company, or its subsidiaries, to any Director of the Company. 137 1. Name of Company SAGICOR FINANCIAL CORPORATION 2. Company No. 21849 3. Restrictions, if any, on share holding and share transfers. SCHEDULE 1 3.1.5 “maximum aggregate holdings” means the number of shares in any class in the capital of the Company that would amount to 20% of the total number of shares in any class of the capital of the Company issued and outstanding at such time; 1. Name of Company SAGICOR FINANCIAL CORPORATION 2. Company No. 21849 3. Restrictions, if any, on share holding and share transfers. SCHEDULE 2 3.1.7 No person may hold, or be beneficially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than the maximum aggregate holdings unless: 3.1.7.1 not less than two thirds of the directors then in office approve of the same; and 3.1.7.2 there is an agreement between the Company and such person restricting the transfer of such shares; and 3.1.7.3 the Supervisor of Insurance (or the Supervisor’s successor regulatory authority) is satisfied that such shareholder is a fit and proper person. 138 MANAGEMENT PROXY CIRCULAR SAGICOR FINANCIAL CORPORATION Company No 21849 Management is required by the Companies Act Chapter 308 of the Laws of Barbados (hereinafter called “the Act”) to send with the Notice convening the Meeting, forms of proxy. By complying with the Act, management is deemed to be soliciting proxies within the meaning of the Act. This Management Proxy Circular accompanies the Notice of the third annual meeting of shareholders of Sagicor Financial Corporation (“the Company”) to be held on June 28, 2006 at 5:00 pm (“the Meeting”) and is furnished in connection with the solicitation of proxies by the management of the Company for use at the Meeting, or any adjournments thereof. The solicitation will primarily be by mail. The cost of the solicitation will be borne by the Company. APPOINTMENT AND REVOCATION OF PROXY A form of proxy is enclosed and, if it is not your intention to be present at the Meeting, you are asked to sign, date and return the proxy. Proxies to be exercised at the Meeting must be deposited with the Company not later than 5:00 pm on June 26, 2006. Any shareholder having given a proxy has the right to revoke it by depositing an instrument in writing executed by the shareholder or his/her attorney authorized in writing, or if the shareholder is a company, by any officer or attorney thereof duly authorized, with the Corporate Secretary at the registered office of the Company at Sagicor Corporate Centre, Wildey, St Michael, Barbados, at any time up to and including the last business day preceding the day of the Meeting or any adjournment thereof. The persons named in the enclosed form of proxy are Directors of the Company. If you wish to appoint some other person or company to represent you at the Meeting you may do so by inserting the name of your appointee, who need not be a shareholder, in the blank space provided on the proxy form. RECORD DATE AND VOTING OF SHARES The Directors of the Company have fixed May 12, 2006 as the record date for determining the shareholders entitled to receive Notice of the Meeting and have given notice thereof by advertisement as required by the Act. Only the holders of common shares of the Company of record at the close of business on that day will be entitled to receive Notice of the Meeting. Common shareholders are voting on (i) the election of Directors (ii) the re-appointment of the incumbent Auditors and Directors’ authorization to fix their remuneration and (iii) the amendment of Schedule 2 of the Restated Articles of Incorporation of the Company to change or remove the rights, privileges, restrictions or conditions in respect of the Shares of the Company by removing the provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares. Only the holders of common shares of the Company will be entitled to vote at the Meeting. On a show of hands, each shareholder has one vote. On a poll, each holder of a Series A common share is entitled to one vote for each share held. Each holder of a Series C common share is entitled to one vote for the first 1,000,000 Series C common shares held, or any part thereof, plus one additional vote for every additional 1,000,000 Series C common shares held. As at December 31, 2005, there are 265,552,748 Series A common shares of the Company outstanding. As at the date hereof there are no Series C common shares of the Company outstanding. PRESENTATION OF FINANCIAL STATEMENTS AND AUDITORS’ REPORT The Financial Statements of the Company for the year ended December 31, 2005 and the Auditors’ Report thereon are included in the 2005 Annual Report which is being mailed to shareholders with this Notice of Meeting and Management Proxy Circular. 139 ELECTION OF DIRECTORS The Board of Directors consists of twelve members. The number of Directors to be elected at the Meeting is four. Mr John Arthur Lionel Bethell, Dr Oscar Wendell Jordan, GCM, and Mr Stephen David Rupert McNamara will retire at the end of the Meeting and will be seeking re-election. Mrs Vivian-Anne Lenora Gittens will also retire at the end of the Meeting but will not be seeking re-election. The following are the names of the qualified persons proposed as nominees for election as Directors of the Company, and for whom it is intended that votes will be cast pursuant to the form of proxy hereby enclosed: • MR JOHN ARTHUR LIONEL BETHELL • DR OSCAR WENDELL JORDAN, GCM, MB, CHB, FRCPE, DCH • MR STEPHEN DAVID RUPERT McNAMARA • MRS JOYCE ETTIENNETTE DEAR, FCCA, MBA J Arthur L Bethell is non-executive Chairman. He retired as President and Chief Executive Officer of The Mutual Group, now the Sagicor Group of Companies, on June 30, 2002, having been appointed to that office in 1995. He joined The Mutual as a sales representative in 1965 and has held the positions of Superintendent of Agencies, Sales Manager, Vice President, Marketing, and Chief Executive Officer of Capital Life Insurance Company Limited (Bahamas). Mr. Bethell was elected a director of The Mutual, now Sagicor Life Inc., in 1994 and is presently chairman of the subsidiary, Life of Jamaica Limited and a director of a number of subsidiaries in the Group. He is Barbadian. Dr Oscar W Jordan, GCM, MB, ChB, FRCPE, DCH, Diabetologist, is Consultant Physician, Department of Medicine of the Queen Elizabeth Hospital, Barbados. He holds a Bachelor of Medicine and Surgery (MB, ChB) from Edinburgh University, Scotland, and is a Fellow of the Royal College of Physicians (FRCPE), Edinburgh University, Scotland. He also holds a Diploma in Child Health (DCH) from Glasgow University, Scotland. He is Chairman of the Diabetes Foundation of Barbados and Director of Clinical Medicine in Barbados for the University of St. Georges, Grenada. A widely published and well-respected physician, he is President of the Caribbean Golf Association. He became a director of The Mutual, now Sagicor Life Inc, in 1990. Dr Jordan is Barbadian. Stephen D R McNamara is Senior Partner of McNamara & Company, Attorneys-at-Law of St Lucia. He is also a Barrister- at-Law of Lincoln’s Inn, College of Legal Education, England. He was elected to the board of The Mutual, now Sagicor Life Inc, in 1997. He is a former chairman of the St Lucia Tourist Board and is currently a director of a number of subsidiaries in the Group. Mr. McNamara is a citizen of St Lucia. Joyce E Dear, FCCA, MBA, was, until 2004, a partner in the Assurance and Business Advisory Services Division of PricewaterhouseCoopers (“PwC”) in Barbados. She is a Fellow of the Association of Chartered Certified Accountants of the United Kingdom and holds a Masters in Business Administration from the University of Warwick. She is also a member of the Hospitality Financial and Technology Professionals. Mrs Dear has over 31 years’ experience in rendering audit and financial services to a wide variety of industries, including public companies, tourism and hospitality entities, manufacturing companies, statutory corporations and international funding agencies/government financed programs and projects. Mrs Dear was the PwC Industry lead partner for the public service assignments. She is a past President of the Institute of Chartered Accountants of Barbados and a former director of a general insurance company in Barbados. Mr Bethell, a former senor insurance executive, Dr Jordan, GCM, a noted and widely published physician, and Mr McNamara, one of St Lucia’ leading Attorneys-at-Law, each brings a wealth of experience to the Board of Directors. They continue to be effective and demonstrate commitment to the role of Director, including commitment of time for board and committee meetings. Mrs Dear brings a wealth of financial experience spanning different industries and will add financial depth to the Board. The Management of the Company does not contemplate that any of the persons named above will, for any reason, become unable to serve as a Director. The Directors recommend that the shareholders vote FOR the election of the above-named Nominees. RE-APPOINTMENT OF INCUMBENT AUDITORS PricewaterhouseCoopers, Chartered Accountants, of The Financial Centre, Bishops Court Hill, St Michael, Barbados, are the incumbent Auditors of the Company. It is proposed to re-appoint PricewaterhouseCoopers as Auditors of the Company to hold office until the next annual meeting of shareholders. The Directors recommend that the shareholders vote FOR the re-appointment of PricewaterhouseCoopers and the authorization of Directors to fix the Auditors’ remuneration. 140 CONSTRAINED SHARE OWNERSHIP PROVISIONS The Company’s Articles contain constrained share ownership provisions (“the Provisions”) which provide that, at any time during the 5 year period immediately following the date of incorporation of the Company, no person may hold, or be beneficially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than 5% of any class in the capital of the Company. The Articles provide further that, at any time after such 5 year period, no person may hold, or be beneficially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than 20% of any class in the capital of the Company unless: (i) not less than two thirds of the directors then in office approve of the same; (ii) there is an agreement between the Company and such person restricting the transfer of such shares; and (iii) the Supervisor of Insurance of Barbados (or the Supervisor’s successor regulatory authority) is satisfied that such shareholder is a fit and proper person. The Trinidad and Tobago Securities and Exchange Commission has issued Guidelines (“the Guidelines”) relating to the listing on the Trinidad and Tobago Stock Exchange (“the Exchange”) of demutualized companies with constrained share ownership provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares. Under the Guidelines, it is recommended that within two years of listing, such a company seek the approval of shareholders for the retention of its constrained share ownership provisions. The company may retain these provisions for a maximum period of five years after listing. At the expiration of the five-year period, the entity may retain its listing with constrained share ownership provisions only if it seeks and obtains the approval of shareholders and the Exchange. These approvals may only be granted for a further period not exceeding two years. Thereafter the entity may only continue to be listed if it removes the provisions completely. The Company was incorporated on December 6, 2002 pursuant to the terms of the Demutualization Plan of the Company’s wholly owned subsidiary, Sagicor Life Inc. The shares of the Company were listed on the Barbados Stock Exchange on February 4, 2003 and cross-listed on the Exchange on August 24, 2004. In accordance with the Company’ Articles, the 5% constrained share ownership provisions are due to expire on December 6, 2007, five years after incorporation of the Company. The Provisions were implemented in 2002 in order to give the Sagicor Group time to adjust from being a mutual society to a publicly listed company, consistent with the practice of demutualized companies in Canada, the demutualization model of which Sagicor Life Inc adopted. The Company’s business strategy is to: Expand internationally and in the Caribbean • • Diversify its product offerings and cross-sell its products • • Continue to improve the efficiency of its operations Effectively use its balance sheet, and The Provisions may limit the Company’s ability to engage in transactions that require an offering or an exchange of shares, which in turn could limit its ability to engage in certain strategic acquisitions, thus having a material adverse effect on its strategic options and growth. The Directors consider it appropriate at this time to remove the constrained share ownership provisions limiting any single shareholder to owning a maximum of 5% of outstanding shares, and to retain the constrained share ownership provisions limiting any single shareholder to owning a maximum of 20% of outstanding shares subject to the existing conditions. The rationale for this recommendation is: • • • the Guidelines; the fact that the 5% constrained share ownership provisions will expire in any event within the next 18 months; and the potential constraints that the Provisions pose to the Company’s ability to execute its strategy. The Board of Directors therefore recommends that the Articles of the Company be amended to remove the constrained share ownership provisions limiting any single shareholder or group of shareholders to holding a maximum of 5% of outstanding shares, but retaining the constrained share ownership provisions limiting any single shareholder to holding a maximum of 20% subject to the condition that no person may hold, or be beneficially entitled to, or control, or have any other interest, directly or indirectly, in any shares (whether in one or more classes of shares in the capital of the Company) that represent more than 20% of any class in the capital of the Company unless: 141 (i) not less than two thirds of the directors then in office approve of the same; (ii) there is an agreement between the Company and such person restricting the transfer of such shares; and (iii) the Supervisor of Insurance of Barbados (or the Supervisor’s successor regulatory authority) is satisfied that such shareholder is a fit and proper person. A majority of not less than two-thirds of the votes cast by Shareholders at the Meeting, whether by proxy or otherwise, will constitute approval of this Special Resolution. EXERCISE OF DISCRETION BY PROXIES Shares represented by any proxy given on the enclosed form of proxy to the persons named in the proxy will be voted or withheld from voting on any ballot in accordance with the instructions contained therein. In the absence of shareholder instructions, COMMON SHARES represented by proxies received will be voted FOR: (a) The election as Directors of: • MR JOHN ARTHUR LIONEL BETHELL • DR OSCAR WENDELL JORDAN, MB, CHB, FRCPE, DCH • MR STEPHEN DAVID RUPERT McNAMARA • MRS JOYCE ETTIENNETTE DEAR, FCCA, MBA (b) The re-appointment of the incumbent Auditors, PRICEWATERHOUSECOOPERS, and the authorization of the Directors to fix their remuneration. (c) The amendment of the Restated Articles of Incorporation of the Company, pursuant to Section 197(1)(e) of the Act , to change or remove the rights, privileges, restrictions or conditions in respect of the Shares of the Company by: (i) deleting Article 3.1.5 of Schedule 2 of the Restated Articles of Incorporation and substituting therefor a new Article 3.1.5 as set out in Schedule 1 annexed to the Notice of the Meeting; and (ii) deleting Article 3.1.7 of Schedule 2 of the Restated Articles of Incorporation and substituting therefor a new Article 3.1.7 as set out in Schedule 2 annexed to the Notice of the Meeting. The enclosed form of proxy confers discretionary authority upon the persons named with respect to amendments to or variations in matters identified in the Notice of Meeting or other matters that may properly come before the Meeting. The management of the Company knows of no matter to come before the Meeting other than the matters referred to in the Notice of Meeting. If any other matters which are not now known to management should properly come before the Meeting, the persons named in the accompanying form of proxy will vote on such matters in accordance with their best judgement. Unless otherwise noted, a simple majority of the votes cast at the Meeting, whether by proxy or otherwise, will constitute approval of any matter submitted to a vote. The contents of this Management Proxy Circular and the sending thereof to the holders of the common shares of the Company have been approved by the Directors of the Company. No Directors’ statement is submitted pursuant to Section 71(2) of the Act. No Auditors’ statement is submitted pursuant to Section 163(1) of the Act. Dated May 15, 2006. Sandra Osborne Corporate Secretary 142 SHAREHOLDER PROXY THIRD ANNUAL MEETING OF SHAREHOLDERS The undersigned shareholder(s) of SAGICOR FINANCIAL CORPORATION hereby appoint(s) J Arthur L Bethell, Chairman, or failing him, Dodridge D Miller, President and Chief Executive Officer and Director, or instead of either of them: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (PLEASE PRINT NAME OF PROXY ON THIS LINE ONLY IF YOU WISH TO APPOINT A PROXY OTHER THAN THE CHAIRMAN OR PRESIDENT) of . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (PLEASE PRINT PROXY’S ADDRESS HERE) as my/our proxy to attend, vote and otherwise act for and on behalf of the undersigned in respect of all other matters that may properly come before the THIRD ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 28, 2006 and any adjournments thereof. The Directors and Management recommend Shareholders vote FOR items numbered 1, 2 and 3 below: 1 Election as Directors of the Nominees listed below: Vote FOR WITHHOLD from Voting JOHN ARTHUR LIONEL BETHELL DR OSCAR WENDELL JORDAN, GCM STEPHEN DAVID RUPERT McNAMARA JOYCE ETTIENNETTE DEAR Vote FOR Vote FOR WITHHOLD from Voting WITHHOLD from Voting 2 Re-appointment of Incumbent Auditors and Authorization of Directors to fix their Remuneration: 3 Adoption of Special Resolution to amend the Articles to change or remove the rights, privileges, restrictions or conditions in respect of the Shares of the Company: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NAME OF SHAREHOLDER (S) (PLEASE PRINT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURE OF SHAREHOLDER(S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DATE NOTES ON PROXY: This form must be executed by the shareholder or by his/her attorney duly authorized in writing. If the shareholder is a body corporate, an estate, or trust, the form must be executed by the officers or attorney thereof or the person, duly authorized, in which case each signatory should state the capacity in which he/she signs. If this form is not dated in the space provided, it will be deemed to bear the date on which it was mailed to the shareholder. This proxy authorization form confers discretionary authority upon the person whom it appoints in respect of any variation or amendments or additions to the matters identified in the Notice of Meeting and any other matter that may properly come before the Meeting or any adjournment thereof. THIS IS YOUR PROXY AUTHORIZATION FORM. PLEASE COMPLETE, SIGN AND RETURN THIS FORM BY 5.00 PM ON JUNE 26, 2006, OR AT LEAST 48 HOURS BEFORE THE TIME APPOINTED FOR HOLDING THE MEETING OR ADJOURNED MEETING, TO THE CORPORATE SECRETARY, SAGICOR FINANCIAL CORPORATION, SAGICOR CORPORATE CENTRE, WILDEY, ST MICHAEL, BARBADOS. 143

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