Sagicor Financial Company Ltd. Annual Report 2006

Plain-text annual report

Vision To be a great Company committed to improving the lives of the people in the communities in which we operate. Sagicor Financial Corporation Contents Financial Highlights Directors’ Report Board of Directors Chairman’s Report President & CEO’s Report Auditors’ Report Actuary’s 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 Executive Management Advisors & Bankers Ofﬁ ces Notice of Annual Meeting Management Proxy Circular Shareholder Proxy 4 6 6 22 25 42 44 46 47 48 49 50 51 145 148 149 152 171 179 3 2006 2005 Bds 50.8 cents Bds 46.0 cents 13.0 cents 12.0 cents Bds$ 135.3m Bds$ 121.5m $ 827.7m 19.0% $ 730.3m 18.8% 2006 2005 Bds$ 1,318.8m Bds$ 1,158.0m $ 201.1m $ 173.2m $ 6,726.6m $ 1,084.6m $ 194.4m $ 170.4m $ 6,396.8m $ 952.7m Sagicor Financial Corporation Financial Highlights SHAREHOLDER RETURNS Earnings per common share Dividends per common share Net income attributable to shareholders Total shareholders’ equity Return on shareholders’ equity GROUP PERFORMANCE Total revenue Income from ordinary operations Net income after tax Total assets Total equity 4 Sagicor Financial Corporation 5 Sagicor Financial Corporation Directors’ Report BOARD OF DIRECTORS Mr Arthur Bethell is the non-executive Chairman of the Company. He retired as President and Chief Executive Officer of the Group on June 30, 2002, having been appointed to that office in 1995. Mr Bethell has extensive knowledge of the insurance industry, having joined the Group in 1965. He has held the positions of Superintendent of Agencies, Sales Manager and Vice President, Marketing. He was also Chief Executive Officer of Sagicor Capital Life Insurance Company Limited. He is a Director of a number of subsidiaries within the Group. Board/Board Committees Position Board of Directors Board Investment Committee Shares as at 31-Dec-06 Chairman Member Director’s Interest Shares as at 10-May-07 J Arthur L Bethell Age 66 Citizen of Barbados Director since December 2002 Beneficial Non-beneficial Beneficial Non-beneficial 38,500 Nil 38,500 Nil Attendance Record 10 of 10 N/A 100% N/A Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Mr Terrence Martins is the non-executive Vice Chairman. He has brought a wealth of knowledge to Sagicor, with over forty years of experience within the financial services industry, both in the Caribbean and the United Kingdom. His areas of expertise include banking, finance, administration, corporate governance, and risk management. Mr Martins previously held the position of Group Chief Executive Officer of RBTT Financial Holdings Limited. He is currently the Chairman of Caribbean Information and Credit Rating Services Ltd (CariCRIS), a Caribbean rating agency. He previously held several directorships within the RBTT Financial Holdings Group in and outside of Trinidad and Tobago, and is also a former member of the Integrity Commission of Trinidad and Tobago. Board/Board Committees Board of Directors Corporate Governance Committee Human Resource Committee Board Investment Committee Position Vice-Chairman Chairman Member Chairman Director’s Interest Shares as at 10-May-07 Shares as at 31-Dec-06 Beneficial Non-beneficial Beneficial Non-beneficial 70,000 Nil 70,000 Nil Attendance Record 10 of 10 6 of 6 3 of 3 N/A 100% 100% 100% N/A Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Terrence A Martins Age 65 Citizen of Trinidad and Tobago Director since January 2004 Independent Director 6 Sagicor Financial Corporation Mr Andrew Aleong holds an MBA from the Richard Ivey School of Business, University of Western Ontario, Canada. He has spent his entire professional career in various management positions within the Albrosco Group of Trinidad and Tobago. He is currently the Director, Sales and Marketing, and a Director of several companies within that Group. Mr Aleong is a past president of the Trinidad and Tobago Manufacturers’ Association. Board/Board Committees Position Board of Directors Audit Committee Attendance Record 10 of 10 2 of 2* 100% 100% Director Member Director’s Interest Shares as at 10-May-07 Shares as at 31-Dec-06 Beneficial Non-beneficial Beneficial Non-beneficial Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil 483,037 483,037 * Mr Aleong was appointed to the Audit Committee on June 28, 2006. Nil Nil Andrew Aleong Age 46 Citizen of Trinidad and Tobago Director since June 2005 Independent Director Mr David Allan is a former President and Chief Executive Officer 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. Mr Allan retired as President and Chief Executive Officer in 1995. He also serves as a Director of Life of Jamaica Limited and Sagicor Life Inc and is a Director of Barbados-registered exempt insurance companies. Mr Allan, with more than 50 years experience in the life insurance industry, is a former West Indies cricketer. Board/Board Committees Position Attendance Record Board of Directors Audit Committee Board Investment Committee Shares as at 31-Dec-06 Director Member Member Director’s Interest Shares as at 10-May-07 David W Allan Age 69 Citizen of Barbados Director since December 2002 Independent Director Beneficial Non-beneficial Beneficial Non-beneficial 1,705 Nil 1,705 Nil 8 of 10 1 of 4 N/A 80% 25% N/A Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil 7 Sagicor Financial Corporation Directors’ Report BOARD OF DIRECTORS Professor Hilary Beckles earned his PhD from Hull University, United Kingdom, 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. He is a Director of Sagicor Life Inc and Life of Jamaica Limited. Board/Board Committees Position Attendance Record Board of Directors Human Resource Committee Shares as at 31-Dec-06 Director Member Director’s Interest Shares as at 10-May-07 Beneficial Non-beneficial Beneficial Non-beneficial 9,579 Nil 9,579 Nil 7 of 10 0 of 1* 70% 0% Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil * Professor Beckles was appointed to the Human Resource Committee on June 28, 2006. 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 several entities such as hotels, attractions, a maintenance company, a water supply company, a shopping centre, a conference centre and a golf course. Prior to assuming this position she worked in other positions within the UDC Group. She is a Director of Life of Jamaica Limited, and of several other private and public sector companies within Jamaica. Board/Board Committees Position Attendance Record Board of Directors Shares as at 31-Dec-06 Director Director’s Interest Shares as at 10-May-07 Beneficial Non-beneficial Beneficial Non-beneficial 1,087 Nil 1,087 Nil 8 of 10 80% Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Professor Hilary McD Beckles Age 51 Citizen of Barbados Director since June 2005 Independent Director Marjorie M Chevannes-Campbell Age 55 Citizen of Jamaica Director since June 2005 Independent Director 8 Sagicor Financial Corporation Mr Christopher deCaires is a Chartered Accountant and holds an MBA. He has over 25 years’ professional and management consulting experience in Barbados and the wider Caribbean, United Kingdom and Brazil. He is the Managing Director of Fednav International Limited, and his areas of expertise include corporate finance, international taxation, financial management, mergers and acquisitions, information systems, organisational design and business planning. He is Chairman of World Cup Barbados. Mr deCaires is a former partner of Price Waterhouse, Barbados, where he was responsible for corporate finance, business advisory, corporate secretarial and trust services. Board/Board Committees Position Board of Directors Human Resource Committee Shares as at 31-Dec-06 Director Chairman Director’s Interest Shares as at 10-May-07 Christopher D deCaires Age 51 Citizen of Barbados Director since June 2005 Independent Director Beneficial Non-beneficial Beneficial Non-beneficial 2,378 Nil 2,378 Nil Attendance Record 10 of 10 2 of 3 100% 66% Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Mrs Joyce Dear is a Fellow of the Association of Chartered Certified Accountants of the United Kingdom and holds an MBA from the University of Warwick. She is also a member of the Hospitality Financial and Technology Professionals. She was, until 2004, a partner in the Assurance and Business Advisory Services Division of PricewaterhouseCoopers (PwC) in Barbados. 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 and is a past President of the Institute of Chartered Accountants of Barbados and a former Director of a general insurance company in Barbados. Board/Board Committees Position Attendance Record Board of Directors Audit Committee Shares as at 31-Dec-06 Director Member Director’s Interest Shares as at 10-May-07 Beneficial Non-beneficial Beneficial Non-beneficial 2,000 Nil 2,000 Nil 3 of 3* 0 of 2* 100% 0% Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil * Mrs Dear was elected a Director on August 11, 2006 and appointed a Member of the Audit Committee effective August 11, 2006. Joyce E Dear Age 63 Citizen of Barbados Director since August 2006 Independent Director 9 Sagicor Financial Corporation Directors’ Report BOARD OF DIRECTORS Dr Oscar Jordan, G.C.M., MB, ChB, FRCPE, DCH, Diabetologist, is an honorary Consultant Physician, Department of Medicine of the Queen Elizabeth Hospital, Barbados. He is a Fellow of Royal College of Physicians of Edinburgh. He is Chairman of the Diabetes Foundation of Barbados and Director of Clinical Medicine in Barbados for the University of St. George’s, Grenada. A widely published and well respected physician, he is a past President of the Caribbean Golf Association. He became a Director of Sagicor Life Inc in 1990. Board/Board Committees Position Attendance Record Board of Directors Director Corporate Governance Committee Member Director’s Interest Shares as at 10-May-07 Shares as at 31-Dec-06 Beneficial Non-beneficial Beneficial Non-beneficial 18,381 Nil 18,381 Nil 9 of 10 6 of 6 90% 100% Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Mr William 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, specialising in all aspects of business valuations, privatisation, mergers and acquisitions and corporate taxation. Mr Lucie-Smith has been a special adviser to the Trinidad and Tobago Government and Central Bank on divestment, and has served on several national committees, such as 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. He is a Director of a number of subsidiaries within the Group. Since his retirement, Mr Lucie-Smith has been an independent Consultant. Board/Board Committees Position Attendance Record Board of Directors Audit Committee Board Investment Committee Shares as at 31-Dec-06 Director Chairman Member Director’s Interest Shares as at 10-May-07 Beneficial Non-beneficial Beneficial Non-beneficial 14,000 Nil 14,000 Nil 9 of 10 4 of 4 N/A 90% 100% N/A Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Dr Oscar W Jordan Age 68 Citizen of Barbados Director since December 2002 Independent Director William P Lucie-Smith Age 55 Citizen of Trinidad and Tobago Director since June 2005 Independent Director 10 Sagicor Financial Corporation Mr Stephen McNamara is Senior Partner of McNamara & Company, Attorneys- at-Law of St. Lucia. He was elected to the Board of Sagicor Life Inc in 1997 and is also a Director of the Group’s US subsidiaries, Sagicor USA Inc, Laurel Life Insurance Company and Sagicor Life Insurance Company, and the St Lucian subsidiary, The Mutual Finance Inc. Board/Board Committees Position Board of Directors Director Corporate Governance Committee Member Member Board Investment Committee Director’s Interest Shares as at 10-May-07 Shares as at 31-Dec-06 Beneficial Non-beneficial Beneficial Non-beneficial 2,011 Nil 2,011 Nil Attendance Record 10 of 10 6 of 6 N/A 100% 100% N/A Grants/Options As at As at 10-May-07 31-Dec-06 Nil Nil Mr Dodridge Miller is a Fellow of the Association of Chartered Certified Accountants (United Kingdom), and obtained his MBA from the University of Wales and Manchester Business School, United Kingdom. He holds an LLM in Corporate and Commercial Law from the University of the West Indies. He was appointed President and Chief Executive Officer of The Mutual Group of Companies, now Sagicor, on July 1, 2002, having previously held the positions of Treasurer and Vice President, Finance and Investments, Deputy Chief Executive Officer and Chief Operating Officer. Mr Miller joined the Group in 1989. He was elected a Director of The Mutual Group in 2001. He is the Chairman of the Group’s main operating subsidiaries, Sagicor Life Inc, Life of Jamaica Limited and Sagicor Life Insurance Company. Mr Miller has more than 20 years’ experience in the insurance and financial services industries. Board/Board Committees Position Board of Directors Board Investment Committee Shares as at 31-Dec-06 Director Member Director’s Interest Shares as at 10-May-07 Beneficial Non-beneficial Beneficial Non-beneficial Attendance Record 10 of 10 N/A 100% N/A Grants As at 31-Dec-06 507,719 As at 10-May-07 507,719 521,109* 521,109* Nil Options as at 31-Dec-06 Vested Nil Not vested 159,817 Nil Options as at 10-May-07 Vested 39,954 Not vested 119,863 * Includes 507,791 Grants made in 2006 11 Stephen D R McNamara Age 56 Citizen of St Lucia Director since December 2002 Independent Director Dodridge D Miller Age 49 Citizen of Barbados Director since December 2002 President and Chief Executive Officer Sagicor Financial Corporation Directors’ Report SHAREHOLDERS’ REPORTS No Shareholder owns more than 5% of the capital of the Company. During 2006, 1,432,588 shares were issued under the Long-Term Incentive Plan (“LTI”) for Executives. On April 13, 2006, 1,342,027 fully vested Restricted Stock were issued under the LTI and on May 1, 2006, 304,915 Restricted Stock were granted over the four-year period commencing May 1, 2006, of which 91,474 became fully vested on May 1, 2006, with 90,561 being issued on August 31, 2006. 932,387 Stock Options at an exercise price of Bds $3.95 were also granted on May 1, 2006, vesting evenly over the four-year period commencing May 1, 2007. These options expire on May 1, 2016. The total shares in issue as at December 31, 2006 and at May 10, 2007 were 266,985,336. ANALYSIS OF SHAREHOLDING Size of Holding 1 - 1,000 1,001 - 2,500 2,501 - 5,000 5,001 - 10,000 10,001 - 25,000 25,001 - 100,000 100,001 - 1,000,000 1,000,001 - & above Total Total Shares Held Number of Shareholders by Size of Holding as at December 31 Number of Shareholders 2006 6,015 16,618 7,817 4,460 3,212 651 189 17 38,979 Percentage of Shareholders 2006 15.43 42.64 20.06 11.44 8.24 1.67 0.48 .04 100.00 2006 3,917,331 27,634,402 27,081,522 31,920,923 45,979,406 30,457,612 50,692,562 49,301,578 266,985,336 2005 14.52 42.98 20.54 11.48 8.31 1.68 0.45 0.04 100.00 2005 5,781 17,107 8,177 4,570 3,302 670 180 15 39,802 2005 3,888,250 28,439,332 27,872,247 32,747,364 47,433,618 31,913,138 46,507,000 46,751,799 265,552,748 Percentage Shares Held 2006 1.47 10.35 10.14 11.96 17.22 11.41 18.99 18.46 100.00 2005 1.46 10.71 10.50 12.33 17.86 12.02 17.51 17.61 100.00 Number of Shareholders by Country of Residence and by Type as at December 31, 2006 Country Directors, Management, Staff, Agents Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shareholders % Shareholders % Shareholders % Shareholders % 68 129 3 1 1 202 33.66 63.86 1.48 0.50 0.50 100.00 536 190 34 50 3 813 65.93 23.37 4.18 6.15 0.37 100.00 16,593 12,464 7,558 366 983 37,964 43.71 32.83 19.91 0.96 2.59 100.00 17,197 12,783 7,595 417 987 38,979 44.12 32.80 19.48 1.07 2.53 100.00 12 Sagicor Financial Corporation Number of Shareholders by Country of Residence and by Type - December 31, 2005 Comparative Country Directors, Management, Staff, Agents Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shareholders % Shareholders % Shareholders % Shareholders % 44 120 5 3 1 173 25.44 69.36 2.89 1.73 0.58 100.00 623 172 35 38 2 870 71.61 19.77 4.02 4.37 0.23 100.00 16,856 12,903 7,926 230 844 38,759 43.49 33.29 20.45 0.59 2.18 100.00 17,523 13,195 7,966 271 847 39,802 44.03 33.15 20.01 0.68 2.13 100.00 Number of Shares Held by Country of Residence and by Type as at December 31, 2006 Country Directors, Management, Staff, Agents Companies Individuals Total Trinidad and Tobago 1,057,154 32.08 49,565,480 71.30 103,166,144 53.13 153,788,778 Shares % Shares % Shares % Shares Barbados Eastern Caribbean Other Caribbean Other Total 2,224,473 67.51 15,686,559 22.56 62,509,406 3,956 1,000 8,540 0.12 0.03 0.26 459,252 3,802,979 3,786 0.66 5.47 0.01 21,759,381 2,519,460 4,217,766 32.19 11.21 1.30 2.17 80,420,438 22,222,589 6,323,439 4,230,092 3,295,123 100.00 69,518,056 100.00 194,172,157 100.00 266,985,336 100.00 % 57.60 30.12 8.32 2.37 1.59 Number of Shares Held by Country of Residence and by Type - December 31, 2005 Comparative Country Directors, Management, Staff, Agents Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shares % Shares % Shares % Shares 733,507 677,608 7,173 160,187 1,000 46.44 53,457,787 75.63 100,936,494 52.22 155,127,788 42.90 13,528,254 19.14 64,657,075 0.45 10.14 0.07 462,374 3,230,899 2,107 0.65 4.57 0.01 22,617,225 1,499,388 3,581,670 33.45 11.70 0.78 1.85 78,862,937 23,086,772 4,890,474 3,584,777 % 58.42 29.70 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 13 Sagicor Financial Corporation Directors’ Report DIVIDENDS A ﬁ nal dividend of Bds 7 cents per Share, payable on May 11, 2007, was approved for the year ended December 31, 2006 to the holders of Common Shares whose names were registered on the books of the Company at the close of business on April 19, 2007. An interim dividend of Bds 6 cents per Share approved for the half year ended June 30, 2006 was paid on September 29, 2006 to the holders of Common Shares whose names were registered on the books of the Company at the close of business on September 11, 2006. The total dividend for the 2006 ﬁ nancial year amounted to Bds 13 cents per Common Share. CORPORATE GOVERNANCE BOARD OF DIRECTORS As at December 31, 2006, the Board comprised twelve Directors – the Chairman, ten independent Non-Executive Directors and the President and Chief Executive Ofﬁ cer. On August 11, 2006, Mrs Joyce Dear was elected to replace Mrs Vivian-Anne Gittens as a Director. Messrs David Allan, Terrence Martins and Dodridge Miller will retire at the fourth annual meeting and have offered themselves for re-election. The Directors bring a wide range of business and ﬁ nancial expertise to the Board. Biographical details of the current Directors are set out earlier in this Report together with details of their current interests in the Company. The Sagicor Group has been successfully executing a business strategy to be the leading insurance company within the Caribbean and to use this strong market position to expand internationally. During the past 15 years, the Sagicor Group has doubled its size approximately every 5 years, when measured in terms of total assets. We intend to continue our growth and expansion in order to maintain our position in the top tier of major regional ﬁ nancial institutions, a position we believe is critical to Sagicor’s long-term viability. Our business strategy comprises four key components: 1. Further expanding the scale of our operations by participating in the consolidation of the ﬁ nancial services industry in the Caribbean, while continuing to streamline existing and acquired operations to extract synergies, and deliver a high quality of service to our customers. 2. Expanding into new product markets to offer a wider range of ﬁ nancial products and services. 3. Expanding into new geographic markets which offer the Sagicor Group attractive opportunities to proﬁ tably grow and expand its business operations. 4. Rigorous ﬁ nancial management to ensure optimization of the use of capital and the delivery of competitive returns to Shareholders. During 2006 the Board met 10 times. The principal business was to: Receive and consider various reports and presentations from management on the performance of the Group (cid:129) (cid:129) Consider and approve the Strategic Plan and Projections of the Group for the period 2006 to 2009 Review the strategic and business development initiatives forming part of the Strategic Plan (cid:129) Review and approve unaudited interim and audited annual consolidated ﬁ nancial statements (cid:129) Approve interim and ﬁ nal dividends (cid:129) Receive reports on work being carried out by Board Committees and consider and approve their recommendations (cid:129) as required. 14 Sagicor Financial Corporation COMMITTEE REPORTS Corporate Governance Committee Report for the Year ended December 31, 2006 Role of Committee The Corporate Governance Committee is a compulsory committee of the Board, and has powers delegated to it. The Committee has Terms of Reference which were approved by the Board on March 9, 2004. Its primary purpose is to: (i) monitor best practices for governance worldwide and review the Group’s governance practices to ensure they (ii) the frequency and content of Board meetings the size and composition of the Board suitable candidates for nomination as Non-Executive Directors appointments to the Boards of Subsidiary and Associate Companies comply with the highest standards of corporate governance; recommend to the Board, inter alia: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) membership and mandates of Board Committees (cid:129) (cid:129) the communication process between the Board and Management appointments of Executives to the Boards of companies outside the Sagicor Group; (iii) establish/monitor an appropriate Code of Conduct for the Company and to consider and deal with all matters of an (iv) (v) (vi) ethical nature, including transactions between the Company, its subsidiaries and afﬁ liates involving Directors; review annually the mandates and composition of Board Committees; review the performance of Directors as a prelude to re-election; review the compensation of Directors based on comparative industry practices, if necessary, in consultation with independent advisors, and recommend appropriate adjustments. Composition The Board appoints and removes the Chairman and Members of the Committee which comprises independent Non- Executive Directors. The Chairman and Chief Executive Ofﬁ cer (CEO) may be invited to attend meetings but have no vote. The current members are: (cid:129) Mr Terrence Martins who was appointed Chairman on August 24, 2005 (cid:129) Dr Oscar Jordan who was appointed a Member on March 9, 2004, and (cid:129) Mr Stephen McNamara who was appointed a Member on March 9, 2004. 2006 Activities The Committee met six times in 2006. The Corporate Secretary acts as secretary to the Committee and minutes of all meetings are recorded. Mr Martins, Dr Jordan and Mr McNamara attended six of the six meetings held. Committee Members earn no fees for serving as members other than their Directors’ fees. An important aspect of the strategy outlined above is the strengthening of our Corporate Governance framework. In 2006 the Corporate Governance Committee embarked on a project to build a robust Corporate Governance architecture for the Group which meets international best practice and regulatory standards. The project is ongoing. In this connection, a number of initiatives were undertaken, including a review of the Bylaws. During the year, the Committee was assisted in its work by two independent professional consultants offering Director Compensation and Corporate Governance consultancy services. The principal business of meetings was to deal with: A Corporate Governance architecture project (cid:129) (cid:129) Director compensation Review of Bylaws (cid:129) (cid:129) The chairmanship of subsidiary boards (cid:129) Director nomination for the parent and subsidiary boards (cid:129) Committee appointments (cid:129) Director and Ofﬁ cer liability cover (cid:129) Managing conﬂ icts of interest 15 Sagicor Financial Corporation Directors’ Report The main area to which much of the Committee’s time was devoted during the year related to the initiative to enhance the Corporate Governance architecture including Director Compensation. Corporate Governance Architecture Project The subject which engaged much of the Committee’s attention relates to the Corporate Governance Architecture Project which started in the last quarter of 2006 and continues into 2007. The objective of the project is to build a Corporate Governance framework which provides entrepreneurial leadership, guidance and oversight to the Company within the bounds of law, community standards and ethical behaviour. The governance model therefore embraces international best practice, industry standards, statutory and regulatory requirements and provides a guide to governing the Group, the relationship between the Board and Management as well as subsidiary governance. The framework is structured on four main pillars: (cid:129) (cid:129) (cid:129) (cid:129) Values and Behaviours - corporate and business management values; Policies and Procedures - a corporate governance policy, a code of business conduct and ethics, an enterprise risk management policy, an internal control policy, investor relations and communications policy and other key policies; Roles and Responsibilities - size and composition of the Board, Director independence, subsidiary governance, Board charter, roles of the Board, Chairman, Directors, Board Committees, Chief Executive Ofﬁ cer and certain key Senior Management corporate positions, the relationship between the Board and Management, Board operations including boardroom dynamics and Director education; Performance and Accountability - performance evaluation of the Board, Committees and Directors, eligibility of Directors for re-nomination, CEO and Senior Management performance evaluation, strategic plan implementation, ﬁ nancial performance, enterprise risk management, internal control assessment, regulatory compliance, Shareholder/Investor relations and communication. The project will, on completion, provide the Group with a comprehensive governance model, implementation of which will commence across the Group in 2007. Review of Bylaws Another important aspect of the overall strengthening of our Corporate Governance framework was to review the Bylaws which relate generally to the conduct of the affairs of the Company. The following amendments were made to the Bylaws: (cid:129) By-law 3.6 provided for certain nationality qualiﬁ cations for Directors. A majority of the Board had to be citizens or permanent residents of and ordinarily resident in Barbados and at least one director had to be a citizen of and ordinarily resident in Jamaica, Trinidad and Tobago and any country in the Eastern Caribbean respectively. As the Company pursues the strategy outlined above it is necessary to select Directors from a suitable pool of regional and international candidates with the requisite knowledge and experience, and to include on the Board persons who reﬂ ect the geographic and business diversity of the Group and who can make meaningful contributions to our growth and development into a global ﬁ nancial services Group. This Bylaw was repealed by the Board. (cid:129) Changes were made to Bylaws 9 and 12.3 to facilitate the listing of the Company’s shares on the London Stock Exchange. Listing on an international stock exchange is also an integral part of the expansion strategy as it affords the Company access to capital in more established markets, creates a footprint in an international capital market and enhances our ability to compete in a global environment. The amendments to Bylaw 9 and the repeal of Bylaw 12.3 are intended principally to: o permit the setting up of a branch register outside Barbados o permit the deposit of Sagicor shares in depositaries other than the Barbados Central Securities Depositary o o permit Directors to prescribe the form of share transfer constituting a valid transfer (which may vary from jurisdiction to jurisdiction), and recognize both the regional and international origin of our Shareholders. remove any references applicable to share restrictions The existing Bylaw 3.6 did not ﬁ t with the new operating realities of the Group and accordingly was repealed by the Board. 16 Sagicor Financial Corporation Directors’ Compensation Project The Board reviewed Directors’ remuneration as part of the strengthening of the Corporate Governance framework. International best practice suggests that in order to attract Directors with the requisite knowledge and experience who can make meaningful contributions to the growth and development of a global ﬁ nancial services organization, Directors’ remuneration should be sufﬁ cient to attract, retain and motivate Directors of the quality required to ensure the Company is managed successfully, and should reﬂ ect the time, commitment, accountability, risk, impact of decisions and responsibilities of the role, having regard to relevant market comparability. Directors’ fees were ﬁ rst ﬁ xed in 2004 at US $20,000 per annum for the Chairman and US $12,500 per annum for Directors. Over the last three years, the time, commitment and responsibilities required of their role as Directors have increased. Accordingly in 2006, the Corporate Governance Committee commissioned the independent ﬁ rm of Ernst and Young of Atlanta (“the Consultants”) to review director compensation. The objectives of the exercise were to: (i) Review competitive market practices for director total compensation, including best global practices and trends. (ii) Review all components of total compensation for the Non-Executive Chairman and Non-Executive Directors in terms of annual retainer, Board meeting fees, committee meeting fees, Board chair and committee chair fees, equity compensation, and other relevant items. (iii) Recommend a competitive level and structure of Board compensation for the Company and its main operating subsidiaries. The project methodology involved gathering Board compensation data from comparable organizations in the Caribbean region and the United States and data comparability was matched along the size of the Sagicor Financial Group in terms of revenue, premium income and type of organization (ﬁ nancial services). Best practices and trends in the United Kingdom, Europe and the United States were also reviewed in areas such as Board, Director and Chief Executive Ofﬁ cer performance evaluations, succession planning, time spent by Directors on company business, frequency of Board meetings, terms of ofﬁ ce of Non-Executive Directors, the number of Executives serving on Boards, and the growing importance of Governance Committees as the third most prevalent Committee behind Audit and Human Resource Committees, the structure of Boards and the structure of director compensation combination (cash and equity). Total cash compensation currently paid to the Chairman and Directors of the Company was then compared to US market data using the 50th percentile and Caribbean market data using the 90th percentile. On the basis of the above ﬁ ndings, the Consultants made the following recommendations which were accepted by the Board on the recommendation of the Committee: (i) Cash compensation should reﬂ ect accountability, risk, impact of decisions and market comparability. (ii) Annual retainers for Board and Committee service should be paid with no separate meeting fees. (iii) (iv) No director compensation should be paid to Executives serving on subsidiary Boards. (v) No equity compensation should be paid at this time and transition to equity compensation should be considered Increased retainers should be paid for Board and Committee Chairs. as the organization evolved and would include target ownership and pay-for-performance. (vi) No other beneﬁ t or perquisite programs should be paid at this time. (vii) Board and individual Director performance evaluations should be implemented and a tool and process should be developed to evaluate effectively overall Board performance and individual contribution. (viii) Cash retainers to compensate Non-Executive Board and Committee Chairs and Members should be recommended for approval by Shareholders as follows: Board/Committee Board Board Committees Non-Executive Chair US $45,000 per annum US $7,000 per annum Non-Executive Member US $40,000 per annum US $5,000 per annum The Board recommends the above fees to shareholders for approval. 17 Sagicor Financial Corporation Directors’ Report Audit Committee Report for the Year ended December 31, 2006 Role of Committee The Audit Committee is a compulsory committee of the Board, and has powers delegated to it. The Committee has a Charter which was approved by the Board on August 25, 2004. Its mandate is to: (a) Assist the Board with oversight of: (i) (ii) (iii) (iv) the integrity of the Group’s ﬁ nancial statements, the Group’s compliance with legal and regulatory requirements, the Independent Auditor’s qualiﬁ cations and independence, and the performance of the Group’s internal audit function and Independent Auditors. (b) Keep under review: (i) (ii) (iii) the ﬁ nancial and compliance information required to be provided by the Group to shareholders, governmental agencies, regulators and others, the systems of internal controls, including the internal audit functions, and the audit process. (c) Review the results of the annual audit of the consolidated ﬁ nancial statements conducted by the Independent Auditors, including the nature and disposition of comments appearing in the Independent Auditors’ management letter. (d) Exercise oversight responsibility of the major activities of subsidiaries and associates and ensure where necessary that subsidiary Boards and Audit Committees are functioning and exercising requisite oversight. (e) Review the actuarial reports and recommendations of the Actuaries. (f) Review and discuss the annual audited ﬁ nancial statements with management and the Independent Auditors and the quarterly ﬁ nancial statements with management. (g) Review with the Independent Auditors any audit problems or difﬁ culties and management response. (h) Regularly review with the Independent Auditor any difﬁ culties encountered in the course of the audit work, including any restrictions on the scope of the Independent Auditor’s activities or access to requested information, and any signiﬁ cant disagreements with management. Exercise oversight of the Company’s annual and quarterly ﬁ nancial reporting process, including the related internal accounting controls and to review, prior to publication, the Company’s annual consolidated ﬁ nancial statements and related signiﬁ cant accounting policies and changes. (i) (j) Review investments, loans and transactions that have a material impact on the Group’s earnings. (k) Discuss earnings releases as well as ﬁ nancial information and earnings guidance generally (i.e. discussion of the types of information to be disclosed and the type of presentation to be made). (l) Where necessary, ensure the review by the Independent Auditors of ﬁ lings with the regulators and other published documents containing the Company’s ﬁ nancial statements. (m) Inquire as to the accounting for new business transactions, products and changes to accounting policies. (n) Discuss with the Independent Auditors and management pending accounting policy changes and their impact on the Group, including implementation impacts on the ﬁ nancial statements. (o) Review the work of other audit ﬁ rms. (p) Review the ﬁ nancial management and controls on a regular basis with the Internal Auditor on a private basis. Composition The Board appoints and removes the Chairman and Members of the Committee who are all independent Directors. There are clearly deﬁ ned rules for determining independence for the purpose of the Committee. The current members are: (cid:129) Mr William Lucie-Smith, who was appointed Chairman on June 28, 2006 (and a Member on August 24, 2005) (cid:129) Mr Andrew Aleong who was appointed a Member on June 28, 2006 (cid:129) Mr David Allan who was appointed a Member on November 23, 2005 and (cid:129) Mrs Joyce Dear who was appointed a Member effective August 11, 2006. All members of the Committee must be ﬁ nancially literate or must become ﬁ nancially literate within a reasonable period of time after his or her appointment to the Committee. At least one member of the Committee must have accounting or related ﬁ nancial management expertise. There are two experienced qualiﬁ ed Chartered Accountants on the Committee. 18 Sagicor Financial Corporation 2006 Activities The Committee is required to meet at least quarterly and met four times in 2006 with the external Auditors being present on one of these occasions. The Corporate Secretary acts as secretary to the Committee and minutes of all meetings are recorded. Mr Lucie-Smith attended four of the four meetings held, Mr Aleong attended two of the two meetings held while he was a Member, Mr Allan was present for one of four meetings and Mrs Dear was overseas for the two meetings held after her appointment. The Committee has power to require and oversee any investigations deemed necessary and to employ auditors, advisors, or consultants as are needed to conduct such investigations. Committee Members earn no fees for serving as members other than their Directors’ fees. The principal business of the meetings was to: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Review actuarial reports Review unaudited interim and audited annual consolidated ﬁ nancial statements Recommend interim and ﬁ nal dividends to the Board Receive a report from the external Auditors on the annual audit Review the minutes of the audit committees of the main operating subsidiaries Review the accounting treatment of important items such as intangible assets, the Long Term Incentive Plan and the Employee Share Ownership Plan Review the Auditors Management Letter on the annual audit and Management’s responses Review Management’s audit plan and the Auditors approach to the audit for the current year Approve non-audit services to be performed by the external Auditors Approve the job description and advertisement for the recruitment of a Group Internal Auditor Receive reports on the progress of the Enterprise Risk Management Project started during 2006. Enterprise Risk Management Enterprise Risk Management (“ERM”) plays a critical role in good Corporate Governance and in 2006 the Group commenced an ERM Project, the primary objective of which is to ensure that all risk exposures are identiﬁ ed and managed effectively, and more particularly to: (cid:129) (cid:129) (cid:129) coordinate the risk-taking activities of various business units and subsidiaries ensure appropriate management of risk and create a risk management culture throughout the organization broaden conﬁ dence of shareholders, policyholders, regulators and rating agencies that the risks are well managed (cid:129) maximize return on a risk adjusted basis (cid:129) gain competitive advantage by 1) leveraging existing exposure to design innovative products that have offsetting exposures and 2) executing effective Asset Liability Management strategies that increase competitiveness of products through yield enhancement, risk reduction and/or lower capital costs promote effective allocation of capital and ensure that the organization is adequately compensated for the risks underwritten lower reserve and capital requirements reduce the ﬁ nancial risk exposure and earnings volatility to within an acceptable level increase proﬁ tability by improving the risk/reward proﬁ le of the business establish risk limits that accurately reﬂ ect the organization’s willingness and ability to take on risk understand the risk proﬁ le of all product lines and make any bets explicit provide a strategic decision making framework for management increase the economic value of the company, thereby increasing future earnings. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 19 Sagicor Financial Corporation Directors’ Report The methodology involves a review of current risk management practices and the benchmarking of those risk practices with a view to: (cid:129) making recommendations for improvements in the context of the implementation of ERM (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) identiﬁ cation of signiﬁ cant sources of risk exposure summary of the goals and objectives for the ERM initiative determination of the priorities and scope for ERM identiﬁ cation of implementation challenges and key success factors an implementation plan for ERM the development of an ERM Policy Statement and Procedure Manual. Human Resource Committee Report for the Year ended December 31, 2006 Role of Committee The Human Resource Committee is a committee of the Board, and has powers delegated to it. The Committee has a Charter which was approved by the Board on May 1, 2006. Its primary purpose is to: Exercise oversight responsibility over the development and effective utilization of Sagicor’s human resources. (i) (ii) Approve Sagicor’s human resources principles, policies and practices, including but not limited to recruitment, compensation, beneﬁ ts, incentive and share plans. (iii) Exercise oversight responsibility over the administration of Sagicor’s human resources policies and practices. (iv) Review and recommend to the Board any material changes to Sagicor’s pension plans which require the approval of the Board. (v) Receive annual reports from Management on compliance with applicable legislation relating to Sagicor’s pension plans, including conﬁ rmation that actuarial valuations are completed no less frequently than as required by law. (vi) Report on executive compensation as required in public disclosure documents. (vii) In relation to Senior Managers (excluding the Chief Executive Ofﬁ cer (CEO)): a. Review and recommend to the Board for approval the general compensation philosophy and guidelines for Senior Managers. b. Approve the recruitment of Senior Managers and report to the Board on such appointments. c. Agree on the compensation, including salary, incentives, beneﬁ ts and other perquisites, of Senior Managers and approve adjustments to such compensation from time to time. d. Review, approve and report to the Board on succession plans for all Senior Managers, including speciﬁ c development plans and career planning for potential successors. (viii) In relation to the CEO: a. Review and recommend to the Board for approval the general compensation philosophy and guidelines for the CEO. b. Consider annually the Governance Committee’s report on the CEO’s performance and agree on the compensation, including salary, incentives, beneﬁ ts and other perquisites of the CEO and approve adjustments to such compensation from time to time. (ix) With regard to incentive plans: a. Review and recommend to the Board for approval the establishment and amendment of incentive plans for b. Executives, Employees and Sales Agents. Interpret and make determinations deemed necessary or desirable by the Committee for the administration of incentive plans. c. Make grants under incentive plans and report to the Board on any such grants. d. Correct any deﬁ ciency, inconsistency or omission in incentive plans. (x) With regard to equity based plans: a. Review and recommend to the Board for approval the establishment and amendment of equity-based plans for Employees and Executives, having regard at all times to the dilutive impact of such plans on the shareholders of any public company within the Sagicor Group. Interpret and make determinations deemed necessary or desirable by the Committee for the administration of equity-based plans. b. c. Recommend to the Board for its approval any proposed amendment to equity-based plans, including any amendment requiring regulatory or shareholders’ approval. d. Make grants under equity-based plans to eligible persons according to the rules of the plans and report to the Board on such grants. 20 Sagicor Financial Corporation Composition The Board appoints and removes the Chairman and Members of the Committee who are all independent Directors. The current members are: (cid:129) Mr Christopher deCaires, who was appointed Chairman on June 28, 2006 (and a Member on October 26, 2005) (cid:129) Professor Hilary Beckles who was appointed a Member on June 28, 2006 and (cid:129) Mr Terrence Martins who was appointed a Member on October 26, 2005. 2006 Activities The Committee is required to meet at least quarterly and in 2006 met three times. From 2007, the Committee will meet six times per year The Corporate Secretary acts as secretary to the Committee and minutes of all meetings are recorded. Mr deCaires and Mr Martins attended two and three of the three meetings held respectively, while Professor Beckles was overseas for the one meeting held after his appointment. Any member of the Committee may, with Board approval, engage outside advisors and consultants. Committee Members earn no fees for serving as members other than their Directors’ fees. Throughout the year, the Committee was assisted in its work by an independent professional ﬁ rm offering human resource consultancy services. The principal business of the meetings was to: (cid:129) (cid:129) (cid:129) Approve the Committee’s Charter Approve a comprehensive Human Resource Development plan for the Sagicor Group, including the structure and composition of management, succession planning and compensation Review Human Resource strategic initiatives and their implications, including a review of the market competitiveness of total executive compensation and developing a total compensation strategy which aligns pay with key business strategies and succession planning Approve the rules of the Long-term Incentive Plan (LTI) and the Employee Share Ownership Plan (ESOP) (cid:129) (cid:129) Designate LTI plan participants and award restricted stock and stock option awards to plan participants under the LTI (cid:129) Make awards to ESOP participants (cid:129) Grant cash incentive awards to management and staff (cid:129) (cid:129) (cid:129) (cid:129) Commission a review of the Committee’s structure and operations. Approve executive appointments Review the accounting treatment for the LTI and ESOP Authorize the audit of the LTI and ESOP Board Investment Committee Report for the Year ended December 31, 2006 Matters pertaining to the group investment portfolio were handled directly by the full parent board during the period under review. Individual ﬁ nancial investment decisions at subsidiary level were dealt with by the respective Board Investment Committee of the speciﬁ c subsidiary. As an important component of the Corporate Governance Architecture Project, a parent board Risk Policy Committee is being created with a mandate which will address the wider issue of group-wide portfolio risk management under an enterprise risk management model. AUDITORS The incumbent Auditors, PricewaterhouseCoopers, offer themselves for re-appointment for the ensuing year. By Order of the Board of Directors. Sandra Osborne Corporate Secretar June 1, 2007 21 Sagicor Financial Corporation Chairman’s Report Dear Shareholders, After a record year of acquisitions in 2005, during which the Sagicor Group acquired ﬁ ve companies, 2006 has been a year of consolidation. The year was used to bring these new acquisitions fully on-stream and to integrate them within the Sagicor Group. This integration process has gone very well and the newly acquired companies are now contributing to our overall Group performance. However, 2006 was not just a year of consolidation, it was a year in which Sagicor made two further but signiﬁ cant strides in our thrust to become a global ﬁ nancial institution. The ﬁ rst of these occurred in May 2006, when Sagicor raised US $150 million on the United States Bond Market. This event was signiﬁ cant not only because our bond issue was successful, but because Sagicor was the ﬁ rst non-governmental Caribbean Company to receive a ﬁ nancial strength rating from Standard & Poor’s, Sagicor Life Inc. our principal operating subsidiary received a ﬁ nancial strength rating of BBB+ and an issuer credit rating of BBB. This was indeed a proud and signiﬁ cant moment for us as it gave testimony to our ﬁ nancial strength and strong and consistent operating performance. Through this strategic initiative, Sagicor established an initial foot print in the international capital market. The second initiative was a successful application to list on the main market of the London Stock Exchange, a process which was completed with the ofﬁ cial listing of all of the common shares of Sagicor on the London Stock Exchange. J Arthur L Bethell Chairman When we speak of becoming a global ﬁ nancial institution, it is not intended to suggest that Sagicor is or will be operating all over the world. “Global” in this sense speaks to the path we intend to follow, a journey which was started in 2000 when we began the process of demutualization. Indeed, the theme of this annual report “From Mutual to Global” best describes Sagicor’s ongoing journey to become a globally integrated ﬁ nancial institution. Sagicor Milestones 1840 – 1858 Establishment of the Barbados Mutual Life Assurance Society St Vincent branch opened Branches in Trinidad and Tobago & Grenada branches opened 1861 – 1896 St Kitts branch opened Antigua & Montserrat branches opened Demerara (Guyana) branch opened Dominica branch opened Jamaica branch opened 22 1987 Mutual Finance Company Ltd established Acquisition of Travelers Portfolio and the rebranding of Aruba, Bahamas, Belize, Cayman Islands, Curacao, St Maarten and Haiti to Capital Life 1993 – 1994 Establishment of the Mutual Bank of the Caribbean, the first indigenous bank to Barbados Mutual Financial Services and Caribbean Caricard Services established 1996 – 1998 Capital International Management Services established Establishment of Mutual Asset Management Inc and Mutual Funds Inc Acquisition of the Panama branch of Atlantic Southern Insurance Company and rebranding to Capital de Seguros Sagicor Financial Corporation February 14, 2007, the day of our ofﬁ cial listing on the London Stock Exchange was therefore a proud and important moment in the history of the Sagicor Group especially since such a listing is an important part of our international business strategy. Sagicor is the second oldest insurance company in the Americas, established in 1840 in Barbados, the company operated for most of its history as a Mutual Life Assurance Society. However, we exist in an ever changing world, and recognized that the mutual business model may not be appropriate for the future. And so it was decided that we would reinvent our company and create a Caribbean based ﬁ nancial institution with the ﬁ nancial strength and operating capability to compete in the international ﬁ nancial services arena. From the beginning of the 1990s, we at Sagicor, have been following a carefully crafted business strategy to transform our company from a local single line life insurance company into a regional and then into an international ﬁ nancial services Group. Some of the key transformational points in this journey were: 1. The consolidation of the Caribbean life insurance industry between the late 1990s and early 2000s. Sagicor led this consolidation emerging as the Region’s leading insurance company. 2. The demutualization of the Company at the end of 2002 and its conversion into a shareholder owned company to create a ﬂ exible capital structure and to facilitate access to capital. 3. The re-branding of the company from “The Barbados Mutual Life Assurance Society”, a name it carried for more than 160 years, to Sagicor, a name which reﬂ ects our heritage, but also reﬂ ects our borderless, timeless journey into the future. Today, Sagicor is the leading life insurance company in the Caribbean. Our assets have moved from US $150 million at the beginning of the 1990s to US $3.3 billion by end of Year 2006. Our Revenue has moved from US $40 million to US $660 million and our proﬁ ts from US $2 million to US $87 million. Our policies inforce have also grown substantially, moving from 60,000 to 600,000. All of this while maintaining very strong Risk Base Capital ratios, low debt to equity ratios and adhering to the most stringent international regulatory requirements. We are rated “A” Excellent by A.M. Best, the international insurance rating agency, and have maintain this rating since 1999. Our principle operating subsidiary Sagicor Life, is rated BBB+ by S&P, a rating that is only constrained by our country rating. 1999 – 2000 Acquisition of Island Life in Jamaica and Nationwide Insurance Company in Trinidad and Tobago. The acquisition of shares in Life of Jamaica First AM Best Rating ‘A’ (Excellent) The acquisition of 23% interest in Life of Barbados 2002 Acquisition of Life of Barbados Resolution for the demutualisation of Barbados Mutual Life Assurance Society was passed Conversion from Barbados Mutual Life Assurance Society to Sagicor Life Inc The establishment of the holding Company, Sagicor Financial Corporation, with 45,000 shareholders The Initial Public Offering of Sagicor Shares, increasing shareholders to 49,000 2003 – 2004 First Sagicor Listing on the Barbados Stock Exchange Sale of the Mutual Bank Sagicor Listing on the Trinidad & Tobago Stock Exchange 2001 Acquisition of Life of Jamaica and Allnation in the US 23 Sagicor Financial Corporation We operate in 20 countries including the Caribbean, Latin America and the US. Our recent entry into the US is part of our international expansion and we are very excited about the opportunities in that market. It is a market we are close to geographically, a market that culturally we understand. We are expanding in a business area that we know well, and where the middle tier companies are going through some of the same issues that the Caribbean experienced in the mid to late 1990s. We believe that there is value to be reaped from this market and we are well poised to capitalize on the opportunities. Our listing on the London Stock Exchange must therefore be viewed within the context of this journey and is a signiﬁ cant part of our international transformation and we are naturally excited about it. In conclusion, permit me to express my particular pride that this historic occurrence took place during my tenure as Chairman of the Board of the Sagicor Group. During my time with the Mutual, now Sagicor, dating back to 1965, the company has gone through many changes and has achieved many signiﬁ cant milestones, all of which can be described as strategic. However, I believe I can say without fear of contradiction that the changes which occurred during the last two decades have been the most signiﬁ cant in its history. I am proud to have been a part of this great Company and to have been given the opportunity to have played a role in what our Company has become. Along the way I have met several people who have given me their advice, guidance and general assistance, and to them I am most grateful. I have no doubt that the Sagicor Group will continue to enjoy strong growth and deliver solid results. I wish to thank all who have contributed to the development of the company over the years and to this year of signiﬁ cant achievement through their dedication and commitment. I would also like to thank the Board, Management, Staff and Advisors of Sagicor for their contribution and support in the development of this Group. I would like to especially thank our Customers who continue to place conﬁ dence in Sagicor by doing business with us. I am conﬁ dent that the future of Sagicor will continue to be bright and rewarding for all of its stakeholders. J Arthur L Bethell Chairman 2005 Acquisition of majority interest in Pan Caribbean Financial Services Acquisition of Laurel Life and its wholly-owned subsidiary, American Founders Life Insurance Company in the US Life of Jamaica acquires Cayman General Insurance Acquisition of 20% of FamGuard Acquisition of First Life Insurance portfolio 2006 Successful US$150 million Bond Offering on the US market Sagicor Life Inc assigned a Standard and Poor’s (S&P) financial strength rating of “BBB+” American Founders Life Insurance Company rebrands as Sagicor Life Insurance Company 2007 Sagicor’s Listing on the London Stock Exchange 24 Sagicor Financial Corporation President & CEO’s Report MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL RESULTS Overview 2006 was another successful year for the Sagicor Group which recorded net income of Bds $173.2 million. Of this, net income allocated to shareholders was Bds $135.3 million. The return on shareholders’ equity was 19% and earnings per share totalled Bds 50.8 cents. Revenue totalled Bds $1,318.8 million, which is an increase of 13.9% over 2005. Beneﬁ ts amounted to Bds $686.1 million and expenses totalled Bds $431.6 million. Assets totalled Bds $6,726.6 million and liabilities were Bds $5,642.0 million as of December 31, 2006. Total equity stood at Bds $1,084.6 million, exceeding Bds $1,000 million for the ﬁ rst time. Dodridge D Miller President and Chief Executive Officer In May 2006, Sagicor successfully raised US $150.0 million on the US market through an issue of senior notes underwritten by Morgan Stanley & Co Incorporated. The notes carry a ﬁ xed interest rate of 7.5% and mature in May 2016. The notes were issued at a price of 99.123% of par. In preparation for the issue, the Company sought a rating from Standard and Poor’s, the internationally recognised rating agency. Sagicor Life Inc, as the principal operating company within the Group was given a BBB+ rating, which is equal to the rating of its sovereign domicile, Barbados. A rating of BBB was given for the issue of the notes. This entry by Sagicor into an international capital market is testimony to the efforts by the management, staff and professional advisors involved in the exercise. It is testimony to the Company’s goal of achieving an international footprint. The notes are now traded in the United States among institutional investors and on the Euro MTF Market, the alternative market of the Luxembourg Stock Exchange. At balance sheet date, the market value of these notes approximated US $153.0 million. With the issue of the notes, the debt to total equity ratio for 2006 increased to 29.6% as of December 31, 2006, up from 16.9% one year previously. Having made ﬁ ve acquisitions in 2005, this year we have consolidated and integrated these recent additions to the Group. We have re-branded our US subsidiary as Sagicor Life Insurance Company, as an initial step to introducing the Sagicor brand in that market. In the Caribbean, we have continued to expand our business and to bring greater efﬁ ciency to our operations. The 2005 additions have enhanced our product offerings in merchant banking, investment and fund management and in health, property and casualty insurance in the region. Sagicor now has signiﬁ cant operations in the English and Dutch speaking countries in the region. On December 1, 2006, we signed an agreement with Industrial Life (the successor company to National Life of Canada) to acquire their life insurance portfolio in the region. Once this acquisition is completed, it will signiﬁ cantly enhance our market position in the Dutch Caribbean. We intend to build a market position in the U.S. and internationally which will be signiﬁ cant to the Sagicor Group. We will further develop our well established position in the Caribbean. In these endeavours, we will rely on our talented and dedicated human resources on the strong ﬁ nancial position of the Group. 25 Sagicor Financial Corporation President & CEO’s Report Economic Conditions The global economy recorded strong real GDP growth of 5% in 2006. This rate has been one of the highest in 30 years despite rising oil prices, rising interest rates and severe conﬂ ict in the Middle East. In the United States, growth in 2006 was 3.4%. The housing market started to soften in 2006, after many years of being a major stimulus to the economy. Growth in employment continues to drive spending in the economy. After regular interest rate increases since mid 2004, the Federal Reserve has maintained its funds rate at 5.25% for the latter part of 2006. While the US Treasury 10 year bond yield increased around 0.2% during the year, the yield stood below the funds rate at 4.7% at the end of 2006. In Europe, growth in the euro zone in 2006 was 2.7%. The largest economy in the euro zone, Germany, recorded positive growth of 2.6%. In the United Kingdom, GDP growth was 2.7% in 2006. In Asia, China’s economy continues to expand rapidly. Economic growth was estimated at 10.5% for 2006 and was being propelled by investment and exports. India’s economy continues to experience signiﬁ cant growth recording an estimated 8.3% for the year. Japan’s economy has started to rebound after a period of stagnation, with real GDP growth estimated at 2.1% for 2006. Fuelled by new demand in Asia, oil and other commodity prices have trended upwards with a resulting positive effect on commodity producing economies throughout the world. Barbados The Barbados economy expanded an estimated 3.5% in 2006. The tourism sector is estimated to have grown at some 2.5% for the year, with long-stay tourists being the source of growth. The construction industry grew by some 7%, a consequence of the Cricket World Cup related projects and other ventures. Manufacturing output was ﬂ at. Government’s ﬁ scal position has improved, with the deﬁ cit estimated at 1.7% of GDP. Inﬂ ation averaged at 7.6% for most of the year. Jamaica Jamaica’s economy improved in 2006. Most key indicators showed positive trends. Interest rates have continued their decline with treasury-bill yields declining by some 1.3% in 2006. The Jamaica dollar declined some 4% during the year. Net international reserves at the end of year approximated four months of imports. Inﬂ ation was 5.8%, the lowest in many years. Real GDP growth is estimated at 2.7% and tourist arrivals in 2006 increased by 15%. Against this trend of positive improvements, public debt remains high and debt service utilises a signiﬁ cant percentage of government revenues. Trinidad and Tobago 2006 was a positive year for the Trinidad and Tobago economy. Real GDP growth was estimated at 12% for the year. Energy is the dominant sector in the economy and accounted for 42% of GDP in 2006. GDP growth was propelled by a full year’s production emanating from new gas and methanol plants. Consumer inﬂ ation also increased in 2006 and was 9.1% for the year. In response to Central Bank initiatives, interest rates have trended upwards in 2006. The government’s ﬁ scal position remained strong, achieving an overall surplus of 0.4% of GDP. The Trinidad and Tobago dollar remained stable during the year, and net international reserves were estimated to be equivalent to more than seven months of imports. 26 Sagicor Financial Corporation Results of Operations The results of operations for the years ended December 31, 2006 and 2005 are summarised in the following table. Revenue Beneﬁ ts Expenses Net income from ordinary operations Income taxes Net income for the year 2006 2005 Bds millions Bds millions $1,318.8 (686.1) (431.7) 201.0 (27.8) $173.2 $1,158.0 (608.7) (354.9) 194.4 (24.0) $170.4 Sagicor has signiﬁ cant concentrations of business in Barbados, Jamaica, Trinidad and Tobago and the United States, where operations are primarily managed through subsidiaries or branches. The following table presents, for 2006 and 2005, the distribution by country of net income from ordinary operations. Barbados Jamaica Trinidad and Tobago United States Other Caribbean Not allocated to segments Total 2006 2005 Bds millions % Bds millions $39.1 103.8 51.6 13.9 32.1 (39.5) $201.0 19.5 51.6 25.7 6.9 16.0 (19.7) 100.0 $6.8 92.3 64.2 (10.0) 37.6 3.5 $194.4 % 3.5 47.4 33.0 (5.1) 19.4 1.8 100.0 Barbados operations have recorded income from ordinary operations of Bds $39.1 million, well surpassing that in 2005. 2006 has beneﬁ ted from growth in premium income, investment property gains and a more favourable change in actuarial liabilities. In 2005 there were notable investment impairment losses which did not recur in 2006. Jamaica operations recorded income from ordinary operations of Bds $103.8 million, an increase of Bds $11.5 million over 2005. Operations in 2006 beneﬁ ted positively from the impact of individual life new business. Group insurance, development banking and investment management also recorded better results in 2006. In 2005, Trinidad operations beneﬁ ted signiﬁ cantly from realised investment gains on equity securities as the Group sought to rebalance its Trinidad investment portfolio. This did not recur in 2006, which now reﬂ ects a more normalised level of income from ordinary activities. The net loss of Bds $10.0 million in 2005 from United States operations has been turned around to a net proﬁ t of Bds $13.9 million in 2006. Our acquisition, Sagicor Life Insurance Company, has had a successful year in 2006. Other Caribbean operations recorded income from ordinary activities of Bds $32.1 million in 2006. Though this is less than the 2005 results, proﬁ ts in 2006 are more evenly distributed among companies in this region. Our acquisition, Sagicor General (Cayman) Limited has had a successful year in 2006. Operations which are not allocated to operating segments showed a loss of Bds $39.5 million in 2006. In this category are ﬁ nance costs which support operations in other segments. Finance costs have risen by some Bds $14.4 million as a result of the additional debt ﬁ nancing on the balance sheet. Also the 2005 results beneﬁ ted from one-off gains on business combinations and acquisitions of Bds $25.1 million. 27 Sagicor Financial Corporation President & CEO’s Report Revenue The following table summarises the composition of total revenue for 2006 and 2005. Net premium revenue Net investment income Share of operating income of associated companies Fees and other revenue Gains arising on business combinations and acquisitions Total 2006 2005 Bds millions % Bds millions $755.2 471.0 5.5 87.1 - 57.3 35.7 0.4 6.6 - $637.0 415.4 3.5 77.0 25.1 % 55.0 35.9 0.3 6.6 2.2 $1,318.8 100.0 $1,158.0 100.0 Trends in revenue by component are discussed in the following sections. Net Premium Revenue The following table shows an analysis of net premium revenue for the years ended December 31, 2006 and 2005. Life insurance Annuities Health insurance Property and casualty insurance Total premium revenue Reinsurance premiums Net premium revenue 2006 2005 Bds millions % Bds millions $463.2 112.2 227.1 134.9 937.4 (182.2) $755.2 49.4 12.0 24.2 14.4 100.0 $392.3 85.3 197.0 74.1 748.7 (111.7) $637.0 % 52.4 11.4 26.3 9.9 100.0 Total premium revenue was Bds $937.4 million in 2006 as compared to Bds $748.7 million in 2005. After deducting the cost of reinsurance premiums, net premium revenue totalled Bds $755.2 million in 2006, an increase of 18.6% over 2005. Premium revenue from life insurance remains the largest class of premium, recording 49.4% of total premium in 2006 (52.4% in 2005). The comparison of 2006 premium revenue with that of 2005 reﬂ ects a combination of (cid:129) (cid:129) the impact of acquisitions made in 2005, for whom a full year’s premium is not reﬂ ected in the 2005 ﬁ gures, and intrinsic growth in the Group’s continuing operations. Premium revenue for 2005 includes revenue from Sagicor Life Insurance Company (USA) for three months only, and from Sagicor General (Cayman) Limited for one month only, since these subsidiaries were acquired on September 30 and November 30, 2005 respectively. Sagicor Life Insurance Company (USA) has premium revenues in life insurance and annuities. Sagicor General (Cayman) Limited has premium revenues in health, property and casualty insurance. Collectively, these two acquisitions have added some Bds $112.9 million in premium revenues in 2006 over 2005, and Bds $59.7 million in reinsurance premium costs in 2006 over 2005. The Group’s remaining operations recorded total premium revenue growth of Bds $75.8 million, or 10.4% over 2005. 28 Sagicor Financial Corporation Net Investment Income 2006 2005 Bds millions % Bds millions Interest income from debt securities Interest income from loans and other securities Net gains on ﬁ nancial investments and investment property Other investment income Total investment income Investment expenses Net investment income $284.7 98.7 59.2 34.9 477.5 (6.5) $471.0 59.6 20.7 12.4 7.3 100.0 $242.4 87.5 79.9 29.9 439.7 (24.3) $415.4 Net investment income increased by 13.4% to Bds $471.0 million in 2006. % 55.1 19.9 18.2 6.8 100.0 Interest from debt securities comprises the largest component of investment income, representing 59.6% in 2006 (55.1% in 2005). Interest income from debt securities increased by Bds $42.3 million in 2006, of which Sagicor Life Insurance Company (USA) accounted for Bds $35.0 million. (Sagicor Life Insurance Company (USA) was consolidated for three months only for 2005, as compared to the full year for 2006). Net gains on ﬁ nancial investments declined by Bds $37.7 million, but were offset by increases gains on investment property totalling Bds $16.9 million. In 2005, the Group recorded signiﬁ cant gains on its equity securities as it rebalanced the Trinidad investment portfolio. Investment expenses declined Bds $17.8 million, largely as a result of a reduction in impairment charges on loans and securities. Other Revenue Items In 2006, the share of operating income from associated companies includes returns from FamGuard Corporation. This associated company investment was made at the end of 2005 and did not generate any income in 2005. Fees and other revenue increased by 13.1% in 2006 to Bds $87.1 million. Gains on business combinations and acquisitions were Bds $25.1 million in 2005 (nil in 2006). These gains arose on the reduction in Sagicor’s interest in Life of Jamaica, from 78% to 60%, and on the acquisition of a 37% interest in Pan Caribbean Financial Services. Beneﬁ ts Beneﬁ ts comprise the returns provided to the holders of policy contracts and the interest return to clients and institutions who deposit funds with or advance special purpose loans to the Group. Beneﬁ ts are accounted for either as policy beneﬁ ts, or as change in actuarial liabilities (i.e. changes in amounts set aside for future policy beneﬁ ts), or as interest expense. Beneﬁ ts for the years ended December 31, 2006 and 2005 are summarised in the table below. Net policy beneﬁ ts Net change in actuarial liabilities Interest expense Total 2006 2005 Bds millions % Bds millions $509.5 17.9 158.7 $686.1 74.3 2.6 23.1 100.0 $388.2 72.6 147.9 $608.7 % 63.8 11.9 24.3 100.0 29 Sagicor Financial Corporation President & CEO’s Report Trends in policy beneﬁ ts by component are discussed in the following sections. Net policy beneﬁ ts The following table shows an analysis of net policy beneﬁ ts for the years ended December 31, 2006 and 2005. Life insurance beneﬁ ts Annuity beneﬁ ts Health insurance claims Property and casualty insurance claims Total policy beneﬁ ts Reinsured beneﬁ ts Net policy beneﬁ ts 2006 2005 Bds millions % Bds millions $258.8 164.8 165.6 32.7 621.9 (112.4) $509.5 41.6 26.5 26.6 5.3 100.0 $219.8 58.7 134.1 20.0 432.6 (44.4) 388.2 % 50.8 13.6 31.0 4.6 100.0 Total policy beneﬁ ts amounted to Bds $621.9 million in 2006 and Bds $432.6 million in 2005. After deducting reinsurance recoveries, net policy beneﬁ ts totalled Bds $509.5 million in 2006, an increase of 31.2% over 2005. The comparison of 2006 policy beneﬁ ts with those of 2005 reﬂ ects a combination of: (cid:129) (cid:129) the impact of acquisitions made in 2005, for whom a full year’s beneﬁ ts are not reﬂ ected in the 2005 ﬁ gures, and intrinsic growth in the Group’s continuing operations. Policy beneﬁ ts for 2005 includes beneﬁ ts from Sagicor Life Insurance Company (USA) for three months only, and from Sagicor General (Cayman) Limited for one month only, since these subsidiaries were acquired on September 30 and November 30, 2005 respectively. Sagicor Life Insurance Company (USA) incurs life insurance and annuity beneﬁ ts and Sagicor General (Cayman) Limited incurs health, property and casualty insurance claims. Collectively, these two acquisitions have added some Bds $143.6 million in policy beneﬁ ts in 2006 over 2005, and Bds $70.9 million in reinsurance recoveries in 2006 over 2005. The Group’s remaining operations experienced growth in total policy beneﬁ ts of Bds $45.7 million, or 11.6% over 2005. Change in actuarial liabilities The change in actuarial liabilities records the amounts set aside for future beneﬁ ts on insurance contracts. The quantum of actuarial liabilities is computed as of December 31 each year. The change in actuarial liabilities reﬂ ects the expected normal increase in liability of inforce policies, the effect of new policies issued during the year, and the impact of changes in actuarial assumptions and modelling. The net change in actuarial liabilities decreased by Bds $54.7 million to Bds $17.9 million in 2006. The overall decrease is a reﬂ ection of the large maturing inforce block of policies of Sagicor Life Insurance Company (USA) and of the changes in actuarial assumptions and modelling, most notably for improvements in expense factors. These trends have offset other normal increases in actuarial liabilities. Interest expense Interest expense is recognised on funds placed on deposit with the Group or on funds loaned to the Group for the purpose of generating operating assets. The interest expense totalled Bds $158.7 million in 2006, an increase of Bds $10.8 million over 2005. 30 Sagicor Financial Corporation Expenses The following table shows an analysis of expenses for the years ended December 31, 2006 and 2005. Administrative expenses Commissions and related compensation Premium taxes Finance costs Depreciation and amortisation Total 2006 2005 Bds millions % Bds millions $250.8 114.1 13.3 18.8 34.7 $431.7 58.1 26.4 3.1 4.4 8.0 100.0 $214.6 95.0 15.3 4.4 25.6 $354.9 % 60.5 26.8 4.3 1.2 7.2 100.0 Total expenses have increased by Bds $76.8 million to Bds $431.7 million in 2006. Expenses for administration comprise the most signiﬁ cant part of overall expenses, amounting to 58.1% of total expenses in 2006 and 60.5% of total expenses in 2005. A signiﬁ cant proportion of administrative expenses comprise remuneration and beneﬁ ts paid to employees. Administrative expenses for 2005 include expenses from Sagicor Life Insurance Company (USA) for three months only, and from Sagicor General (Cayman) Limited for one month only, since these subsidiaries were acquired on September 30 and November 30, 2005 respectively. Collectively, these two acquisitions have added some Bds $28.8 million in administrative expenses in 2006 when compared to 2005. The Group’s remaining operations experienced a 3.6% growth in administrative expenses over 2005. Commissions and related compensation have increased by some Bds $19.1 million in 2006, mirroring the trends recorded with premium revenues. Finance costs have increased by some Bds $14.4 million in 2006. This increase is attributable to the issue of senior notes by the Group which increased the level of debt ﬁ nancing. Income taxes Sagicor is taxed in the countries in which its operations are carried out. Taxes are based on investment income or on net income in each country according to the tax regulations of that country. The income tax expense is composed of current taxes and deferred taxes. Income taxes increased by 15.8% to Bds $27.8 million in 2006. The effective income tax rate on income from ordinary activities was 13.8% for 2006 (12.4% for 2005). Net Income Group net income totalled Bds $173.2 million for 2006 and Bds $170.4 million for 2005. Group net income is allocated to shareholders, to participating policies of Sagicor Life Inc, and to minority interests. The allocation for the years ended December 31, 2006 and 2005 is summarised below. Shareholders Participating policyholders Minority interest Total net income 2006 2005 Bds millions Bds millions $121.5 12.0 36.9 $170.4 $135.3 (0.6) 38.5 $173.2 31 Sagicor Financial Corporation President & CEO’s Report Net income attributable to shareholders totalled Bds $135.3 million for 2006, an increase of Bds $13.8 million or 11.4% over 2005. The net income attributed to participating policyholders is inﬂ uenced by the levels of investment income, the mortality and lapse experience and by the level of expenses, all attributable to the policies in the participating funds. In 2005, the participating account reﬂ ected the recognition of new business proﬁ ts which had been deferred from earlier years. In addition, changes in the mechanisms for valuing policies in the participating funds, and in the accounting for these funds have resulted in a restatement of the 2005 proﬁ ts allocated to these participating policies. The net income attributable to minority interest reﬂ ects the allocation of net income to the minority shareholders in subsidiaries which are not wholly owned by Sagicor. Assets The Group’s assets totalled Bds $6,726.6 million as of December 31, 2006. This represents an increase of Bds $329.8 million since December 31, 2005. The principal components of the Group’s assets as of December 31, 2006 and 2005 are set out in the following table. Financial investments and cash Properties, plant and equipment Intangible assets Reinsurance assets Other assets and receivables Total assets Asset components are discussed in the following sections. Financial investments and cash 2006 2005 Bds millions Bds millions $4,851.7 329.8 240.2 686.7 288.4 $6,396.8 $5,225.0 342.2 225.4 643.4 290.6 $6,726.6 2006 2005 Bds millions % Bds millions Debt securities Equity securities Mortgage loans Policy loans Finance loans and leases Securities purchased under agreements to re-sell Deposits Cash Total $3,301.7 374.2 492.0 251.8 245.9 44.6 339.4 175.4 $5,225.0 63.2 7.2 9.4 4.8 4.7 0.8 6.5 3.4 100.0 $3,140.7 440.4 420.6 255.0 235.1 69.0 172.0 118.9 $4,851.7 % 64.7 9.1 8.7 5.3 4.8 1.4 3.5 2.5 100.0 Financial investments and cash totalled Bds $5,225.0 million as of December 31, 2006, an increase of Bds $373.3 million for the year. Financial investments and cash are held in various currencies, with balances in United States dollars comprising 47.0%, in Jamaica dollars 21.4%, in Barbados dollars 13.6%, in Trinidad dollars 9.5% and in other currencies 8.5%. 32 Sagicor Financial Corporation Debt securities comprise the largest class of ﬁ nancial assets, at $3,301.7 million, or 63.2% of the total, as of December 31, 2006. Debt securities include government debt obligations, corporate debt securities and collateralised mortgage securities. The effective interest income yield on ﬁ nancial investments for the years ended December 31, 2006 and 2005 is set out below. Debt securities Mortgage loans Policy loans Finance loans and leases Securities purchased under agreements to re-sell Deposits Other asset classes 2006 % 9.4 8.2 8.3 11.6 11.4 4.8 2005 % 11.6 7.7 9.7 12.9 9.1 5.2 Investment property, owner-occupied property, plant and equipment totalled Bds $342.2 million as of December 31, 2006. The property components totalled Bds $281.9 million. Intangible assets totalled Bds $225.4 million as of December 31, 2006. Intangible assets largely comprise assets which are recognised on the acquisition of subsidiaries and insurance portfolios, with the largest items being goodwill and customer relationships. Reinsurance assets arise when the Groups cedes insurance risks to reinsurers in order to limit the Group’s exposure on claims. The asset represents the reinsurers’ share of the risks. Total reinsurance assets as of December 31, 2006 totalled Bds $643.4 million. Assets under management In addition to the assets in the Group balance sheet, the Group manages assets of pension funds, mutual funds and unit trusts for fee income. As of December 31, 2006, invested assets of these funds totalled Bds $2,290.5 million. Liabilities The Group’s liabilities totalled Bds $5,642.0 million as of December 31, 2006, an increase of Bds $197.9 million since December 31, 2005. The principal components of the Group’s liabilities as of December 31, 2006 and 2005 are set out in the following table. Policy liabilities Deposits and security liabilities Senior notes and loans payable Other liabilities and payables Total liabilities 2006 2005 Bds millions Bds millions $3,500.6 1,440.5 160.7 342.3 $5,444.1 $3,494.3 1,490.8 321.1 335.8 $5,642.0 33 Sagicor Financial Corporation President & CEO’s Report Liability components are discussed in the following sections. Policy Liabilities Actuarial liabilities – individual insurance Actuarial liabilities – group insurance Other insurance liabilities Investment contract liabilities Total 2006 2005 Bds millions % Bds millions $2,394.1 353.1 305.4 441.7 $3,494.3 68.5 10.1 8.7 12.7 100.0 $2,422.5 368.7 283.2 426.2 $3,500.6 % 69.2 10.5 8.1 12.2 100.0 Policy liabilities totalled Bds $3,494.3 million as of December 31, 2006. These policy liabilities are denominated in various currencies, with obligations in United States dollars representing 36.7%, in Jamaica dollars 12.7%, in Barbados dollars 26.3%, in Trinidad dollars 15.2% and in other currencies 9.1%. Individual insurance actuarial liabilities represent the largest class of policy liabilities and comprise some 68.5% of balances as of December 31, 2006 (69.2% for 2005). These obligations are principally in respect of long-term life insurance and annuity contracts. Investment contract liabilities arise from contracts which do not have an insurance element, and comprise mainly pension and savings deposits. Deposit and Security Liabilities Deposit and security liabilities represent sources of funds for on-lending, leasing and portfolio investments. Balances as of December 31, 2006 and 2005 are set out in the table below. 2006 2005 Bds millions % Bds millions Other funding instruments Deposits Securities sold under agreements to repurchase Bank overdrafts Total $289.7 246.3 948.8 6.0 $1,490.8 19.4 16.5 63.7 0.4 100.0 $296.3 227.5 908.0 8.7 $1,440.5 % 20.6 15.8 63.0 0.6 100.0 Deposit and security liabilities are denominated in various currencies, with obligations in United States dollars representing 55.6%, in Jamaica dollars 35.7%, in Barbados dollars 6.7%, in Trinidad dollars nil, and in other currencies 2.0%. Other funding instruments comprise loans from ﬁ nancial institutions. Securities sold under agreements to repurchase represent deposits made by customers and other ﬁ nancial institutions which are collateralised by debt securities held by the Group. These agreements are customarily short- term in nature, with most agreements maturing within three months of balance sheet date. 34 Sagicor Financial Corporation The effective interest rate paid on deposit and security liabilities for the years ended December 31, 2006 and 2005 is set out below. Other funding instruments Deposits Securities sold under agreements to repurchase Senior Notes and Loans Payable 2006 % 6.1 7.1 9.3 2005 % 5.6 7.3 10.0 Senior notes and loans payable are obligations arising from funding received to be used for Group expansion and corporate purposes. These obligations are regarded as debt ﬁ nancing. During 2006, the Group issued US $150.0 million (Bds $300.0 million) in Senior Notes in the United States market. Interest is ﬁ xed at 7.5% for the 10 year duration of the notes. With the issue of the notes, the Group utilised Bds$ 147.7 million of the proceeds to re-ﬁ nance bank loans, thereby extending the overall maturity of its debt. The remaining proceeds are available for further corporate activity. In addition to the senior notes outstanding, the Group had bank loans payable of Bds $28.0 million at balance sheet date. Cash Flows Cash ﬂ ows are summarised into categories of operating activities, investing activities, or ﬁ nancing activities. Cash and cash equivalents comprise readily available cash balances, ﬁ nancial investments with original maturities of 90 days or less, less bank overdraft balances. Summary movements in cash ﬂ ows and cash and cash equivalents for the years ended December 31, 2006 and 2005 are set out in the following table. Cash ﬂ ows from operating activities Cash ﬂ ows used in investing activities Cash ﬂ ows from ﬁ nancing activities Effects of exchange rate changes Net increase, cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 2006 2005 Bds millions Bds millions $313.9 (261.6) 109.6 (23.2) 138.7 135.6 $274.3 $178.5 (26.5) 112.1 (23.7) 240.4 274.3 $514.7 Financial investments included in cash equivalents totalled Bds $357.6 million as of December 31, 2006. This represents an increase of Bds $191.7 million over 2005’s total, reﬂ ecting high liquidity within the Group at balance sheet date. This rise in liquid ﬁ nancial investments has also brought down the cash from operating activities that would otherwise have been generated. Cash used in investing activities in 2005 included Bds $214.9 million in acquisition related cash outﬂ ows. With no acquisitions in 2006, the cash used in investing activities largely comprised the purchase of ofﬁ ce related assets and vehicles for leasing. 35 Sagicor Financial Corporation President & CEO’s Report Cash generated from ﬁ nancing activities reﬂ ect the net additional debt ﬁ nancing received by the Group. From this amount are deducted the dividends paid to shareholders and minority interests. Equity and Capital Resources Equity Total equity of the Group comprises shareholders’ equity, the participating policyholders’ accounts of Sagicor Life Inc, and minority interests in subsidiaries not wholly owned by Sagicor. As of December 31, 2006, total equity amounted to Bds $1,084.6 million, an increase of Bds $131.9 million since December 31, 2005. The components of equity as of December 31, 2006 and 2005 were as follows: Shareholders’ equity Participating accounts Minority interests Total equity Capital Resources 2006 2005 Bds millions Bds millions $730.3 20.9 201.5 $952.7 $827.7 19.8 237.1 $1,084.6 The principal capital resources of the Group comprise its shareholders’ equity, its minority interest equity, and its debt ﬁ nancing The resources totalled Bds $1,385.9 million as of December 31, 2006, and Bds $1,092.5 million as of December 31, 2005. The Group deploys its capital resources to its operating activities. These operating activities are carried out through subsidiary companies which are either insurance entities or provide other ﬁ nancial services. The capital is deployed in such a manner as to ensure that subsidiaries have adequate and sufﬁ cient capital resources to carry out their activities and to meet regulatory requirements. The capital adequacy of the principal subsidiaries is discussed in the following section. Capital Adequacy Sagicor Life Inc Group** Capital adequacy is managed at the operating company level. It is calculated by the Appointed Actuary and reviewed by executive management, the audit committee and the board of directors. In addition, The Group Appointed Actuary (who is independent of the Group) also reviews capital adequacy. The Group seeks to maintain internal capital adequacy at levels higher than the regulatory requirements. To assist in evaluating the current business and strategy opportunities, a risk-based capital approach is one of our core measures of ﬁ nancial performance. The risk-based assessment measure which we have adopted is the Canadian Minimum Continuing Surplus and Capital Requirement (MCCSR) standard. It should be noted that many of the jurisdictions in which the Sagicor Life Inc Group operates have no capital adequacy requirements. The minimum standard recommended by the Canadian regulators for companies is an MCCSR of 150%. The MCCSR for the Sagicor Life Inc Group as of December 31, 2006 and 2005 is set out below. Sagicor Life Inc 2006 MCCSR 2005 MCCSR 263% 256% ** includes Life of Jamaica Limited, Sagicor Capital Life Insurance Company Limited and Nationwide Insurance Company Limited. 36 Sagicor Financial Corporation Sagicor Life Insurance Company (USA) A risk-based capital (RBC) formula and model were adopted by the National Association of Insurance Commissioners (NAIC) of the United States. 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 least severe regulatory action is 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. Sagicor Life Insurance Company looks to maintain at least 250% of the Company Action Level, allowing it ﬂ exibility in its asset and product mix. The RBC ratios, deﬁ ned to be “the % of the Company Action Level” as of December 31, 2006 and 2005 are set out in the table below. Sagicor Life Insurance Company Pan Caribbean Financial Services Group 2006 RBC 360% 2005 RBC 438% Under the Bank of Jamaica (BOJ) and the Financial Services Commission (FSC) regulatory framework, the securities and banking operations are required to maintain unconsolidated Capital Adequacy Ratios of at least 10% of their risk-weighted assets. The FSC’s early warning benchmark is 14% while the BOJ’s trigger is 12%. Pan Caribbean Financial Services Limited (PCFS) is regulated by the FSC in respect of its securities operations. Pan Caribbean Merchant Bank Limited (PCMB) is regulated by the BOJ in respect of its banking operations. The Capital Adequacy Ratios as of December 31, 2006 and 2005 are set out in the table below. PCFS PCMB Risk Management 2006 2005 Capital Adequacy Ratio 79% 23% 62% 27% The Group’s activities of issuing insurance contracts, of accepting funds from depositors and by investing insurance premium and deposit receipts in a variety of ﬁ nancial and other assets, exposes the Group to various insurance, ﬁ nancial and operational risks. Before issuing any insurance contract, Sagicor considers the nature and amount of the insurance risk, and by the process of underwriting, determines if it will assume the insurance risk, and if so, at what rate of premium and if any conditions should be attached. Sagicor has in place many reinsurance agreements, which will or may allow the cession of some of the insurance risk. Sagicor has in place underwriting guidelines which are updated with company and industry experience. 37 Sagicor Financial Corporation President & CEO’s Report Financial risks include credit, liquidity and market risks. Credit risk is the exposure that a counterparty, to whom funds have been loaned, is unable to pay amounts when due. Liquidity risk is the exposure that funds may be required when unavailable or that excess funds may accumulate with loss of opportunity to earn returns. Group companies monitor cash inﬂ ows and outﬂ ows. Through experience and monitoring, the Group is able to maintain sufﬁ cient liquid resources to meet current obligations. Market risks arise from changes in market conditions relating to interest rates, fair values or currency exchange rates. The Group mitigates these risks by a variety of policies. Operational risks may arise in the conduct of business operations. The risks include technology failure, business interruption, error, fraud or money laundering. The Group mitigates these risks by having in place technology back- ups or alternative procedures; business interruption policies and plans; employee / management selection, training and performance procedures; internal audit processes; anti-money laundering procedures; and management review of ﬁ nancial and operating criteria. An Enterprise Risk Management process is being introduced throughout the Group’s operations. On completion, the Group will then have fully documented risk management policies and procedures which undergo constant monitoring. Financial Ratings The Group has obtained ﬁ nancial ratings for certain subsidiaries. Current ratings are set out in the table below. Sagicor Life Inc Sagicor Capital Life Insurance Company Limited Life of Jamaica Limited Sagicor Life Insurance Company (USA) Sagicor General Insurance Inc CORPORATE SOCIAL RESPONSIBILITY Standard & Poor’s Financial Strength Rating BBB+ A.M. Best Financial Strength Rating A (Excellent) A (Excellent) A (Excellent) B++ (Good) A- (Excellent) Sagicor’s belief in corporate social responsibility is inherent in its vision – “To be a great company committed to improving the lives of the people in the communities in which it operates.” Not only are we committed to the delivery of quality products and services, but also to initiatives that provide ﬁ nancial support and voluntary assistance, primarily in the areas of health, education, youth development and sports. Over the past year, and indeed over several decades, we have provided signiﬁ cant support to the Chronic Disease Research Centre, a project of the School of Clinical Medicine and Research of the University of the West Indies. Our funding has been crucial in sustaining ongoing research, and seeding new projects to address the rapidly growing problem of life-style related chronic diseases such as hyper-tension, diabetes and ischemic heart disease. Sagicor’s collaboration with the Caribbean Food and Nutrition Institute, dedicated as they are to advancing nutrition knowledge and showcasing creative and innovative forms of food and nutrition promotion across the Caribbean, has been a fruitful and successful one. In 2006, schools from 18 countries participated in the programme. This level of participation serves to promote a heightened awareness for proper nutrition among the people of the region, and further embodies Sagicor’s commitment to the improvement of their health. We have continued to promote healthy living by assisting in the funding of the National Council on Substance Abuse’s Life Education Centre, a mobile learning centre for Primary school children. This initiative helps children to make informed choices by teaching them the dangers of using hard drugs, as well as providing information on socially acceptable drugs like tobacco and alcohol. The centre’s focus is on prevention and it uses hi-tech training equipment and interactive training techniques. 38 Sagicor Financial Corporation Sagicor also assists a number of youth development and sporting organisations in areas such as table tennis, basketball, swimming, chess and horseracing. However, it is in the area of cricket that we have concentrated our efforts. In collaboration with the University of the West Indies, Cave Hill Campus we have developed the Sagicor Cricket Operations Research Enterprise (SCORE), a cricket research and training facility that will implement academic and training programmes geared towards assisting cricketers at all levels throughout the region in pursuit of attaining excellence at their craft. The Sagicor Cricket Operations Research Enterprise, was also designed to give tangible sustenance and visibility to the development of regional cricket, thereby nourishing one of the primary vehicles through which Caribbean people have demonstrated world-class excellence. In addition, given the historical importance of the sport of cricket in the Caribbean, Sagicor has invested heavily in cricket research and development to ensure that Caribbean people can record, celebrate, analyze, learn and build on the single most unifying force in the region – Cricket. Sagicor’s corporate responsibility reaches beyond strategic management decisions, and is inherent in its corporate culture with staff-initiated community activities. In 2006, employees donated an impressive US$35,000 towards London’s Run, a 13-mile race named after London Solomon, a courageous six-year-old who died from leukemia. Proceeds from this race beneﬁ ted the Phoenix Children’s Hospital Centre of Blood Disorders and Cancer. Employees also participated in the race’s fundraising Breakfast, which assisted another child in accessing the medicines needed following a bone marrow transplant. Individual employees are also whole-heartedly committed to the “Make a Difference” Project, which provides meals for homeless teenagers at the Home Base Youth Services. Employees also volunteer personal time to “Save the Family”, a comprehensive program of transitional housing, case management and supportive services. This program also protects young children by providing for the entire family, and “Adopt a Classroom” programmes’ employees contribute monies, clothes and toys to deserving children. At Sagicor, in addition to our strong belief in the link between proﬁ tability and economic development, we are also highly cognizant of the importance of maintaining and improving societal values and attitudes that are conducive to quality living. This commitment describes the essence of our vision for the foreseeable future. It is this commitment which will shape and inform our business strategies and operating plans as we strive to continue evolving as a great Caribbean company for the next decade and beyond. We ﬁ rmly believe that we have a vital role to play in the future development of our region, and are acutely aware that we must deliver on this promise in order to do so. HUMAN RESOURCES The Sagicor Group is committed to the creation and maintenance of a performance driven working environment which is characterized by innovation, continuous learning, opportunity for growth and development and fair and equitable treatment for all staff. We believe that this is essential to future growth and development of the Group. The Human Resource strategy of the Group is therefore centered on the achievement of this important objective through the implementation of projects designed to ensure that the Group is adequately served over the long- term by employees who are well trained, highly motivated and operate within a performance driven environment. Some of the projects cover areas such as organizational structures, succession planning, resource alignment with business objectives, compensation and performance based incentive programs. Other projects review the process of recruitment, orientation and retention in order to ensure that Sagicor gets its fair share of a limited pool of critical skills. At the beginning of 2006, the HR Committee approved an 18 month development plan which covers all of the key areas outlined above. Several HR projects are now in progress pursuant to this development plan. One of these projects covers the harmonization of organization structures, compensation structures and performance 39 Sagicor Financial Corporation President & CEO’s Report incentive programs across the Group. In addition, in order to align the performance of management and staff with the objectives of the company, the project has introduced a performance evaluation program based on a “balanced score card” approach. This program was ﬁ rst introduced at the Parent Company level but is now being implemented across all Group companies. Another project focuses on succession planning and is designed to ensure organizational continuity, orderly and systematic knowledge transfers, and the availability of an adequate supply of quality resources to support the Group’s business strategy. During the year, a new on-line performance management system was introduced in Sagicor Life during the year and it is expected that this system will be introduced into all major Group companies within the next eighteen months. The Group also implemented a new enterprise compensation system for our sales representatives and Sagicor Advisors. This new compensation system recognizes the changing face of the ﬁ nancial services industry today – the new products and services being delivered and the quality of advice that customers require from an integrated ﬁ nancial institution. The new compensation system was implemented with the assistance of the Life Insurance Management and Research Association (LIMRA). With regards to training and professional development, Sagicor continues to support training and professional development for all categories of staff. We continue to support employees pursuing educational programs and training offered through the Life Ofﬁ ce Management Association (LOMA), the American Health Insurance Plans (AHIP), and the Academy of Life Underwriting (ALU). Employees and Advisors now have 24 hour access to training through the LOMA E-Learning facility. We also take a very active part in the future development of these programs with our Senior Executive Vice President Mr. Steve Stoute being a member of the LOMA Education Council. At a less formal level, management and supervisory staff continue to beneﬁ t from exposure to a number of conferences, workshops and seminars, covering areas such as performance management, ﬁ nance and information technology. In order to ensure that our employees deliver a high quality of service to our customers, we continue to expose our executives and staff to industry and compliance related training covering important areas such as money laundering and data protection and privacy. These programs are designed to ensure that management and staff adhere to a high standard of ethical behavior, comply with international regulatory best practice in the delivery of their products and services and comply with all legal and regulatory requirements for the protection of our customers. We continue to recognize the outstanding performance of our employees and ﬁ nancial advisors with several Sagicor Advisors and Employee Recognition programs across the Group. Our family fun days have become signiﬁ cant events on our annual calendar, and we encourage our staff and advisors to participate in our Wellness Programs and healthy lifestyles initiatives. We believe that these programs and initiatives which form part of our Human Resource development plan support our objective to encourage a performance base culture and the creation of an exciting, innovative and growth oriented working environment. CONCLUSION The ﬁ nancial year 2006 was another successful one for the Sagicor Group of Companies. Net income for the year of $173 million exceeded both the net income of the previous year and planned net income for 2006. During the year, the company made two strategic decisions which supported its international business strategy. The ﬁ rst was to develop an initial foot-print in the international capital markets with a successful bond issue in the US Bond Market. Through this initiative, the Company received further conﬁ rmation of its capital strength and consistent proﬁ tability when Sagicor Life Inc., its principal operating subsidiary, was given a ﬁ nancial strength rating of BBB+ by Standard and Poor’s (S&P) and BBB issuer credit rating. The second strategic decision was to seek a listing on the London Stock Exchange (LSE). If Sagicor is to continue to grow and expand internationally, access to capital and exposure to capital markets, where fundamental share price discovery is possible, is critical to our overall success. A listing on the LSE was therefore an important part of our business strategy, and we are all delighted to have achieved this. Sagicor was admitted to the Ofﬁ cial List of the London Stock Exchange on February 14th 2007, to become the ﬁ rst Caribbean company to have achieved this milestone. While the two strategic events described earlier reinforced Sagicor’s reputation as a ﬁ nancially, solid proﬁ table company, with the operating capability to compete internationally, we at Sagicor have not been sitting on our laurels. During the year, we have taken further steps to enhance our governance systems and operating capabilities. We 40 Sagicor Financial Corporation have commenced the implementation of three initiatives, which are designed to ensure that Sagicor can enter the international market with the conﬁ dence that it can compete successfully. The ﬁ rst initiative is a project to strengthen our Corporate Governance processes by the development and implementation of a Group-wide corporate governance framework, which meets international best practice, and enhances our governance practices across the Group of companies. The second project is an enterprise-wide risk management framework (ERM), designed to facilitate the early identiﬁ cation of ﬁ nancial and operating risk and to provide adequate opportunity to properly manage these risks. The third, and perhaps the most important initiative, is a comprehensive Human Resource Development plan. This plan covers all aspects of human resource management, with particular focus on ensuring that the Sagicor Group is adequately served by a well-trained, highly motivated Executive and Staff, who are committed to the proper execution of the long-term vision of the Sagicor Group. Successful execution of these projects will enhance our infrastructure as we continue to expand. Finally, we are conﬁ dent that with our solid ﬁ nancial condition and our operating capabilities, Sagicor is well placed to compete successfully in the international ﬁ nancial services market, and we are fully conﬁ dent in our future. I would like to thank our Customers, the Board of Directors, Management, Staff and Advisors for their contribution to what has been, indeed, another successful year for the Sagicor Group. Dodridge D Miller President and Chief Executive Ofﬁ cer 41 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Sagicor Financial Corporation We have audited the accompanying consolidated ﬁ nancial statements of Sagicor Financial Corporation set out on pages 46 to 144 which comprise the consolidated balance sheet as of December 31, 2006 and the consolidated income statement, consolidated statement of changes in equity, and consolidated cash ﬂ ow statement for the year then ended and a summary of signiﬁ cant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these ﬁ nancial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of ﬁ nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these ﬁ nancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the ﬁ nancial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the ﬁ nancial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the …/2 Page 2 Independent Auditors’ Report …/cont’d. entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the ﬁ nancial statements. We believe that the audit evidence we have obtained is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁ nancial statements present fairly, in all material respects, the ﬁ nancial position of Sagicor Financial Corporation as of December 31, 2006, and its ﬁ nancial performance and its cash ﬂ ows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers Chartered Accountants April 4, 2007 Sagicor Financial Corporation CONSOLIDATED BALANCE SHEET As of December 31, 2006 Amounts expressed in Barbados $000 Notes 2006 2005 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 Other insurance liabilities Investment contract liabilities Other liabilities Senior notes and 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 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 181,156 161,055 53,671 225,416 5,049,644 643,378 36,665 200,202 175,367 6,726,554 2,747,168 305,402 441,709 3,494,279 321,065 1,490,783 41,130 37,355 257,331 5,641,943 460,470 96,212 271,017 827,699 19,805 237,107 1,084,611 181,586 148,248 49,829 240,187 4,732,847 686,648 35,711 202,888 118,863 6,396,807 2,791,197 283,248 426,161 3,500,606 160,728 1,440,445 37,446 30,958 273,890 5,444,073 458,451 106,526 165,329 730,306 20,920 201,508 952,734 Total equity and liabilities 6,726,554 6,396,807 These financial statements have been approved for issue by the Board of Directors on April 4, 2007. Director Director 46 Sagicor Financial Corporation CONSOLIDATED INCOME STATEMENT Year ended December 31, 2006 Amounts expressed in Barbados $000 Notes 2006 2005 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 acquisitions Total revenue BENEFITS Policy benefits and change in actuarial liabilities Policy benefits and change in actuarial liabilities reinsured Net policy benefits and change 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 Net income attributable to shareholders - EPS Basic earnings per common share Fully diluted earnings per common share 27 27 28 9 29 38 30 30 31 33 35 35 937,406 (182,162) 755,244 471,032 5,455 87,115 - 748,707 (111,689) 637,018 415,415 3,473 76,951 25,115 1,318,846 1,157,972 586,780 (59,395) 527,385 158,739 686,124 250,743 114,132 13,240 18,839 34,700 431,654 201,068 (27,818) 173,250 135,325 (606) 38,531 173,250 498,986 (38,189) 460,797 147,869 608,666 214,544 94,961 15,308 4,426 25,636 354,875 194,431 (24,046) 170,385 121,455 12,013 36,917 170,385 50.8 cents 50.8 cents 46.0 cents 46.0 cents 47 Sagicor Financial Corporation CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2006 Amounts expressed in Barbados $000 Year ended December 31, 2006 Share capital Note 24 Reserves Note 25 Retained earnings Participating accounts Note 26 Minority interest Total 458,451 106,526 165,329 20,920 201,508 952,734 - - - 5,652 - (3,633) - - 2,019 (11,875) - (11,875) - 2,944 - - (1,383) (10,314) (44) 135,325 135,281 - - - (31,980) 2,387 105,688 2 (606) (604) - - - - (511) (1,115) 7,920 38,531 46,451 4,123 - - (14,482) (493) 35,599 (3,997) 173,250 169,253 9,775 2,944 (3,633) (46,462) - 131,877 Balance, beginning of year as restated (note 43) Net gains/(losses) recognised directly in equity Net income/(loss) for the year Total recognised gains and income for the year Issue of shares Value of employee services rendered Purchase of treasury shares Dividends declared (note 35) Other movements Balance, end of year 460,470 96,212 271,017 19,805 237,107 1,084,611 Year ended December 31, 2005 Share capital Note 24 Reserves Note 25 Retained earnings Participating accounts Note 26 Minority interest Total 432,495 167,694 85,705 676 57,918 744,488 - - - 25,956 - - - 25,956 (63,499) - (63,499) - - - 2,331 (61,168) 96 121,455 121,551 - (31,600) - (10,327) 79,624 235 12,013 12,248 - - - 7,996 20,244 (23,469) 36,917 13,448 88,200 (9,026) 50,968 - 143,590 (86,637) 170,385 83,748 114,156 (40,626) 50,968 - 208,246 Balance, beginning of year as restated (note 43) 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 Other movements Balance, end of year 458,451 106,526 165,329 20,920 201,508 952,734 48 Sagicor Financial Corporation CONSOLIDATED CASH FLOW STATEMENT Year ended December 31, 2006 Amounts expressed in Barbados $000 Notes 2006 2005 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, net Investment in associated companies, net Intangible assets, net Acquisition of subsidiaries and insurance businesses, net of cash and cash equivalents Net cash used in investing activities Cash flows from financing activities Purchase of treasury shares Dividends paid to shareholders Shares issued to minority interest Dividends paid to minority interest Senior notes and loans payable, net Net cash from financing activities Effects of exchange rate changes Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 36 36 36 36 36 36 201,068 (211,201) 384,321 (172,731) (27,048) (121,042) 125,137 178,504 (22,690) 620 (4,456) - (26,526) (3,633) (31,594) 3,534 (14,538) 158,299 112,068 194,431 (177,242) 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 (23,676) (23,198) 240,370 274,342 514,712 138,734 135,608 274,342 49 Sagicor Financial Corporation INDEX TO THE NOTES TO THE FINANCIAL STATEMENTS 1. INCORPORATION AND PRINCIPAL ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2. ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 4. RISK MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 5. STATUTORY RESTRICTIONS ON ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6. SEGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 INVESTMENT PROPERTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 7. 8. PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 9. INVESTMENT IN ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 10. INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 11. FINANCIAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 12. REINSURANCE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 13. INCOME TAX ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 14. MISCELLANEOUS ASSETS AND RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 15. CASH RESOURCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 16. ACTUARIAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 17. OTHER INSURANCE LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 18. INVESTMENT CONTRACT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 19. SENIOR NOTES AND LOANS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 20. DEPOSIT AND SECURITY LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 21. PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 22. INCOME TAX LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 23. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 24. SHARE CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 25. RESERVES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 26. PARTICIPATING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 27. PREMIUM REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 28. NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 29. FEES AND OTHER REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 30. POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 31. INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 32. EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 33. INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 34. DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 35. EARNINGS AND DIVIDENDS PER COMMON SHARE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 36. CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 37. ASSETS AND LIABILITIES BY CURRENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 38. ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 39. COMMITMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 40. CONTINGENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 41. ASSETS UNDER ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 42. RELATED PARTY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 43. RESTATEMENT AND RECLASSIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 50 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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: (cid:129) Insurance (cid:129) Annuities (cid:129) Pensions (cid:129) Pension fund management (cid:129) Mutual fund management (cid:129) Corporate trust services (cid:129) Securities dealing (cid:129) Currency dealing (cid:129) Merchant banking (cid:129) 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 Jamaica Limited Life and health insurance, annuities and pension administration services Life and health insurance and annuities Sagicor Life Insurance Company ( formerly American Founders Life Insurance Company) (2) Life insurance and annuities Life and health insurance, annuities and pension administration services Sagicor Capital Life Insurance Company Limited Country of Incorporation Effective Shareholders’ Interest Barbados 100% Jamaica 60% (1) Texas, USA 100% The Bahamas 100% Capital Life Insurance Company Bahamas Limited Capital de Seguros, SA Life insurance The Bahamas Life and health insurance Nationwide Insurance Company Limited Life insurance Panama Trinidad & Tobago 100% 100% 100% 51 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) Subsidiary Companies Principal Activities Sagicor Life of the Cayman Islands Limited Life insurance Laurel Life Insurance Company (2) Sagicor Allnation Insurance Company Sagicor General Insurance Inc Life insurance Health insurance Property and casualty insurance Sagicor Re Insurance Limited Property and casualty insurance Country of Incorporation The Cayman Islands Texas, USA Delaware, USA Barbados The Cayman Islands Sagicor General Insurance (Cayman) Limited (formerly Cayman General Insurance Company Limited) (3) LOJ Pooled Investment Funds Limited Employee Benefits Administrator Limited Pan Caribbean Financial Services Limited (5) Pan Caribbean Merchant Bank Limited (5) Pan Caribbean Asset Management Limited (5) Manufacturers Investments Limited (5) Globe Finance Inc The Mutual Finance Inc Sagicor Asset Management Inc LOJ Property Management Limited Sagicor Insurance Managers Limited (formerly Cayman National Insurance Managers Limited) (3) Property, casualty and health insurance The Cayman Islands Pension fund management Pension administration services Development banking and investment management Merchant banking Investment management Investment management Loan and lease financing, and deposit taking Loan and lease financing, and deposit taking Investment management Property management Jamaica Jamaica Jamaica Jamaica Jamaica Jamaica Trinidad & Tobago St. Lucia Barbados Jamaica Captive insurance management services The Cayman Islands Sagicor Merchant Limited (7) Investment management Effective Shareholders’ Interest 60% (1) 100% 100% 53% 60% (1) 31% 60% (1) 60% (4) 65% (6) 65% (6) 65% (6) 65% (6) 100% 70% 100% 60% (1) 31% Barbados 51% Sagicor International Management Services, Inc Management and business development services Florida, USA 100% Sagicor Finance Limited (8) Group financing vehicle LOJ Holdings Limited Sagicor USA Inc The Mutual Financial Services Inc Sagicor Funds Incorporated LTE Limited (9) 52 Insurance holding company Insurance holding company Financial company Mutual fund holding company Holding company services holding The Cayman Islands Jamaica Delaware, USA Barbados Barbados Barbados 100% 100% 100% 73% 100% 100% Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) (1) An equity interest of 78% until April 1, 2005. (2) Acquired September 30, 2005. (3) Acquired by Life of Jamaica Limited on November 30, 2005. Through control of Life of Jamaica Limited, the Group has a 51% voting interest in the subsidiary. (4) An equity interest of 39% until April 1, 2005. (5) Acquired January 7, 2005. (6) 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. Incorporated March 30, 2006. Incorporated as a special purpose vehicle to temporarily hold the Company’s direct 34% interest in Pan Caribbean Financial Services Limited. (7) (8) (9) The associated companies of the Group are as follows: Associated Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest RGM Limited Property ownership and management FamGuard Corporation Limited (10) Family Guardian Insurance Company Limited (10) Family Guardian General Insurance Agency Limited (10) BahamaHealth Insurance Brokers and Benefit Consultants Limited (10) (10) Acquired December 28, 2005. Trinidad & Tobago Bahamas Bahamas Investment holding company Life and health insurance and annuities General insurance brokerage Bahamas Insurance brokers and benefit consultants Bahamas 33% 20% 20% 20% 20% 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. 53 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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. Where necessary, comparative figures have been reclassified to conform to changes in presentation in the current year. (a) Changes in IFRS New and revised IFRSs and revised International Accounting Standards (IASs) are effective from the 2006 reporting year. A new standard which is effective for accounting periods beginning on January 1, 2006 has been introduced and is as follows: IFRS 6 Exploration for and Evaluation of Mineral Resources. 54 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The standards which have amendments effective for accounting periods beginning January 1, 2006 are as follows: IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 4 Insurance Contracts IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 39 Financial Instruments: Recognition and Measurement None of the above changes have a significant effect on the presentation, disclosure or accounting in the Group’s financial statements. (b) Prior period adjustments Prior period adjustments have been made in respect of intangible assets, policy liabilities, participating accounts and gains arising on business combinations. These changes are summarised in note 43. 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. 55 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 in associated companies are originally recorded at cost and include intangible assets identified on acquisition. Accounting policies of associates have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. The Group recognises in income its share of associated companies’ post acquisition income and its share of the amortisation and impairment of intangible assets which were identified on acquisition. 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. The Group recognises in equity its share of associated companies reserve movements. (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 separate 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 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. 56 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.2 Basis of consolidation (continued) (f) Employees share ownership plan (ESOP) The Company has established an ESOP Trust which either acquires Company shares on the open market, or is allotted new shares by the Company. The Trust holds the shares on behalf of employees until the employees’ retirement or termination from the Group. Until distribution to employees, shares held by the Trust are accounted for as treasury shares. Dividends accruing to the Trust are used to acquire additional Company shares on the open market. 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. 57 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (continued) Exchange rates of the other principal operating currencies to the Barbados dollar were as follows: December 2006 closing rate 2006 average rate December 2005 closing rate 2005 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 33.4741 0.90 3.1473 0.50 0.50 1.00 0.4175 1.35 32.8257 0.90 3.1450 0.50 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 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. (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. 58 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.4 Segment reporting The Group’s primary segments are geographic and the secondary segments are defined by business activity. Geographical segments are determined by the location of the subsidiary or branch initiating the business. This segmentation is not materially different from the segmentation by location of the customers. The Group’s business segments reflect how the Group’s operations are managed within geographical segments. Certain balances can be clearly allocated to geographical segments, but not to business segments. These include certain associated company, income tax, and pension plan balances which relate to specific geographical segments, but are attributable to more than one business segment. In such instances, these balances are allocated to their geographic segments, but are not allocated by business segment. Other balances not allocated to segments mainly comprise borrowings and finance costs related to Group expansion and other corporate activities. 2.5 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 2.6. 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. 59 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.6 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. Owner- occupied property includes property held under partnership and joint venture arrangements with third parties. These are accounted for under the proportionate consolidation method. Subsequent expenditure is capitalised when it will result in future economic benefits to the Group. 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 40 to 50 years 10 years or lease term 3 to 10 years 4 to 5 years 5 to 6 years 60 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.7 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 not larger than a subsidiary’s operations in a geographical segment or in a business segment. Goodwill arising from an investment in an associate is included in the carrying value of the investment in associated companies. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment. (b) Other intangible assets Other intangible assets identified on acquisitions 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 4 – 20 years 4 years, indefinite 2 – 10 years 61 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.8 Financial assets (a) Classification The Group classifies its financial assets into four categories: (cid:129) (cid:129) (cid:129) (cid:129) held to maturity financial assets; available for sale financial assets; financial assets at fair value through income; 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. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets in the category at fair value through income include held for trading securities. An asset is classified as held for trading at inception if acquired principally for the purpose of selling in the short-term or if it forms part of a portfolio of financial assets in which there is evidence of short-term profit taking. Financial assets at fair value through income include investments held to back certain deposit administration and unit linked policy contracts where the full return on the asset accrues to the contract-holder. Other financial assets are classified as available for sale. (b) Recognition and measurement 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. Held to maturity assets, loans and receivables are carried at amortised cost less provision for impairment. Financial assets in the category at fair value through income 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. Financial assets in the available for sale category 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. 62 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.8 Financial assets (continued) 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. (c) 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. (d) 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. (e) 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 financial asset at fair value through income. 63 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.8 Financial assets (continued) (f) Financial assets held in trust under modified coinsurance arrangements These assets are held in trust for a reinsurer and are in respect of policy liabilities ceded to the reinsurer. The assets are included in the balance sheet along with a corresponding account payable to the reinsurer. No income is recorded from these assets in the income statement. 2.9 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. 2.10 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 its value in use. 2.11 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 held to meet statutory requirements. 2.12 Policy contracts (a) Classification The Group issues policy contracts that transfer insurance risk and / or financial risk from the policyholder. The Group defines insurance risk as an insured event that could cause an insurer to pay significant additional benefits in a scenario that has a discernable effect on the economics of the transaction. Insurance contracts transfer insurance risk and may also transfer financial risk. Investment contracts transfer financial risk and no insurance risk. Financial risk includes credit risk, interest rate risk and fair value risk. A reinsurance contract is an insurance contract in which an insurance entity cedes assumed risks to another insurance entity. 64 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 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: (cid:129) that are likely to be a significant portion of the total contractual benefits; (cid:129) whose amount or timing is contractually at the discretion of management; and (cid:129) 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. (b) Recognition and measurement Policy 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. Property insurance contracts provide coverage for the risk of property damage or of loss of property. For commercial policyholders insurance may include coverage for loss of earnings arising from the inability to use property which has been damaged or lost. Casualty insurance contracts provide coverage for the risk of causing physical harm to third parties. Personal accident, employers’ liability and public liability are common types of casualty insurance. 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 balance sheet date. Reserving involves uncertainty and the use of informed estimates and judgements. The claim reserve is included in other insurance liabilities. 65 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) An insurer may obtain 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 or of the reinsurance contract as appropriate. 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 earned. At balance sheet date, commissions and premium taxes arising on unearned premiums are included in miscellaneous assets and receivables. (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 2.13. An insurer 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. (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, either the contract may terminate or an automatic premium loan may settle the premium or the contract may continue at a reduced value. 66 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 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 balances. Reserves for future policy liabilities are recorded as described in note 2.13. An insurer 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. (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. Policy benefits are recognised on notification of death, receipt of a withdrawal request or on the annuity payment date. Reserves for future policy liabilities are recorded as described in note 2.13. An insurer 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. 67 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) (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. (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. Policy liabilities 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 insurer’s 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) Deposit administration and other investment 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 investment contracts are valued at amortised cost and are otherwise accounted in a manner similar to deposit administration contracts. 68 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) (c) Embedded derivatives Certain insurance contracts contain embedded derivatives which are options whose value may vary in response to changes in interest rates or other market variables. The Group does not separately measure embedded derivatives that are closely related to the host insurance contract or that meet the definition of an insurance contract. Options to surrender an insurance contract for a fixed amount are also not measured separately. In these cases, the entire contract liability is measured as set out in note 2.13. (d) 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. 2.13 Actuarial liabilities (a) Life insurance and annuity contracts 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 Group 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. 69 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.13 Actuarial liabilities (continued) (b) Health insurance contracts 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. 2.14 Financial liabilities During the ordinary course of business, the Group issues investment contracts or otherwise assumes financial liabilities that expose the Group to financial risk. The recognition and measurement of the Group’s principal types of financial liabilities are disclosed in note 2.12(b) (vii) and in the following paragraphs. (a) 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. (b) Deposit liabilities Deposits are recognised initially at fair value and are subsequently stated at amortised cost using the effective yield method. (c) 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 notes or 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. 70 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 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 includes coupon interest on fixed rate financial instruments 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. 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. 71 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (continued) (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. An accrual is recognised where there are contractual obligations or where past practice has created a constructive obligation. (d) Equity compensation benefits The Group has a number of share-based compensation plans in place for administrative, sales and managerial staff. (i) Equity-settled share-based transactions with staff The services received in an equity-settled transaction with staff are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date. If the equity instruments granted vest immediately and the individual is not required to complete a further period of service before becoming entitled to those instruments, the services received are recognised in full on grant date in the income statement for the period, with a corresponding increase in equity. Where the equity instruments do not vest until the individual has completed a further period of service, the services received are accounted for in the income statement during the vesting period, with a corresponding increase in the share based payment reserves or in minority interest. Until the instrument vests, the number of instruments vesting is re-measured annually and the corresponding change in fair value is adjusted at the re-measurement date. Amounts held in the share based payment reserve are transferred to share capital or minority interest either on the distribution of share grants or on the exercise of share options. 72 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (continued) (ii) Cash-settled share-based transactions with staff The services received in a cash-settled transaction with staff and the liability to pay for those services, are recognised at fair value as the individual renders services. Until the liability is settled, the fair value of the liability is re-measured at balance sheet date and at the date of settlement, with any changes in fair value recognised in income during that period. (iii) Measurement of the fair value of equity instruments granted The equity instruments granted consist either of grants of, or options to purchase, common shares of listed entities within the Group. Common shares granted are measured at the listed price prevailing on the grant date. Options granted are measured using standard option pricing valuation models, which incorporate factors and assumptions that knowledgeable, willing market participants would consider in setting the price of the equity instruments. (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 Taxes (a) Premium taxes Insurers are subject to tax on premium revenues generated in certain jurisdictions. The principal rates of premium tax are as follows: Barbados Jamaica Trinidad and Tobago United States of America Life insurance and non-registered annuities 3% - 5% 3% Nil 0.75% - 3.5% Health insurance Property and casualty insurance 3% Nil 6% Nil 3% - 5% Nil 6% Nil 73 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.19 Taxes (continued) (b) Income taxes The Group is subject to taxes on income in the jurisdictions in which business operations are conducted. Rates of taxation in the principal jurisdictions for income year 2006 are as follows: Life insurance and non- registered annuities 5% of gross investment income 15% of investment income 15% of investment income 35% of net income Registered annuities Other lines of business Nil Nil Nil 25% of net income 33 1/3 % of net income 25% - 35% of net income 35% of net income 35% of net income Barbados Jamaica Trinidad and Tobago United States of America (i) Current income taxes Current tax is the expected tax payable on the taxable income for the year, using the tax rates in effect for the year. Adjustments to tax payable from prior years are also included in current tax. (ii) Deferred income taxes The Group uses the balance sheet liability method of accounting for deferred 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. No provision is made for deferred taxes which could arise on the remittance of retained earnings from subsidiaries, unless there is a current intention to remit such earnings. 2.20 Participating Accounts (a) “Closed” participating fund For participating policies of Sagicor Life Inc in force at de-mutualisation, 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 de-mutualisation. The fund also includes an ancillary fund comprising the required provisions for adverse deviations as determined in the computation of actuarial liabilities of the said policies. Changes in the ancillary fund are not recorded in the participating account, but are borne by the general operations of Sagicor Life Inc. 74 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.20 Participating Accounts (continued) (b) “Open” participating fund Sagicor Life Inc also established an open participating fund for participating policies it issues after de- mutualisation. 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 de-mutualisation. 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 an ancillary fund comprising the provisions for adverse deviations on the transferred policies. Changes in the ancillary fund are not recorded in the participating account, but are borne by the general operations of Sagicor Life Inc. 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, was 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. (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 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. 75 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 2. ACCOUNTING POLICIES (continued) 2.21 Treasury shares Where a Group entity purchases the Company’s common shares, the consideration paid, including any directly attributable cost, is deducted from share capital. Where such shares are subsequently sold to a third party, the deduction from share capital is reversed, and any difference with net consideration received is taken to retained earnings. 2.22 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. 2.23 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 financial 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. 76 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 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 cash flows or of net income from ordinary activities 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 or earnings multiple models to these projections to determine if there is any impairment of goodwill. (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. 77 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 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. (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. The principal assumptions and margins used in the determination of actuarial liabilities are summarised in note 16.3. However, the liability resulting from the application of these assumptions can never be definitive as to the ultimate timing or the amount of benefits payable and is therefore subject to future re-assessment. 78 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 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. 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 liaibilities by currency are set out in note 37. 79 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 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 policy contracts and financial 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 financial 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: (cid:129) minimum annuity rates which are guaranteed to be applied at some future date; (cid:129) minimum guaranteed death benefits which are applicable when the performance of an interest bearing or unit linked fund falls below expectations; (cid:129) 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, policy contracts and financial liabilities in response to market changes. In certain Caribbean markets, 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 these 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. 80 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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, 19 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. 81 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 (cid:129) (cid:129) (cid:129) 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; 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. Insurers are also exposed to lapse and expense risk. At early durations, lapses and surrenders are likely to result in a loss to the insurer, as the acquisition costs associated with the policy contract would not have been recovered from product margins. Higher expenses in maintaining a policy contract may mean that the policy reserve may be inadequate to cover future policy maintenance expenses, thereby requiring the insurer to increase the associated policy reserve. 82 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 4. RISK MANAGEMENT (continued) 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, Netherlands 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 quantifies 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 insured at December 31, 2006, gross and net of reinsurance on life, property and casualty risks are summarised below. Contracts issued to individuals – life insurance Contracts issued to groups – life insurance Property and casualty insurance Gross amount insured 2005 2006 27,270,155 30,579,784 8,800,346 11,848,761 11,920,398 14,932,984 Net amount insured 2005 2006 20,988,717 21,288,570 7,242,619 9,842,180 7,295,843 7,818,375 83 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 (cid:129) maximum retention of $20,000 for a single event; (cid:129) maximum retention of $10,000 for a catastrophic event; (cid:129) 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. (cid:129) Motor and liability risks Miscellaneous accident risks (cid:129) maximum retention of $1,000 for a single event; (cid:129) treaty limits apply. (cid:129) maximum retention of $216 for a single event; (cid:129) treaty limits apply. Engineering business risks (cid:129) maximum retention of $300 (cid:129) treaty limits apply for material damage and for liability claims. Marine risks (cid:129) maximum retention of $150 for a single event; (cid:129) treaty limits apply. Property, motor, liability, and engineering risk (cid:129) (cid:129) 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 $800 Retention per individual to a maximum of $400 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 84 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 above $10 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, 17, 23, 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. Total assets under administration are disclosed in note 41. 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 $1,319 million (2005 - $1,271 million) have been deposited with regulators or are held in trust to the order of regulators. In some countries where the Group operates, there are exchange controls or other restrictions on the remittance of funds out of those countries. 85 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 6. SEGMENTS 6.1 Geographical Segments 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, 2006 Total assets Total liabilities Total revenue Income from ordinary activities Total cash flows 1,156,090 2,114,599 798,949 1,680,068 821,188 155,660 6,726,554 1,079,964 1,611,756 559,237 1,538,795 519,464 332,727 5,641,943 252,431 560,323 167,130 106,310 232,576 76 1,318,846 39,092 103,814 51,652 13,887 32,101 (39,478) 201,068 47,760 52,108 (27,079) (3,780) (11,351) 182,712 240,370 Year ended December 31, 2005 Total assets Total liabilities Total revenue Income from ordinary activities Total cash Flows 1,159,784 1,990,820 734,358 1,782,293 729,148 404 6,396,807 1,029,101 1,561,793 536,803 1,646,972 493,711 175,693 5,444,073 218,652 513,850 191,558 46,012 160,892 27,008 1,157,972 6,835 92,270 64,153 (9,970) 37,647 3,496 194,431 (9,114) 71,340 25,104 5,588 54,998 (9,182) 138,734 Other balances by geographical segment are disclosed in notes 8, 9, 10, 16 and 41. 6.2 Business segments Life insurance, health insurance and annuities from contracts issued to individuals Life insurance, health insurance, annuities and pensions from contracts issued to groups Property and casualty insurance Banking, investment management and other financial services Not allocated to segments (1) Total assets Total revenue 2006 2005 2006 2005 3,914,456 3,975,728 724,401 609,367 832,719 230,041 788,075 188,803 327,162 58,535 279,147 44,785 1,549,887 199,451 6,726,554 1,416,207 27,994 6,396,807 207,098 1,650 1,318,846 197,665 27,008 1,157,972 (1) Includes associated company, income tax and pension plan balances attributable to more than one business segment. 86 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 Transfers to real estate developed for resale Transfers to property, plant & equipment Disposals Appreciation in fair values Effects of exchange rate changes Balance, end of year 2006 181,586 3,043 (2,551) (9,017) (8,977) 18,602 (1,530) 181,156 2005 179,015 8,873 (5,849) - (336) 1,710 (1,827) 181,586 Investment property includes $37,302 (2005 - $43,552) which represents the Group’s proportionate interest in 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 United Nations House, Marine Gardens, Christ Church BET Building, Wildey, St Michael Trinidad & Tobago: Ernst & Young Building, Sweet Briar Road, Port-of-Spain Percentage owned by the Group 50% 50% 33% 25% 10% 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 2006 2,084 886 4,492 47 2005 4,830 553 3,588 221 87 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 8. PROPERTY, PLANT AND EQUIPMENT Net book value, beginning of year Additions at cost Transfers from investment property Transfers to intangible assets 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, 2006 Owner- Furnishings occupied & leasehold properties improvements Office equipment & vehicles Leased vehicles & equipment 91,263 980 9,017 - (261) 1,579 (1,447) (383) 100,748 10,036 10,200 - - (41) - (2,283) (119) 17,793 27,224 8,135 - (2,270) (666) - (8,090) (300) 24,033 19,725 7,290 - - (3,134) - (5,400) - 18,481 Total 148,248 26,605 9,017 (2,270) (4,102) 1,579 (17,220) (802) 161,055 102,792 (2,044) 100,748 41,455 (23,662) 17,793 82,084 (58,051) 24,033 28,154 (9,673) 18,481 254,485 (93,430) 161,055 Year ended December 31, 2005 Owner- Furnishings occupied & leasehold properties improvements Office equipment & vehicles Leased vehicles & equipment 6,939 5,333 2,113 (2,349) - (1,886) (114) 10,036 20,264 7,671 7,497 (461) - (7,162) (585) 27,224 16,089 10,322 - (2,094) - (4,592) - 19,725 Total 131,562 23,865 9,610 (5,723) 4,896 (15,020) (942) 148,248 31,629 (21,593) 10,036 77,261 (50,037) 27,224 28,318 (8,593) 19,725 229,188 (80,940) 148,248 Net book value, beginning of year Additions at cost Assumed on 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 88,270 539 - (819) 4,896 (1,380) (243) 91,263 91,980 (717) 91,263 88 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 8. PROPERTY, PLANT AND EQUIPMENT (continued) Additions to and depreciation of property, plant and equipment by geographical segment are as follows: Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments Additions Depreciation 2006 2005 2006 2005 16,591 1,770 3,289 1,258 3,628 69 26,605 16,998 3,819 1,089 260 1,695 4 23,865 9,993 3,170 1,266 718 2,062 11 17,220 9,163 2,872 1,097 342 1,546 - 15,020 Owner-occupied property includes $2,972 which represents the Group’s proportionate interest in joint ventures set out below. Description of property Belize: Belize Insurance Centre, North Front Street, Belize City Grenada: The Mutual / Trans-Nemwil Office Complex, The Villa, St George’s Percentage owned by the Group 50% 50% 89 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 9. INVESTMENT IN ASSOCIATED COMPANIES Investment, beginning of year Additions Income from ordinary activities Amortisation of intangible assets which were identified on acquisition Income taxes Dividends received Effects of exchange rate changes Investment, end of year 2006 49,829 1,327 5,455 (987) (16) (1,948) 11 53,671 2005 24,276 25,280 3,473 - (16) (3,102) (82) 49,829 The investment in associated companies and the income from ordinary activities by geographical segment are as follows: Barbados Jamaica Trinidad & Tobago Other Caribbean Investment in associated companies Income from ordinary activities 2006 249 81 28,128 25,213 53,671 2005 253 85 24,775 24,716 49,829 2006 (4) - 3,373 2,086 5,455 2005 40 68 3,365 - 3,473 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 2006 586,047 406,736 176,527 21,951 2005 447,823 284,502 34,099 10,321 90 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 10. INTANGIBLE ASSETS (a) Analysis and changes for the year Goodwill Customer relationships Year ended December 31, 2006 Trade names Software Total Net book value, beginning of year as restated Transfer from property, plant and equipment Additions at cost Amortisation and other charges Effects of exchange rate changes Net book value, end of year Represented by: Cost Accumulated amortisation and charges 121,406 98,076 11,663 9,042 240,187 - - (1,965) (1,145) 118,296 - - (6,092) (3,328) 88,656 - - (4,238) (353) 7,072 2,270 4,456 (4,198) (178) 11,392 2,270 4,456 (16,493) (5,004) 225,416 120,261 99,274 14,777 22,031 256,343 (1,965) 118,296 (10,618) 88,656 (7,705) 7,072 (10,639) 11,392 (30,927) 225,416 91 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 10. INTANGIBLE ASSETS (continued) Net book value, beginning of year Additions at cost Assumed on acquisitions Identified on acquisitions: PCFS (note 38.1) EBA (note 38.2) First Life (note 38.3) Laurel Life (note 38.4) Cayman General (note 38.5) Disposals Amortisation charge Effects of exchange rate changes Net book value, end of year Represented by: Cost Accumulated amortisation Net book value, as previously stated Adjustment for disposal of goodwill (note 38) Adjustment for valuation of intangible assets (note 38) Net book value, as restated (b) Geographical segment information Customer relationships - - - Year ended December 31, 2005 Trade names - - - Software 3,223 6,117 1,207 63,798 33,803 - 724 8,088 - (4,763) (3,574) 98,076 15,212 - - - 656 - (3,803) (402) 11,663 - 106 - - 659 - (2,050) (220) 9,042 Goodwill 100,124 - - 5,814 16,385 3,856 1,965 3,688 (8,099) - (2,327) 121,406 Total 103,347 6,117 1,207 84,824 50,294 3,856 2,689 13,091 (8,099) (10,616) (6,523) 240,187 121,406 - 121,406 102,884 (4,808) 98,076 15,340 (3,677) 11,663 14,318 (5,276) 9,042 253,948 (13,761) 240,187 120,350 106,892 13,049 10,214 250,505 (8,099) - - - (8,099) 9,155 121,406 (8,816) 98,076 (1,386) 11,663 (1,172) 9,042 (2,219) 240,187 Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments Goodwill 2006 45,266 40,822 9,831 - 22,377 - 118,296 2005 45,266 41,958 9,840 1,965 22,377 - 121,406 Additions to intangible assets 2005 2006 2,539 1,485 3,578 1,387 - - - 1,406 - 82 - 96 6,117 4,456 Amortisation of intangible assets 2005 2006 896 1,448 9,720 10,519 - 5 - 2,915 - 1,606 - - 10,616 16,493 92 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 10. INTANGIBLE ASSETS (continued) (c) Goodwill Goodwill arising on past acquisitions is reviewed by cash generating unit (CGU). The recoverable amount of each CGU is determined either by its value in use or by its fair value less costs to sell. A CGU’s value in use is estimated using cash flow projections prepared by management. Detailed cash flow projections are prepared for three years and are extrapolated for subsequent years. The fair value of a CGU is estimated by capitalising its expected earnings over time. Cash flow discount factors, residual growth rates and earnings multiples utilised in the assessment of recoverable amounts were as follows: Cash Flow discount factor 2006 Cash flow residual Growth rate Barbados Jamaica Trinidad & Tobago Other Caribbean 13.3%, 14.7% 21.2% n/a 14.6% 4.5% 7.0% n/a 3.5% Earnings multiples 8.67 4.48, 5.30 8.01 7.70, 8.54 93 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 December 31, 2006 Fair Value Carrying Value December 31, 2005 Fair Value Carrying Value 6,503 6,451 4,062 3,984 2,461,493 326,667 2,788,160 2,461,493 326,667 2,788,160 2,308,667 397,174 2,705,841 2,308,667 397,174 2,705,841 175,437 47,549 222,986 175,437 47,549 222,986 150,884 43,261 194,145 150,884 43,261 194,145 658,288 492,018 251,782 245,880 44,640 339,387 2,031,995 661,479 490,533 251,782 245,880 44,640 339,387 2,033,701 677,084 420,600 254,993 235,133 69,029 171,960 1,828,799 712,053 419,406 254,993 235,133 69,029 171,960 1,862,574 Total financial investments 5,049,644 5,051,298 4,732,847 4,766,544 Debt securities comprise: Government debt securities Corporate debt securities Collateralised mortgage obligations Other securities 2006 2,058,119 657,180 480,452 105,970 3,301,721 2005 1,943,775 612,692 475,636 108,594 3,140,697 94 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 11.1 Analysis of financial investments (continued) Debt securities include $46,900 (2005 - $49,452) and policy loans include $60,824 (2005 - $62,930) in assets held in trust for a reinsurer. The Group earns no income on these assets. Debt securities include $14,893 (2005 - $12,733) that contain options to convert to common shares of the issuer. Corporate debt securities include: (i) convertible loans totalling $9,543 (2005 - $1,548) issued to the Group by an associated company. These loans can be converted into equity or bonds issued by the associated company. (ii) $23,833 (2005 - $25,598) in bonds issued by an associated company. Equity securities include $12,503 (2005 - $12,526) in mutual funds managed by the Group. 11.2 Pledged assets Debt securities include $78,440 (2005 – $82,330) held in trust supporting reinsurance liabilities assumed. The Group manages these investments and bears the investment risk. Debt and equity securities include $40,993 (2005 - $55,749) as collateral for loans payable. The collateral for other funding instruments from the Federal Home Loan Bank (FHLB), consists of an equity holding in the FHLB with market value of $10,622 (2005 - $12,026), and mortgages and mortgage backed securities having a total market value of $247,792 (2005 - $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, 2006, these pledged assets totalled $949,662 (2005 - $904,302). Of these assets pledged as security $378,151 (2005 – $394,706) 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 Deposits: FirstCaribbean International Bank 2006 2005 1,447,125 585,506 164,796 1,322,041 576,354 208,154 164,049 9,211 95 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 11.4 Effective interest rates Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits 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 2006 9.4% 8.2% 8.3% 11.6% 11.4% 4.8% 2005 11.6% 7.7% 9.7% 12.9% 9.1% 5.2% December 31, 2006 Repayable between one and five years Repayable after five years 966,468 38,478 89,593 - 25,418 1,119,957 1,955,405 441,908 62,889 - 3,171 2,463,373 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 Repayable within one year 379,848 11,632 93,398 44,640 310,798 840,316 Repayable within one year 235,775 7,965 81,163 69,029 134,326 528,258 Total 3,301,721 492,018 245,880 44,640 339,387 4,423,646 Total 3,140,697 420,600 235,133 69,029 171,960 4,037,419 Policy loans are repayable either at the discretion of the policyholder or on termination of the policy. 96 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 11. FINANCIAL INVESTMENTS (continued) 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 and certain deposit administration contracts. Debt securities Equity securities Mortgage loans Securities purchased under agreements to resell 11.7 Allowances for impairment losses Mortgage loans Debt securities Finance loans and finance leases 2006 130,301 44,089 87,317 4,903 266,610 2006 5,728 14,608 4,947 25,283 2005 125,899 35,520 82,504 6,706 250,629 2005 5,222 14,826 5,710 25,758 Interest of $6,557 (2005 - $3,645) has been accrued on impaired financial investments. 12. REINSURANCE ASSETS Reinsurers’ share of: Actuarial liabilities (note 16.1) Policy benefits in the course of settlement (note 17.2) Provision for unearned premiums (note 17.3) Other items 2006 2005 552,941 42,003 35,886 12,548 643,378 605,995 43,483 24,662 12,508 686,648 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. The reinsurers’ share of actuarial liabilities and claim recoveries from reinsurers include the following significant balances: Scottish Re (U.S.) Inc - rated B (Fair) by A.M. Best Washington National Insurance Company - rated B++ (Good) by A.M. Best 2006 337,442 2005 366,900 190,522 211,532 The reinsurers’ share of liabilities held by Scottish Re is secured by assets held in trust by a third party totalling $296,745 and by the Group (see note 11.1). 97 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 13. INCOME TAX ASSETS Deferred income tax assets (note 34) Income and withholding taxes recoverable 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 2006 8,451 28,214 36,665 2005 8,226 27,485 35,711 2006 2,008 25,802 55,852 6,028 110,512 200,202 2005 2,195 23,498 52,517 10,722 113,956 202,888 Real estate developed for resale includes $17,675 (2005 - $8,611) which is expected to be realised after one year. Real estate developed for resale includes $6,323 (2005 - $4,628) 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 2006 31,204 2005 72,440 98 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES 16.1 Analysis of actuarial liabilities Gross liability Reinsurers’ share 2006 2005 2006 2005 (a) Life insurance, annuities and health insurance - contracts issued to individuals: Life - participating polices Life and annuity - non-participating policies Health Unit linked funds Reinsurance contracts held (b) Life insurance, annuities and health insurance - contracts issued to groups: Life Annuities Health 559,078 1,635,984 7,903 178,980 12,114 2,394,059 537,231 1,689,997 7,192 169,151 18,910 2,422,481 50,560 266,933 35,616 353,109 54,704 282,565 31,447 368,716 6,554 441,662 3,179 - - 451,395 4,790 95,858 898 101,546 6,302 483,188 2,666 - - 492,156 7,157 106,428 254 113,839 Total actuarial liabilities 2,747,168 2,791,197 552,941 605,995 The following notes are in respect of the above: (cid:129) Life insurance includes coverage for disability and critical illness. (cid:129) Actuarial liabilities include $305,419 (2005 - $368,271) in assumed reinsurance. (cid:129) Liabilities for reinsurance contracts held occur because the reinsurance premium costs exceed the mortality costs assumed in determining the gross liability of the policy. 99 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.2 Movement in actuarial liabilities The movement in actuarial liabilities for the year is as follows: Gross amount Reinsurers’ share 2006 2005 2006 2005 Balance, beginning of year as restated (note 43) Transfers Amounts assumed on acquisitions Change in actuarial liabilities (note 30) Effect of exchange rate changes Balance, end of year 2,791,197 1,804 - (35,135) (10,698) 2,747,168 1,485,042 - 1,254,825 66,379 (15,049) 2,791,197 The change in gross liability by geographical segment is as follows: Barbados Jamaica Trinidad & Tobago USA Other Caribbean 16.3 Assumptions 605,995 - - (53,062) 8 552,941 2006 8,170 25,321 7,207 (91,794) 15,961 (35,135) 2,889 - 609,373 (6,267) - 605,995 2005 28,834 8,660 31,374 (1,624) (865) 66,379 (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. 100 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) (b) Assumptions for mortality and morbidity Mortality rates are related to the incidence of death in the insured population. Morbidity rates are related to the incidence of sickness and disability in the insured population. For the 2006 valuation, certain insurers 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 (Canadian Institute of Actuaries (CIA) 1986 – 1992 tables) 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 CIA tables or to other established scales. Assumptions for morbidity are determined after taking into account insurer and industry experience and established guidelines from Actuarial Institutes. (i) Change in assumption and prior year adjustment For the 2006 valuation, the AA reviewed the approach for determining the mortality assumption for the former Life of Barbados Limited insurance policies which were transferred into the opening participating fund on February 1, 2005 (the date of amalgamation of Sagicor Life Inc and Life of Barbados Limited). It was concluded that the use of a specific mortality assumption for these insurance policies provides a closer representation of best estimate than the use of a combined mortality assumption derived from a wider grouping of insurance policies. This conclusion is supported by actuarial practice and is consistent with the terms of the open participating fund as described in the Scheme of Amalgamation of Sagicor Life Inc and Life of Barbados Limited. Accordingly, revised mortality assumptions were adopted for these open participating policies and for the other policies in the wider grouping of insurance policies referred to above. These changes have resulted in a restatement of the actuarial liabilities from February 1, 2005, and are reflected in the restated amounts for the year ended December 31, 2005 as summarised in note 43. (c) Assumptions for lapse Lapses relate to the forced termination of policies due to non-payment of premium or to the voluntary termination of policies by policyholders. Lapse studies were performed by certain insurers for the 2006 valuation, to determine the most recent experience of persistency. Appropriate rates of termination by policy duration were determined and applied in the actuarial valuation. 101 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (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 the valuation date, all investments, except policy loans, are reinvested in long-term, default free government bonds. 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 2006 URR 5.0% 7.0% 5.0% 4.0% - 4.75% 5.0% (e) Assumptions for operating expenses and taxes Policy acquisition and policy maintenance expense costs for long-term business of each insurer are measured and monitored using internal expense studies. Policy maintenance expense costs are reflected in the actuarial valuation after adjusting for expected inflation. Costs were updated for the 2006 valuation and were applied on a per policy basis. (i) Change in assumption and prior year adjustment For the 2006 valuation, the AA reviewed the approach for determining the inflation assumption for the former Life of Barbados Limited insurance policies which were transferred into the opening participating fund on February 1, 2005 (the date of the amalgamation of Sagicor Life Inc and Life of Barbados Limited). The rate of inflation and the methodology for applying the inflation assumption were changed for consistency to those applied to the policies in the closed participating funds. These changes in rate and methodology have resulted in a restatement of actuarial liabilities of the open participating insurance polices from February 1, 2005, and is reflected in the restated amounts for the year ended December 31, 2005 as summarised in note 43. (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. 102 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) (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 (h) Health insurance 2006 46,479 36,903 108,572 20,976 212,930 2005 Restated 50,337 34,864 162,908 25,627 273,736 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 from the balance sheet date. (i) Movement in actuarial liabilities arising from changes in assumptions The increase in actuarial liability for the year includes the effects arising from changes in assumptions. 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 total effect of changes in assumptions and actuarial modelling are as follows. Decrease in actuarial liabilities 2006 (103,206) 2005 (68,577) Significant specific changes in assumptions and actuarial modelling which represent more than 5% of actuarial liabilities at the beginning of the year are set out below. Increase in actuarial liabilities arising from the introduction of margins on equity securities and real estate supporting policy liabilities 2006 2005 - 76,400 103 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) 16.4 Sensitivity analysis (a) Sensitivity arising from the valuation of actuarial liabilities The valuation of actuarial liabilities is sensitive to: (cid:129) the economic scenario used in CALM, (cid:129) the investments allocated to back the liabilities, (cid:129) the underlying assumptions used, and (cid:129) 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: (cid:129) Operating expenses and taxes (cid:129) Lapse (cid:129) Mortality and morbidity 104 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (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 (cid:129) 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; (cid:129) to alert management to material, plausible and imminent threats to the insurer’s solvency; (cid:129) and to describe possible courses of action to address these threats. Full DCAT testing has not yet been completed for certain insurers. However, limited sensitivity tests have been completed in accordance with DCAT scenarios for the following insurers: (cid:129) Sagicor Life Inc; (cid:129) Life of Jamaica Limited; (cid:129) Sagicor Life of the Cayman Islands Limited; (cid:129) Sagicor Capital Life Insurance Company Limited; (cid:129) Capital Life Insurance Company Bahamas Limited; (cid:129) Nationwide Insurance Company Limited. These insurers have net actuarial liabilities totalling $1,619,331 or 74% of the Group total. 105 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) The results are as follows. (i) Worsening rate of lapse. The scenario was tested in either of the following ways: (cid:129) For business which produces higher valuation reserves with an increase in lapse rates, the scenario lapse rates were increased. For business which produces higher valuation reserves with a decrease in lapse rates, the scenario lapse rates were reduced. (cid:129) The business was tested by applying a factor of 1.1 and 0.9 to the existing lapse rates. The 0.9 factor produced the higher valuation reserve and was included in the results. 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 – 0.5% per year for 10 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. (vi) Level new business. New business planned for 2007 was maintained for the 5 year period. Overall, this scenario has no effect on the 2006 liabilities. (vii) Double new business. New business planned for the 5 year period was projected to grow at twice the rate of growth anticipated in the base scenario. Overall, this scenario has no effect on the 2006 liabilities. 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. 106 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 16. ACTUARIAL LIABILITIES (continued) The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities totalling $1,619,331 at balance sheet date. Scenario (i) Worsening rate of lapse (ii) High interest rate (iii) Low interest rate (iv) Worsening mortality / morbidity (v) Higher expenses (vi) Level new business (vii) Double new business 2006 (Increase)/decrease in net actuarial liability (58,378) 328,484 (159,171) (53,560) (75,094) - - 17. OTHER INSURANCE LIABILITIES 17.1 Analysis of other insurance liabilities Dividends on deposit and other policy balances Policy benefits in the course of settlement Provision for unearned premiums 17.2 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: 2006 121,750 113,080 70,572 305,402 2005 116,685 109,596 56,967 283,248 Life insurance and annuity benefits Health claims Property and casualty claims Gross liability Reinsurers’ share 2006 70,536 2,019 40,525 113,080 2005 64,826 1,140 43,630 109,596 2006 21,700 2,630 17,673 42,003 2005 20,377 851 22,255 43,483 Health claims include $1,648 (2005 - $315) in provisions for claims incurred but not yet reported. Property and casualty claims include $8,209 (2005 – $8,744) in provisions for claims incurred but not yet reported. 107 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 17. OTHER INSURANCE LIABILITIES (continued) (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, as restated (note 43) Amounts assumed on acquisitions Policy benefits incurred (note 30) Policy benefits paid Effect of exchange rate changes Balance, end of year Gross amount Reinsurers’ share 2006 2005 2006 2005 109,596 - 621,915 (616,677) (1,754) 113,080 150,908 33,022 432,607 (505,028) (1,913) 109,596 43,483 - 112,457 (113,206) (731) 42,003 90,883 10,263 44,456 (101,238) (881) 43,483 (c) Change in methodology and prior year adjustment The method for computing the provision for claims incurred but not reported for property and casualty business was changed in 2006. The change provides a more comprehensive assessment of the provision. It was applied retroactively and resulted in increases in the gross liability of $6,822 as of December 31, 2004 and of $7,049 as of December 31, 2005. The reinsurers’ share of the liability decreased by $2,029 as of December 31, 2004 and by $913 as of December 31, 2005. These restatements are summarised in note 43. 17.3 Provision for unearned premiums (a) Analysis of provision for unearned premiums The provision for unearned premiums arises from: Property and casualty insurance Health insurance Gross liability Reinsurers’ share 2006 2005 2006 2005 68,026 2,546 70,572 53,857 3,110 56,967 35,886 - 35,886 24,662 - 24,662 108 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 17. OTHER INSURANCE LIABILITIES (continued) (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, as restated (note 43) Amounts assumed on acquisitions Premiums written Premium revenue Effect of exchange rate changes Balance, end of year Gross amount Reinsurers’ share 2006 2005 2006 2005 56,967 - 190,533 (176,914) (14) 70,572 35,636 21,131 99,869 (97,931) (1,738) 56,967 24,662 - 107,841 (96,636) 19 35,886 6,950 15,003 38,207 (35,325) (173) 24,662 (c) Change in methodology and prior year adjustment The method for computing the reinsurers’ share of the provision for unearned premiums for property and casualty business was adjusted in 2006 to exclude the effects of calendar year reinsurance treaties. The adjustment was applied retroactively and resulted in decreases of $6,449 as of December 31, 2004 and of $8,627 as of December 31, 2005 in the reinsurers’ share of the provision for unearned premiums. These restatements are summarised in note 43. 18. INVESTMENT CONTRACT LIABILITIES Deposit administration liabilities Other investment contracts 18.1 Deposit administration liabilities The effective interest rate of deposit administration liabilities is as follows: Effective interest rate 2006 2005 352,388 89,321 441,709 340,615 85,546 426,161 2006 7.8% 2005 7.8% Deposit administration liabilities represent pension fund balances on deposit which are long term in nature and which are generally expected to be settled after one year. 109 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 18. INVESTMENT CONTRACT LIABILITIES (continued) 18.2 Other investment contract liabilities The effective interest rate and contractual maturity profile of other investment contract liabilities are as follows: Effective interest rate Contractual maturity profile: Repayable on demand or within one year Repayable between one and five years Repayable after five years 19. SENIOR NOTES AND LOANS PAYABLE 7.5% senior notes due 2016 Bank loans 2006 7.9% 48,698 10,917 29,706 89,321 2005 8.9% 52,828 15,459 17,259 85,546 December 31, 2006 Fair Value Carrying Value December 31, 2005 Fair Value Carrying Value 293,030 28,035 321,065 305,955 28,035 333,990 - 160,728 160,728 - 160,728 160,728 On May 12, 2006, Sagicor Finance Limited issued US$ 150 million senior notes which are guaranteed by the Company and another subsidiary. The notes are repayable 10 years after issue and the rate of interest is fixed for the duration. The notes are traded and are listed on the Luxembourg Euro MTF Market. Bank loans are secured either by portfolios of investment securities or by the holdings in subsidiaries. The effective interest rate and contractual maturity profile of senior notes and loans payable are as follows: Effective interest rate Contractual maturity profile: Repayable within one year Repayable between one and five years Repayable after five years 110 2006 7.4% 19,292 11,788 289,985 321,065 2005 4.9% 132,168 28,560 - 160,728 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 20. DEPOSIT AND SECURITY LIABILITIES Other funding instruments: Loans for mortgage financing Loans for development financing Loans from commercial banks Deposits: Customer deposits Securities: Securities sold under agreements to repurchase Bank overdrafts Total deposit and security liabilities December 31, 2006 Fair Value Carrying Value December 31, 2005 Fair Value Carrying Value 247,585 31,003 11,081 254,547 31,003 11,121 252,704 31,042 12,496 250,792 31,042 12,451 246,315 246,315 227,504 227,504 948,836 5,963 1,490,783 948,836 5,963 1,497,785 907,987 8,712 1,440,445 907,987 8,712 1,438,488 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 $3,558 (2005 – $6,054). (a) Significant concentrations Other funding instruments: Federal Home Loan Bank (FHLB) (b) Effective interest rates Other funding instruments Deposits Securities 2006 2005 241,310 252,704 2006 6.1% 7.1% 9.3% 2005 5.6% 7.3% 10.0% 111 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 20. DEPOSIT AND SECURITY LIABILITIES (continued) (c) Contractual maturity profiles Other funding instruments Deposits Securities Bank overdrafts Other funding instruments Deposits Securities Bank overdrafts 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 112 2006 Repayable between one and five years 35,582 70,100 703 - 106,385 2005 Repayable between one and five years 41,886 47,952 107 - 89,945 Repayable within one year 164,580 156,550 943,689 5,963 1,270,782 Repayable within one year 154,103 163,665 907,880 8,712 1,234,360 Repayable after five years 89,507 19,665 4,444 - 113,616 Repayable after five years 100,253 15,887 - - 116,140 2006 35,925 5,205 41,130 2006 14,868 22,487 37,355 Total 289,669 246,315 948,836 5,963 1,490,783 Total 296,242 227,504 907,987 8,712 1,440,445 2005 34,080 3,366 37,446 2005 10,938 20,020 30,958 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 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 2006 3,299 135,533 7,217 111,282 257,331 2005 2,331 139,046 11,956 120,557 273,890 Amounts due to reinsurers include $107,724 (2005 – $112,382) due to a reinsurer in respect of assets held in trust by the Group (see note 11.1). 24. SHARE CAPITAL 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. Issued and fully paid common shares: Balance, beginning of year Allotments Balance, end of year Treasury shares: Shares acquired by ESOP trustees Year ended December 31, 2006 Year ended December 31, 2005 Number of shares ‘000 Number of shares ‘000 $000 265,553 1,432 266,985 458,451 5,652 464,103 260,030 5,523 265,553 $000 432,495 25,956 458,451 (798) (3,633) - - Total share capital 266,187 460,470 265,553 458,451 The Company’s shares are listed on the Barbados and Trinidad stock exchanges. On February 14, 2007, the Company’s shares were listed on the London stock exchange. 113 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 25. RESERVES Fair value reserves Year ended December 31, 2006 Balance, beginning of year, as restated (note 43) Unrealised gains arising on revaluation, net of taxes Gains transferred to income on disposal and impairment Retranslation of foreign operations Net gains/(losses) recognised directly in equity Value of employee services rendered Net change for the year Available for sale assets Owner occupied property Currency translation reserve 112,013 17,771 (32,878) 9,378 1,290 - (9,799) - - - - (12,744) (421) 1,290 (12,744) Share based payment reserves - - - - - - 39 (382) - - 1,290 - - (12,744) 2,944 - 2,944 - (1,422) (1,422) Statutory reserves Total 9,620 106,526 - - - - 10,668 (9,799) (12,744) (11,875) 2,944 (1,383) (10,314) Balance, end of year 111,631 19,061 (45,622) 2,944 8,198 96,212 Year ended December 31, 2005 Fair value reserves Available for sale assets Owner occupied property Currency translation reserve Statutory reserves Total Balance, beginning of year 172,920 12,971 (25,486) 7,289 167,694 Unrealised gains arising on revaluation, net of taxes (Gains)/losses transferred to income on disposal and impairment Gains transferred to retained earnings on disposal Retranslation of foreign operations Net gains/(losses) recognised directly in equity Net change for the year 4,967 4,896 - (65,874) - 5,732(1) - - (96) - - (13,124) - - - - (60,907) - (60,907) 4,800 - 4,800 (7,392) - (7,392) - 2,331 2,331 9,863 (60,142) (96) (13,124) (63,499) 2,331 (61,168) Balance, end of year 112,013 17,771 (32,878) 9,620 106,526 (1) Restated amount (see notes 38 and 43). 114 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 26. PARTICIPATING ACCOUNTS The movements in the participating accounts during the year were as follows: Balance, beginning of year: As previously stated Prior year adjustments (see below) As restated Net unrealised gains arising on available for sale investment securities Transfer from retained earnings to support the profit distribution to shareholders Return of transfer to support profit distribution to shareholders Return of seed capital to retained earnings Net income/(loss) for the year Balance, end of year Closed participating account Open participating account 2006 2005 2006 2005 13,964 (3,424) 10,540 2 - - - 3,773 14,315 779 (712) 67 235 - - - 10,238 10,540 20,683 (10,303) 10,380 - - (511) - (4,379) 5,490 609 - 609 - 13,994 (498) (5,500) 1,775 10,380 During 2006, management reviewed the mechanisms for valuing policies in the participating funds and for accounting for these funds. In notes 16.3(b)(i) and 16.3(e)(i), valuation changes are described to insurance policies included in the participating funds. These changes have also given rise to a decrease of $2,298 in 2005 of income attributable to the closed participating account and a decrease of $8,865 in 2005 of income attributable to the open participating account. The review also considered the method for allocating investment income derived from the assets backing the ancillary fund components of the two participating funds. In prior years this income was included in the income of the participating funds. Management has now determined that this income should be excluded from the income of the participating funds because it is the responsibility of the general operations of Sagicor Life Inc to support the ancillary funds in the two participating funds. This change is also consistent with the terms of the Demutualization Scheme, the Scheme of Amalgamation of Sagicor Life Inc and Life of Barbados Ltd, and with actuarial practice. Accordingly, the allocation of investment income for the ancillary funds has been restated from the establishment of the first ancillary fund. In 2005, the change gave rise to a decrease of $620 in income attributable to the closed participating account and a decrease of $3,134 in income attributable to the open participating account. Other consequential changes have given rise to increases in 2005 income of $206 and $1,202 attributable to the closed and open participating accounts respectively. Prior year changes to the participating accounts are also summarised in note 43. 115 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 26. PARTICIPATING ACCOUNTS (continued) The amounts in the financial statements relating to participating funds are as follows: Assets Liabilities Revenues Benefits Expenses Income taxes 27. PREMIUM REVENUE Life insurance Annuities Health insurance Property and casualty insurance Closed participating fund Open participating fund 2006 184,817 170,502 21,857 14,569 3,137 378 2005 181,104 170,564 20,589 6,208 3,573 570 2006 424,241 418,751 70,299 55,659 17,337 1,682 2005 403,784 393,404 68,045 44,197 20,615 1,458 Gross revenue 2006 463,205 112,183 227,095 134,923 937,406 2005 392,303 85,302 197,039 74,063 748,707 Reinsurance expense 2005 2006 57,726 75,016 122 730 8,452 11,324 45,389 95,092 111,689 182,162 Gross revenue includes $38,377 (2005 - $24,640) in reinsurance assumed. 28. NET INVESTMENT INCOME Income: 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 Rental income from investment property Net fair value gains on investment property Foreign exchange translation and trading Other investment income 116 2006 2005 284,681 35,843 15,346 26,423 8,056 12,790 271 383,410 12,551 40,530 10,690 18,628 5,739 6,018 477,566 242,360 28,071 14,184 25,431 10,735 8,619 509 329,909 12,432 78,189 11,179 1,710 4,461 1,825 439,705 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 28. NET INVESTMENT INCOME (continued) Income (page 116) Expenses Allowances for impairment losses Direct operating expenses of investment property Other direct investment expenses Net investment income Interest from debt securities includes $2,648 (2005 - $2,881) from an associated company. 29. FEES AND OTHER REVENUE Fee income – assets under administration Fee income – deposit administration and policy funds Commission income on insurance and reinsurance contracts Other fees and commission income Other operating and miscellaneous income 30. POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES 2006 2005 477,566 439,705 365 2,610 3,559 6,534 15,608 2,430 6,252 24,290 471,032 415,415 2006 23,393 5,749 22,680 15,411 19,882 87,115 2005 19,792 5,762 16,687 17,038 17,672 76,951 Policy benefits: Life insurance benefits Annuity benefits Health insurance claims Property & casualty insurance claims Total policy benefits Change in actuarial liabilities (note 16.2) Total policy benefits and change in actuarial liabilities Gross amount Reinsurers’ share 2006 2005 2006 2005 258,844 164,820 165,606 32,645 621,915 (35,135) 586,780 219,788 58,676 134,128 20,015 432,607 66,379 498,986 47,873 45,338 6,705 12,541 112,457 (53,062) 59,395 27,242 2,634 8,782 5,798 44,456 (6,267) 38,189 Gross policy benefits include $42,342 (2005 - $23,085) arising from reinsurance assumed. 31. INTEREST EXPENSE Insurance contracts Investment contracts Other funding instruments Deposits Securities Other Items 2006 5,319 35,002 17,309 16,163 82,793 2,153 158,739 2005 6,107 32,060 5,801 14,598 87,418 1,885 147,869 117 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 2006 111,539 8,540 3,436 688 4,978 1,756 130,937 2005 91,272 7,082 6,773 1,026 4,672 1,403 112,228 The total number of administrative staff at December 31 was 1,764 persons (2005 – 1,627 persons). 32.1 Equity compensation benefits (a) The Company Effective December 31, 2005, the company introduced a Long Term Incentive (LTI) plan for designated executives of the Sagicor Group and an Employee Share Ownership Plan (ESOP) for permanent administrative employees and sales agents of the Group. A total of 26,555,274 common shares of the Company (or 10% of shares then in issue) have been set aside for the purposes of the LTI plan and the ESOP. (i) LTI plan Share options and restricted share grants have been granted to designated key management of the Group during the year. Options are granted at the fair market price of the shares at the time that the option is granted. 25% of the options each vest on the first, second, third and fourth anniversaries of the grant date. Options are exercisable up to 10 years from the grant date. Restricted share grants have been granted to designated key management of the Group during the year. Share grants may vest over a four year period beginning at the grant date. The vesting of share grants is conditional upon the relative profitability of the Group as compared to a number of peer companies. Relative profitability is measured with reference to the financial year preceding the vesting date. 118 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) The movement in share options and restricted share grants during the year is as follows: Balance, beginning of year Granted during the year Vested during the year Balance, end of year Exercisable at the end of the year Share options Restricted share grants Number of options ‘000 - 932 - 932 - Weighted average Number of grants exercise ‘000 price - - 305 B$ 3.95 (91) - 214 B$ 3.95 - - Weighted average fair value - B$ 3.95 B$ 3.95 B$ 3.95 - Further details of share options and the assumptions used in determining their pricing are as follows: Share price at grant date Fair value of options at grant date Expected volatility Expected life Expected dividend yield Risk-free interest rate Share options B$3.95 B$1.38 35.8% 7.0 years 3.0% 6.0% Effective December 31, 2005 and during 2006, the Company authorised further compensation to designated key management which, at the option of the recipient, could be settled either in cash or in shares issued by the Company, or by a combination of cash and shares. During 2006, 1,342,000 common shares were issued to key management out of the compensation awarded. These shares were issued at the market price prevailing at the exercise dates for a total value of $5,294. (ii) ESOP During the year, the Company approved an award under the ESOP in respect of permanent administrative employees and sales agents of the Company and Sagicor Life Inc. The ESOP is administered by Trustees under a discretionary trust. The amount awarded is used by the Trustees to acquire company shares. Administrative employees and sales agents are required to serve a qualifying period of five years from the award date in order to qualify as a beneficiary. Shares are distributed to beneficiaries upon their retirement or termination of employment. During the year, 798,000 common shares have been acquired by the Trustees in order to satisfy current and future awards. 119 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) (iii) Expense The expense recorded in the income statement in respect of the LTI plan and ESOP totalled $2,395. (b) Life of Jamaica Limited (LOJ) Effective May 1, 2003, LOJ instituted a share based plan for executives. 150,000,000 ordinary shares (or 5% of the authorised share capital at that date) have been set aside for the plan. Share options in LOJ shares are granted to key management of LOJ who have completed the minimum eligibility period of one year. Options are granted at a 25% discount of the last sale price on the Jamaica Stock Exchange on the trading day prior to the grant date and are exercisable at that price. Options are exercisable beginning one year from the date of grant and have a contractual term of five years. The movement in share options was as follows: Balance, beginning of year Options granted Balance, end of year Exercisable at the end of the year 2006 Weighted 2005 Number of options ‘000 19,045 4,047 23,092 9,682 average Number of options exercise ‘000 price 14,959 J$ 6.14 4,086 J$ 8.00 19,045 J$ 8.81 3,739 J$ 7.39 Weighted average exercise price J$ 5.13 J$ 9.86 J$ 6.14 J$ 9.86 Further details of share options outstanding at December 31, 2006 are as follows: Fair value of options outstanding Weighted average share price at grant date Exercise price Standard deviation of expected share price returns Weighted average remaining contractual term Risk-free interest rate Share options J$15,463,000 J$ 2.70 J$ 2.30 – 5.67 34.0% 3 years 13.7% The total expense recorded in the income statement in respect of the share option plan totalled $179 (2005 – $292). LOJ has in place a share purchase plan which enables its administrative and sales staff to purchase shares at a discount. The proceeds from shares issued under this plan totalled $3,245 (2005 - $4,754). 120 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) (c) Pan Caribbean Financial Services Limited (PCFS) PCFS offers share options to employees who have completed the minimum eligibility period of employment. Options are conditional on the employee completing a minimum service period of one year. Options are forfeited if the employee leaves PCFS before the options vest. PCFS share options were granted as follows: (i) 450,000 share options on February 7, 2002. These expired on December 31, 2006. The shares in respect of these options have been issued by PCFS and are held in an Employee Share Option Trust. The exercise price for these options is J$4.55. The remaining 290,000 of these options were taken up during the year. (ii) 17,220,000 share options on March 8, 2004. These options expire on December 31, 2007. The exercise price for these options is J$10. The options were vested December 31, 2006. 7,500,000 of these options were vested and exercised in prior years. A further 5,168,000 vested options were exercised in 2006. (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 February 28, 2009. The exercise price for the options is J$36.50. The options vest over four years – 25% on each anniversary date of the grant. 600,000 of these options were forfeited and contracts for 450,000 were cancelled. 150,000 of the share options vested on March 1, 2006. (v) 1,200,000 share options on March 1, 2006. These options expire on February 28, 2010. The exercise price for the options is J$19.29. The options vest over four years – 25% on each anniversary date of the grant. The movement in share options was as follows: Balance, beginning of year Assumed on acquisition Options granted Options exercised Options lapsed/forfeited Balance, end of year Exercisable at the end of the year 2006 Weighted 2005 Number of options ‘000 11,210 - 1,200 (5,458) (1,050) 5,902 4,702 average Number of options exercise ‘000 price - J$ 12.70 11,887 - 1,200 J$ 19.29 (1,817) J$ 9.71 (60) J$ 36.50 11,210 J$ 12.56 7,510 J$ 10.85 Weighted average exercise price - J$ 9.80 J$ 36.50 J$ 10.00 J$ 4.55 J$ 12.70 J$ 10.20 The weighted average share price at the date of exercise for options exercised during the year was J$18.95. 121 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) Further details of share options outstanding at December 31, 2006 are as follows: Fair value of options outstanding Weighted average share price at grant date Exercise price Standard deviation of expected share price returns Weighted average remaining contractual term Risk-free interest rate Share options J$ 32,400,000 J$ 13.18 J$ 10.00 - 36.50 30.0% 2 years 13.7% The total expense recorded in the income statement in respect of the share option plan totalled $ 364 (2005 – $ 656). 32.2 Employee retirement benefits Certain Group subsidiaries have contributory defined benefit pension schemes in place for eligible administrative staff. Some subsidiaries also offer medical and life insurance benefits that contribute to the health care and life insurance coverage of retirees and beneficiaries. The amounts recognised in the balance sheet are determined as follows: Fair value of retirement plan assets Present value of retirement obligations Unrecognised actuarial (gains)/losses Amounts recognised in the balance sheet Represented by: Asset balances Liability balances Other retirement benefits Pension benefits 2006 130,680 (163,592) (32,912) 6,606 (26,306) 2005 116,780 (138,051) (21,271) (4,326) (25,597) 2006 1,939 (14,421) (12,482) 4,871 (7,611) 2,008 (28,314) (26,306) 2,195 (27,792) (25,597) - (7,611) (7,611) 2005 - (9,117) (9,117) 2,829 (6,288) - (6,288) (6,288) Included in liability balances are interest bearing deposit administration fund balances totalling $33,690 (2005 - $31,422) representing employee pension plan funds on deposit with the Group. 122 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 32. EMPLOYEE BENEFITS (continued) The amounts recognised in the income statement are determined as follows: Current service cost Interest cost Net actuarial (gains)/losses recognised during the year Past service cost Expected return on retirement plan assets Total cost Pension benefits 2006 2005 5,608 12,697 2,096 348 (15,771) 4,978 5,322 10,519 123 696 (11,988) 4,672 Other retirement benefits 2006 872 1,109 (6) - (219) 1,756 2005 734 670 (1) - - 1,403 The actual return on retirement plan assets was $14,488 (2005 – $10,573). The movement in the amounts recognised in the balance sheet is as follows: Pension benefits Other retirement benefits 2006 2005 2006 2005 Amounts recognised, beginning of year Amounts recognised on subsidiaries acquired Total cost Contributions made Effects of exchange rate changes Amounts recognised, end of year (25,597) - (4,978) 4,210 59 (26,306) (24,531) 452 (4,672) 3,043 111 (25,597) (6,288) - (1,756) 160 273 (7,611) (5,149) (110) (1,403) 154 220 (6,288) The principal actuarial assumptions used were as follows: Pension benefits 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 Long term increase in health costs Jamaica Trinidad & Tobago 12.0% 14.0% 9.5% 3.5% 0.0% 0.0% n/a 8.0% 8.0% 6.5% 1.5% 0.0% 2.5% n/a Other retirement benefits Jamaica 12.0% 14.0% 9.5% n/a Barbados & other countries 6.0% - 8.0% 6.0% - 8.0% 2.3% - 6.5% 2.0% - 2.5% 0.0% n/a 2.5% - 3.5% n/a n/a 11.0% 123 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 33. INCOME TAXES 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 2006 27,566 236 16 27,818 2006 124,852 29,428 154,280 2005 17,514 6,516 16 24,046 2005 66,083 13,034 79,117 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 relating to the origination of temporary differences Deferred tax (income) expense relating to changes in tax rates and the imposition of new taxes Deferred tax income that arises from the reversal of a write down of a deferred tax asset Tax on distribution of profits from policyholder funds Other taxes 2006 154,280 28,797 (8,597) 10 1,963 (203) 1,325 2005 79,117 13,091 (3,813) (1,353) (131) 10,549 (315) (97) 695 (1,958) 3,002 3,576 27,818 552 3,526 1,245 24,046 124 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 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 Unrealised gains on available for sale investments Other items Total (Note 22) 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 2006 2005 1,411 7,436 (396) 8,451 1,332 7,693 (799) 8,226 2006 2005 3,344 372 134 1,373 6,999 2,646 14,868 2006 7,537 11,836 2,192 372 75 397 5,884 2,018 10,938 2005 8,606 7,516 The Group has not recognised potential deferred income tax assets of $44,847 (2005 – $36,950) arising from unrecognised tax losses of $148,389 (2005 - $118,207). 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. Due to a recently announced change in income tax rules to eliminate tax on overseas dividends, no tax liability is expected to arise in the future. 125 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 35. EARNINGS AND DIVIDENDS PER COMMON SHARE 35.1 Earnings per common share The basic earnings per common share is computed by dividing the net income for the year attributable to shareholders by the weighted average number of common shares in issue during the year, excluding treasury shares. The computation of diluted earnings per common share recognises the dilutive impact of LTI share grants and share options and of ESOP shares grants. 2006 2005 Restated 2005 Previously stated Net income for the year attributable to shareholders 135,325 121,455 136,562 Weighted average number of shares in issue in thousands LTI restricted share grants ESOP shares Adjusted weighted average number of shares in issue 266,514 70 6 266,590 263,937 - - 263,937 263,937 - - 263,937 Basic earnings per common share 50.8 cents 46.0 cents 51.7 cents Fully diluted earnings per common share 50.8 cents 46.0 cents 51.7 cents 35.2 Dividends per common share In respect of the financial year 2005, the Company declared dividends totalling 12 cents per common share. The interim dividend was 6 cents which was declared and paid in 2005. The final dividend was 6 cents which was declared and paid in 2006. In respect of the financial year 2006, the Company declared dividends totalling 13 cents per common share. The interim dividend was 6 cents which was declared and paid in 2006. The final dividend was 7 cents which was declared on April 4, 2007. 126 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 36. CASH FLOWS The components of certain items in the cash flow statement are as follows: OPERATING ACTIVITIES 2006 2005 Adjustments for non-cash items, interest and dividends Interest and dividend income Net gains on financial investments and investment property Gain on business combinations and acquisitions Net increase in actuarial liabilities Interest expense Depreciation and amortisation 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 Other assets and receivables (395,961) (59,158) - 17,927 177,578 34,700 13,713 (211,201) 2006 5,999 (86,200) 56,168 (72,375) (1,172) (16,908) 22,171 (30,210) 1,485 (121,042) (342,341) (79,899) (25,115) 72,646 153,140 25,636 18,691 (177,242) 2005 (2,688) (144,400) 78,181 (38,153) (303) (53,623) 272,529 42,623 60,218 214,384 127 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 36. CASH FLOWS (continued) The gross changes in investment property, debt securities and equity securities are as follows. Investment property 2005 2006 Debt securities 2006 2005 Equity securities 2006 2005 Disbursements Disposal proceeds (3,043) 9,042 5,999 (8,873) (1,538,210) 1,452,010 6,185 (86,200) (2,688) (675,475) 531,075 (144,400) (58,953) 115,121 56,168 (171,860) 250,041 78,181 Changes in operating liabilities Insurance liabilities Investment contract liabilities Other funding instruments Customer deposits Securities sold under agreements to repurchase Other liabilities and payables INVESTING ACTIVITIES Property, plant and equipment Purchases Disposal proceeds FINANCING ACTIVITIES Senior notes and 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 128 2006 10,897 19,866 (4,798) 25,397 77,158 (3,383) 125,137 2005 (14,578) 18,438 (4,977) 48,674 6,740 (87,507) (33,210) 2006 2005 (26,605) 3,915 (22,690) (23,865) 5,570 (18,295) 2006 2005 319,969 (161,670) 158,299 162,905 (18,911) 143,994 2006 2005 163,078 357,597 (5,963) 514,712 117,105 165,949 (8,712) 274,342 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 37. ASSETS AND LIABILITIES BY CURRENCY 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 Other insurance liabilities Investment contract liabilities Other liabilities Senior notes and loans payable Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total liabilities Barbados $ Balances denominated in Trinidad $ Jamaica $ US $ Other currencies 2006 Total 101,078 82,753 249 48,593 679,801 12,474 5,275 39,454 17,118 81 133,413 1,094,055 2,115 22,066 40,548 24,937 28,128 9,829 479,699 14,130 576 - 9,424 - 3,450 2,407,730 570,428 4,636 76 26,823 25,213 30,131 388,359 44,231 4,112 181,156 161,055 53,671 225,416 5,049,644 643,378 36,665 55,386 29,104 1,014,713 52,641 23,453 1,384,396 12,918 18,204 628,969 63,674 47,866 3,107,208 15,583 56,740 591,268 200,202 175,367 6,726,554 686,837 121,845 110,159 918,841 - 99,431 12,892 7,180 273,032 64,338 104,720 442,090 - 532,426 11,248 20,772 369,292 29,701 131,599 530,592 1,198,142 41,201 43,452 1,282,795 219,865 48,317 51,779 319,961 2,747,168 305,402 441,709 3,494,279 88 - 7,393 7,327 320,977 829,260 609 (12) - 29,666 8,988 2,088 321,065 1,490,783 41,130 37,355 28,888 1,067,232 45,248 1,051,784 15,158 560,558 131,281 2,564,910 36,756 397,459 257,331 5,641,943 Net position (52,519) 332,612 68,411 542,298 193,809 1,084,611 129 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 37. ASSETS AND LIABILITIES BY CURRENCY (continued) 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 Other insurance liabilities Investment contract liabilities Other liabilities Senior notes and loans payable Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total liabilities Barbados $ 98,699 78,663 253 48,507 700,281 6,501 5,907 37,169 29,920 1,005,900 Balances denominated in Trinidad $ Jamaica $ US $ Other currencies 2005 Total 33,678 18,782 85 156,009 1,003,742 4,247 22,083 64,534 12,389 1,315,549 38,641 20,790 24,775 9,847 484,632 10,004 300 14,363 6,120 609,472 7,191 5,369 - 3,447 2,164,149 623,564 5,690 45,800 44,666 2,899,876 3,377 24,644 24,716 22,377 380,043 42,332 1,731 41,022 25,768 566,010 181,586 148,248 49,829 240,187 4,732,847 686,648 35,711 202,888 118,863 6,396,807 671,532 105,132 106,349 883,013 - 85,571 12,851 3,098 263,537 19,102 127,471 410,110 - 513,912 8,938 18,080 355,924 28,801 121,318 506,043 1,304,632 58,912 22,392 1,385,936 195,572 71,301 48,631 315,504 2,791,197 283,248 426,161 3,500,606 - 861 5,851 4,579 160,728 817,406 1,226 2,516 - 22,695 8,580 2,685 160,728 1,440,445 37,446 30,958 25,549 1,010,082 52,076 1,003,116 7,916 525,250 191,898 2,559,710 (3,549) 345,915 273,890 5,444,073 Net position (4,182) 312,433 84,222 340,166 220,095 952,734 130 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS During 2005, the Group acquired control of: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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) and now renamed Sagicor General (Cayman) Limited. 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 $12,938. The gain reflects differences in the values of shares issued to the minority interest shareholders and in their share of the net assets after the transaction. The goodwill and currency translation attributable to the 18% interest have also been charged against the gain and are reflected in these financial statements as a prior year adjustment of $13,831 to revenue, $8,099 to goodwill and $5,732 to currency translation (see notes 10, 25 and 43). The Group also acquired an interest in an associated company, FamGuard Corporation Limited (Family Guardian). In 2005, the Group accounted for the above acquisitions provisionally. Adjustments have now been incorporated in these financial statements, resulting in a decrease of $2,219 in the carrying amounts of goodwill and other intangible assets (see note 10). Finalised details of the above acquisitions are set out below. 131 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 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. The fair values of the net assets acquired, the purchase consideration and the goodwill arising on the January 7 acquisition are set out below. Acquiree’s Total fair value carrying value January 2005 January 2005 2,920 25,227 1,237,064 5,069 17,086 24,898 (1,091,279) (16,838) (21,425) 182,722 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 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 132 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 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 90,976 643 14,537 939 62,856 78,975 12,001 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 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) 26,130 133 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 Acquiree’s (restated) carrying value 167 - 63,065 338 9,297 4,713 (24,662) (25,458) (10,129) (1,767) (234) (3,898) 11,432 167 33,908 63,065 338 9,297 4,713 (24,662) (25,458) (10,129) (1,767) (234) (4,082) 45,156 11,419 739 49,383 61,541 16,385 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. 134 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) (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 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: 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 (note 10) Total fair value Acquiree’s (restated) carrying value 11,813 40 47 1,355 508 (9,045) (4,101) (617) - 11,813 40 47 1,355 508 (9,045) (4,101) (617) - 3,856 3,856 In Jamaica, it is common for shares of listed financial services entities to trade above their related book values. The individual life insurance business was acquired from a listed Jamaica company. The goodwill recognised in this transaction is therefore a reflection of market conditions and the further synergies which the acquisition brings to the Group. (b) Details of acquiree’s net income 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. 135 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 (now renamed Sagicor 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) Total fair value Acquiree’s (restated) 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 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 acquiree’s 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. 136 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.5 Cayman General (a) Details of acquisition On November 30, 2005, 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 Total fair value Acquiree’s (restated) carrying value 2,250 372 103 33,489 16,254 23,291 (28,266) (24,830) 22,663 2,250 9,776 103 33,489 16,254 23,291 (28,266) (24,828) 32,069 16,355 20,043 3,688 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 was not coterminous with the Group and the information is not readily available. 137 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 38. ACQUISITIONS (continued) 38.6 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 arising on acquisition 2005 (restated) 20,916 24,838 3,922 The market value, as determined by the listed price of Family Guardian’s shares, of the Group’s shareholding amounted to $24,200 as of December 31, 2005. At acquisition date, a strategic alliance with Family Guardian was formalised through which the Group anticipates benefits from future operational synergies. (b) Details of net income and fair value The Group has not recognised any net income or loss between the acquisition date and December 31, 2005. 39. COMMITMENTS Effective December 1, 2006, Sagicor Capital Life Insurance Company Limited entered into a transfer and assumption agreement to acquire an insurance portfolio in the Netherlands Antilles and Aruba. The agreement is subject to regulatory approvals. The liabilities to be assumed are estimated at $78,225 and the effective purchase price is estimated at $5,336. In the normal course of business, the Group has entered into commitments at balance sheet date for which no provision has been made in these financial statements. Such commitments include the following: Loan advances Expenditure on real estate Operating lease agreements and rental payments Customer guarantees and letters of credit 2006 94,745 5,980 11,778 9,182 2005 44,824 19,229 8,543 6,751 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. 138 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 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 in Jamaica. The design of a Universal Life policy is such that on realistic assumptions, the fund value built-up from premiums paid and from investment earnings is required in later years to pay the administrative costs and mortality charges. A review of the Universal Life policies portfolio in Jamaica revealed that approximately 17,000 policies were affected by fund values which were insufficient to cover these costs through the life of the policies. Once the problem was recognised, the company initiated discussion with the Regulators, the Financial Services Commission (FSC), as a result of which the affected policyholders were given the opportunity to reduce their existing coverage under the policies or to increase the premiums at their expense. More than 90% of these policyholders have already agreed to adjustments to their policies. The Group estimates that less than 1% of the affected policyholders have filed complaints with the FSC, which carried out investigations and made a submission to the company. The FSC suggested a number of alternatives to remedy the problem. The Group is in discussions with the FSC on the matter. The cost, if any, of resolving this issue cannot be quantified at this time. 139 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 41. ASSETS UNDER ADMINISTRATION In the ordinary course of business, the Group manages assets of pension funds, mutual funds, unit trusts and other assets which are not included in the group’s balance sheets. The invested and cash assets under administration by geographical segment are as follows: Barbados Jamaica Trinidad & Tobago Other Caribbean 42. RELATED PARTY TRANSACTIONS (a) Key management 2006 2005 724,245 1,471,107 20,104 75,023 2,290,479 733,565 1,333,611 17,600 69,878 2,154,654 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 Effects of exchange rate changes Balance, end of year 2006 24,344 2,724 1,110 28,178 Other loans 791 117 (445) (14) 449 2005 17,196 6,773 401 24,370 Total loans 6,499 2,309 (995) (14) 7,799 Mortgage loans 5,708 2,192 (550) - 7,350 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 4% to 8%. Other loans bear interest at rates from 5% to 11%. (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, 2006 amounted to $132,997 (2005 - $116,806) and are included in the assets under administration referred to in note 41. 140 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 42. RELATED PARTY TRANSACTIONS (continued) (c) First Jamaica Investment Limited (First Jamaica) In 2005, 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 which are set out in note 38, First Jamaica holds a 25% interest in LOJ and is a significant minority interest. Because of the size of this shareholding, First Jamaica is considered to be a related party. As of December 31, the Group has the following balances with First Jamaica: Financial investments Accounts receivable Accounts payable 2006 8,890 3,000 6,362 2005 4,970 7,856 6,138 141 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 43. RESTATEMENT AND RECLASSIFICATION Adjustments to intangible assets, policy liabilities, participating accounts and gains arising on business combinations, have been applied retroactively as indicated in notes 10, 16.3, 17.2, 17.3, 26 and 38 respectively. Reclassification has also been made to some prior year numbers to conform to the current year reporting. The effect of these changes to the 2005 balance sheet, 2005 income statement and 2004 balance sheet is summarised in the following tables. December 31, 2005 Effect of changes to Previously stated Business combinations Policy liabilities Restatement & reclassification Ancillary fund interest Other 250,505 696,188 5,470,500 6,417,193 2,777,231 276,199 2,370,156 5,423,586 458,451 100,794 188,304 747,549 34,647 211,411 993,607 (10,318) - - (10,318) - - - - - 5,732 (13,969) (8,237) - (2,081) (10,318) - (9,540) - (9,540) 13,966 7,049 - 21,015 - - (12,978) (12,978) (9,755) (7,822) (30,555) - - - - - - - - - - 4,466 4,466 (4,466) - - - - (528) (528) - - (528) (528) - - (494) (494) 494 - - Total 240,187 686,648 5,469,972 6,396,807 2,791,197 283,248 2,369,628 5,444,073 458,451 106,526 165,329 730,306 20,920 201,508 952,734 Balance sheet Intangible assets Reinsurance assets Other items Total assets Actuarial liabilities Other insurance liabilities Other items Total liabilities Share capital Reserves Retained earnings Total shareholders’ equity Participating accounts Minority interest Total equity 142 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 43. RESTATEMENT AND RECLASSIFICATION (continued) December 31, 2005 Effect of changes to Previously stated Business combinations Policy liabilities Restatement of ancillary fund interest Total Income statement Gains arising on business combinations and acquisitions Other items Total revenue 38,946 1,135,035 1,173,981 (13,831) - (13,831) Net policy benefits and change in actuarial liabilities Other items Total benefits and expenses 447,720 502,606 950,326 - 138 138 - (2,178) (2,178) 13,077 - 13,077 223,655 (24,046) 199,609 (13,969) - (13,969) (15,255) - (15,255) Income from ordinary activities Income taxes Net income for the year Net income attributable to: Shareholders Participating policyholders Minority interest - - - - - - - - - 25,115 1,132,857 1,157,972 460,797 502,744 963,541 194,431 (24,046) 170,385 136,562 25,522 37,525 199,609 (13,969) - - (13,969) (4,892) (9,755) (608) (15,255) 3,754 (3,754) - - 121,455 12,013 36,917 170,385 143 Sagicor Financial Corporation NOTES TO THE FINANCIAL STATEMENTS Year ended December 31, 2006 Amounts expressed in Barbados $000 43. RESTATEMENT AND RECLASSIFICATION (continued) Balance sheet Reinsurance assets Other items Total assets Other insurance liabilities Other items Total liabilities Share capital & reserves Retained earnings Total shareholders’ equity Participating accounts Minority interest Total equity Previously stated 109,200 3,028,687 3,137,887 272,240 2,105,859 2,378,099 600,189 93,079 693,268 1,388 65,132 759,788 December 31, 2004 Effect of changes to policyliabilities Restatement of ancillary fund interest (8,478) - (8,478) 6,822 - 6,822 - (8,086) (8,086) - (7,214) (15,300) - - - - - - - 712 712 (712) - - Total 100,722 3,028,687 3,129,409 279,062 2,105,859 2,384,921 600,189 85,705 685,894 676 57,918 744,488 144 Sagicor Financial Corporation Executive Management Mr Dodridge D Miller, FCCA, MBA, LLM Mr Dodridge Miller was appointed President and Chief Executive Officer of The Mutual Group of Companies, now Sagicor, on July 1, 2002, having previously held the positions of Treasurer and Vice President, Finance and Investments, Deputy Chief Executive Officer and Chief Operating Officer. Mr Miller joined the Group in 1989. He was elected a Director of The Mutual Group in 2001. He is the Chairman of the Group’s main operating subsidiaries, Sagicor Life Inc, Life of Jamaica Limited and Sagicor Life Insurance Company. Mr Miller is a Fellow of the Association of Chartered Certified Accountants (United Kingdom), and obtained his MBA from the University of Wales and Manchester Business School, United Kingdom. He holds an LLM in Corporate and Commercial Law from the University of the West Indies. He has more than 20 years’ experience in the insurance and financial services industries. 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 Chairman of Red Stripe and the National Water Commission. Mrs Patricia Downes-Grant President and Chief Executive Officer Sagicor Life Inc Dr. Patricia Downes-Grant was appointed President and Chief Executive Officer on January 1, 2006, having served as Group Chief Operating Officer, since July 1, 2002. 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 Chief Executive Officer. She holds an MBA in Finance, an MA in Economics, and a Doctorate in Business Administration (Finance). in joining Sagicor, Dr. Downes-Grant was a Prior to Senior Manager the Management, Consulting and Insolvency Division of Coopers & Lybrand (now PricewaterhouseCoopers). Dr. Downes-Grant has also had significant work experience in development banking. She is a former Chairman of the Barbados Stock Exchange and Barbados Central Securities Depository and a Director of several companies within Sagicor and the private sector of Barbados. 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. 145 Sagicor Financial Corporation Executive Management Mr J. Andrew Gallagher, FSA, FCIA Chief Risk Officer Ms. Maxine MacLure, BSc, MEd, MBA President and CEO, Sagicor USA Inc. 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. Ms. Maxine MacLure was appointed President and CEO of Sagicor USA in 2004. In September 2005, she successfully completed the Group’s acquisition of its first US life insurance subsidiary, American Founders Life (AFLIC) and oversaw its integration into the Sagicor Group. 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 the Sagicor Group, Ms. MacLure was General Manager of Insurance for the Jamaican Government, and 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. She also spent seven years as a Senior Government Financial Sector Regulator in Canada. Ms. MacLure has am Masters degree in Education from Western Washington University in the United States, 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. Mr Philip N. W. Osborne BSc, FCA Chief Financial Officer Mr Osborne has held senior finance positions in life insurance for over 17 years, having joined Life of Barbados Limited (then a Barbados based life insurer) in 1989. Subsequently in 1996, he was appointed a Director of Life of Barbados and remained so through its acquisition by and its eventual amalgamation with Sagicor Life Inc. Mr Osborne was appointed Chief Financial Office for the Group in 2003. He is currently a director of three subsidiaries in the Sagicor Group and of Almond Resorts Inc., a publicly listed company in Barbados. Mr Osborne is a U.K. trained chartered accountant and has worked in professional accounting firms in London and Barbados over a ten year period. He also holds a BSc in Mathematics with Computer Science from the University of London. 146 Sagicor Financial Corporation Ms. Sandra Osborne, S.C.M., BSc, LLB, FCIS Executive Vice President, General Counsel and Secretary Mrs Melba Smith, BA Vice President, Corporate Communications Mrs Melba Smith is a Communications professional with over 25 years’ experience in business communication, public relations and management. Prior to joining Sagicor in 2002 as Vice President, Corporate Communications, 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, and is a member of the International Association of Business Communicators. Ms. Sandra Osborne is an Attorney-at-Law and Chartered Secretary who joined Sagicor in 1989. She has almost 30 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. Ms. Osborne holds a BSc (Hons) in Political Science and an LLB (Hons) from the University of the West Indies 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. 147 Sagicor Financial Corporation Advisors and Bankers Appointed Actuary Sylvain Goulet, FCIA, FSA, MAAA, Affiliate Member of the (British) Institute of Actuaries Auditors PricewaterhouseCoopers, Chartered Accountants Legal Advisors Allen & Overy LLP, New York, USA Allen & Overy LLP, London, United Kingdom Carrington & Sealy, Barbados Patterson K H Cheltenham, QC, LLM, Barbados Barry L V Gale, QC, LB (Hons), Barbados Hobsons, Trinidad and Tobago Shutts & Bowen LLP, Florida, USA Bankers Butterfield Bank (Barbados) Limited FirstCaribbean International Bank Limited RBTT Bank Limited The Bank of Nova Scotia 148 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 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 Montserrat Administered by Antigua Branch St Vincent Incorporated Agencies Limited Kenmars Building, Halifax Street Kingstown Tel: (784) 456-1159 Fax: (784) 456-2232 149 Sagicor Financial Corporation Offices Curaçao Schottegatweg Oost #11 Tel: (599) 9 736-8558 Fax: (599) 9 736-8575 Email: capital.life@curinfo.an SAGICOR 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 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 SAGICOR 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 150 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 GLOBE FINANCE INC 6 Rendezvous Court, Rendezvous Main Road Christ Church, Barbados Tel: (246) 426-4755 Fax: (246) 426-4772 Website: www.globefinanceinc.com 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 SAGICOR GENERAL INSURANCE (CAYMAN) 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 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 THE MUTUAL FINANCE INC Sagicor Financial Centre Choc Estate, Castries, St Lucia Tel: (758) 452-4272 Fax: (758) 452-4279 SAGICOR FUNDS INCORPORATED Sagicor Corporate Centre, Wildey St Michael, Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com SAGICOR ASSET MANAGEMENT INC Sagicor Corporate Centre Wildey, St Michael, Barbados Tel: (246) 467-7500 Fax: (246) 426-1153 Email: info@sagicor.com Other Subsidiaries/Associated Companies SAGICOR INTERNATIONAL MANAGEMENT SERVICES, INC 1511 North West Shore Blvd, Suite 820 Tampa, Florida 33607-4543, USA Tel: (813) 287-1602 Fax: (813) 287-7420 Website: www.globalsure.com 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 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 151 Sagicor Financial Corporation NOTICE OF ANNUAL MEETING NOTICE is hereby given that the Fourth Annual Meeting of Shareholders of Sagicor Financial Corporation (“the Company”) will be held at Hilton Barbados, Needham’s Point, St Michael, Barbados, Tuesday June 26, 2007 at 5.30 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, 2006 and the Auditors’ Report thereon. 2. To elect Directors. 3. To re-appoint the incumbent Auditors for the ensuing year and to authorize Directors to fix their remuneration. 4. To consider and if thought advisable adopt the following resolution: WHEREAS it is considered expedient and in the best interests of the Company to amend Bylaw No. 1 of the Company (“the Bylaws”): BE IT RESOLVED that the following amendments to the Bylaws made by the Directors on March 16, 2007 be and are hereby confirmed without amendment: (a) the repeal of Bylaw 3.6 and the consequential renumbering of Bylaws 3.7 to 3.17 as Bylaws 3.6 to 3.16; (b) the insertion in place of Bylaw 9 of a new Bylaw 9 as set out in Schedule 1 to this Notice which is incorporated by reference herein; (c) the repeal of Bylaw 12.3 and the consequential renumbering of Bylaws 12.4 to 12.8 as Bylaws 12.3 to 12.7. 5. To consider and if thought advisable adopt the following resolution: BE IT RESOLVED that Directors’ remuneration be and is hereby fixed at the following amounts with effect from January 1, 2007: (a) US $45,000 per annum for the Non-Executive Chairman of the Board (b) US $40,000 per annum for a Non-Executive Director (c) US $7,000 per annum for the Non-Executive Chairman of a Board Committee (d) US $5,000 per annum for a Non-Executive Director serving on a Board Committee. 6. To transact such other business as may properly come before the Meeting. By Order of the Board of Directors Sandra Osborne Corporate Secretary June 1, 2007 152 PROXIES: Sagicor Financial Corporation Shareholders who are unable to attend the Meeting in person may complete and return the enclosed form of proxy to either: (cid:129) the Corporate Secretary, Sagicor Financial Corporation, Sagicor Corporate Centre, Wildey, St Michael, Barbados, or the Corporate Secretary, Sagicor Financial Corporation, c/o Sagicor Life Inc, Sagicor Financial Centre, 16 Queen’s Park West, Port of Spain, Trinidad, or the Branch Registrar, Computershare Investor Services (Channel Islands) Limited, Ordinance House, 31 Pier Road, St Helier, Jersey, Channel Islands, (cid:129) (cid:129) at least 48 hours before the appointed time of the Meeting or adjourned Meeting. DOCUMENTS INCLUDED IN SCHEDULES TO NOTICE OF MEETING: 1 The new Bylaw 9 is set out in Schedule 1 to the Notice of the Meeting. 2 Repealed Bylaws 3.6, 9 and 12.3 are set out in Schedule 2 to the Notice of the Meeting. 3 The complete Bylaws as amended on March 16, 2007 are set out in Schedule 3 to the Notice of the Meeting. DOCUMENTS AVAILABLE FOR INSPECTION: 1 Copies of the original Bylaws enacted December 6, 2002 and the Bylaws as amended on March 16, 2007 are available for inspection on the Company’s website www.sagicor.com and at the following offices: (cid:129) (cid:129) Sagicor Financial Corporation, Sagicor Corporate Centre, Wildey, St Michael, Barbados Sagicor Life Inc’s Branch Offices/Agencies: o Sagicor Financial Centre, 16 Queen’s Park West, Port of Spain, Trinidad o Malliouhana Insurance Co Ltd, Caribbean Commercial Centre, The Valley, Anguilla o Sagicor Financial Centre, 9 Factory Road, St John’s, Antigua o Willcher Services Inc, 44 Hillborough Street, Corner Hillsborough & Independent Street, Roseau, Dominica o The Mutual/Trans-Nemwil Office Complex, The Villa, St George’s, Grenada o Corner Cayon and West independence Square Streets, Basseterre, St Kitts o Sagicor Financial Centre, Choc Estate, Castries, St Lucia o Life of Jamaica Limited, 28-48 Barbados Avenue, Kingston 5, Jamaica Barbados Central Securities Depositary Inc, First Floor, Hincks Street, Bridgetown, Barbados (cid:129) (cid:129) (cid:129) Computershare Investor Services (Channel Islands) Limited, Ordinance House, 31 Pier Road, St Helier, Jersey, Incorporated Agencies Limited, Kenmars Building, Halifax Street, Kingstown, St Vincent Channel Islands 2 There are no service contracts granted by the Company, or its subsidiaries, to any Director of the Company. 153 Sagicor Financial Corporation SCHEDULE 1 TO NOTICE OF MEETING (New Bylaw 9) 9 – Securities 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 Allotment – Subject to the Act, the articles and any unanimous shareholder agreement, the directors may from time to time allot, issue and grant options to purchase any part of the authorized and unissued shares of the Company at such times and to such persons or class of persons and for such consideration and on such terms and conditions as the directors shall determine provided that no share shall be issued until it is fully paid as prescribed by the Act. Commissions – The directors may from time to time authorise the Company to pay a commission to any person in consideration of his purchasing or agreeing to purchase shares of the Company, whether from the Company or from any other person, or procuring or agreeing to procure purchasers for any such shares. Registers – Securities registers issued by the Company shall be kept at the registered office of the Company or such other place within or outside Barbados as may from time to time be designated by the directors. Registration and Deposit of Securities – Without prejudice to the Company’s discretion to keep its securities registers in such format as it deems fit, the Company may register or deposit securities issued by it with the BCSDI under the provisions of the Securities Act. The Company may also register or deposit its securities in such other depositaries as it deems fit and may issue and transfer all or any part of such securities referred to in this Bylaw by book entries. Security Certificates – Any issue or transfer of securities may be automatically credited to accounts maintained for security holders in the register of security holders of the Company and the form of security certificate shall be in the form of a security holding statement, depositary receipt or such other document showing details of a holder’s interest in the capital of the Company as may be approved by the directors. Effect of Later Security Holding Statement – The issue of a security holding statement bearing a later date cancels and replaces any security holding statement in favour of the same person bearing an earlier date. Joint Security Holders – If two or more persons are registered as joint holders of any securities the Company shall not be bound to issue more than one certificate in respect thereof and delivery of such certificate to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the certificate issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such securities. Deceased Security Holders – In the event of death of a holder or of one of the joint holders of any securities the Company shall not be required to make any entry in the securities register in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Company and its transfer agents. Transfers of Securities – Subject to the provisions of the Act and the articles, the directors may from time to time prescribe the form of transfer constituting a valid instrument of transfer of the securities in the capital of the Company and may authorise the same for registration as a valid transfer of the number of securities specified therein. 9.10 Transfer Agents and Registrars – The directors may from time to time appoint a registrar to maintain the securities register and a transfer agent to maintain the register of transfers and may also appoint one or more branch registrars to maintain branch securities registers and one or more branch transfer agents to maintain branch registers of transfers but one person may be appointed both registrar and transfer agent. The directors may at any time terminate any such appointment. 154 9.11 Disclosure of Interests Sagicor Financial Corporation 9.11.1 The Company may by notice in writing require any security holder within such reasonable time as is specified in the notice to indicate in writing the capacity in which he holds any shares in the capital of the Company, and if he holds them otherwise than as a beneficial owner, to indicate in writing so far as it lies within his knowledge, the person who has an interest in them (either by name and address or by other particulars sufficient to enable that person to be identified) and the nature of that person’s interest. 9.11.2 Where the Company is informed in pursuance of a notice given to any person under by-law 9.11.1, that any other person has an interest in any shares in the capital of the Company, the Company may by notice in writing require that other person within such reasonable time as specified in the notice to indicate in writing the capacity in which he holds that interest, and if he holds it otherwise than as a beneficial owner, to indicate in writing so far as it lies within his knowledge, the person who has an interest in it (either by name and address or by other particulars sufficient to enable him to be identified) and the nature of that person’s interest. 9.11.3 The Company may by notice in writing require any member of the Company to indicate in writing, within such reasonable time as is specified in the notice, whether any of the voting rights carried by any shares comprised in the capital of the Company held by him are the subject of an agreement or arrangement under which another person is entitled to control his exercise of those rights and, if so, to give, so far as it lies within his knowledge, written particulars of the agreement or arrangement and the parties to it. 9.11.4 Where the Company is informed, in pursuance of a notice given to any person under by-law 9.11.3 or this by-law, that any other person is a party to such agreement or arrangement as is mentioned in by-law 9.11.3, the Company may by notice in writing require that other person within such reasonable time as is specified in the notice to give, so far as it lies within his knowledge, written particulars of the agreement or arrangement and the parties to it. SCHEDULE 2 TO NOTICE OF MEETING (Repealed Bylaw 3.6) 3.6 Nationality and Residence – A majority of the directors must at all times be citizens or permanent residents of and ordinarily resident in Barbados. At least one director must be a citizen of and ordinarily resident in Jamaica; at least one director must be a citizen of and ordinarily resident in Trinidad and Tobago and at least one director must be a citizen of and ordinarily resident in any country in the Eastern Caribbean. (Repealed Bylaw 9) 9 – Shares 9.1 9.2 9.3 9.4 Allotment – Subject to the Act, the articles and any unanimous shareholder agreement, the directors may from time to time allot, issue and grant options to purchase any part of the authorized and unissued shares of the Company at such times and to such persons or class of persons and for such consideration and on such terms and conditions as the directors shall determine provided that no share shall be issued until it is fully paid as prescribed by the Act. Commissions – The directors may from time to time authorise the Company to pay a commission to any person in consideration of his purchasing or agreeing to purchase shares of the Company, whether from the Company or from any other person, or procuring or agreeing to procure purchasers for any such shares. Registers – Registers of shares, securities and debentures (“securities”) issued by the Company shall be kept at the registered office of the Company or such other place within Barbados as may from time to time be designated by the directors. Registration of Securities – Without prejudice to the Company’s discretion to keep its registers of securities in such format as it deems fit, the Company may register securities issued by it with the BCSDI under the provisions of the Securities Act and may issue and transfer such securities by book entries. 155 Sagicor Financial Corporation 9.5 9.6 9.7 9.8 Share Certificates – Any issue of shares may be automatically credited to accounts maintained for shareholders in the register of shareholders of the Company and the form of share certificate shall be in the form of a shareholding statement showing details of transactions each time the shareholder acquires or disposes of shares during the period covered by the statement, or in the form of such a statement sent annually or semi-annually to shareholders. Effect of Later Shareholding Statement – The issue by BCSDI of a shareholding statement bearing a later date cancels and replaces any shareholding statement in favour of the same person bearing an earlier date. Joint Shareholders – If two or more persons are registered as joint holders of any shares the Company shall not be bound to issue more than one shareholding statement in respect thereof and delivery of such statement to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the shareholding statement issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such shares. Deceased Shareholders – In the event of death of a holder or of one of the joint holders of any shares or debentures the Company shall not be required to make any entry in the securities register in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Company and its transfer agents. 9.9 Issue and Transfer of Shares – No shares may be issued or transferred without the person in whose name the shares are to be registered furnishing a declaration, if required, as to: (a) the identity of the beneficial owner of the shares; (b) whether the shareholder is an affiliate or associate of any other shareholder or beneficial owner of the shares; and (c) such other information or further facts that the directors consider relevant. 9.10 9.11 Registration of Transfers – Subject to the provisions of the Act and the articles, no transfer of shares shall be registered in a securities register except upon presentation of a transfer in the form prescribed by the directors and endorsed thereon or delivered therewith duly signed or executed by the registered holder and the transferee or by their respective attorney or successor duly appointed, together with such reasonable assurance or evidence of signature, identification and authority to transfer as the directors may from time to time prescribe, and upon payment of all applicable taxes and any fees prescribed by the directors, and upon compliance with such restrictions on transfer as are stipulated or authorized by the articles. Transfer Agents and Registrars – The directors may from time to time appoint a registrar to maintain the securities register and a transfer agent to maintain the register of transfers and may also appoint one or more branch registrars to maintain branch securities registers and one or more branch transfer agents to maintain branch registers of transfers but one person may be appointed both registrar and transfer agent. The directors may at any time terminate any such appointment; provided however that the failure of any registrar or transfer agent to observe the provisions of by-law 9.10 shall in no way constitute a waiver of the provisions of that by-law by the Company. (Repealed Bylaw 12.3) 12.3 Recorded Address – Any shareholder whose address is not in a country that is a member of Caricom (“Caricom country”) shall provide the Company with a recorded address for service and the payment of dividends within a Caricom country. If such shareholder fails to do so within six months of being entered on the register of shares or of acquiring an address outside of a Caricom country, the Company shall not be obliged to send any notice or dividends to such shareholder until the shareholder provides the Company with a recorded address within a Caricom country. The secretary may change or cause to be changed the recorded address of any shareholder, director, officer, auditor or member of a committee of the directors in accordance with any information believed by him to be reliable. 156 Sagicor Financial Corporation SCHEDULE 3 TO NOTICE OF MEETING THE COMPANIES ACT CHAPTER 308 BY-LAW NO. 1 of SAGICOR FINANCIAL CORPORATION Enacted December 6, 2002 Amended March 16, 2007 157 Sagicor Financial Corporation BY-LAW NO. 1 A by-law relating generally to the conduct of the affairs of SAGICOR FINANCIAL CORPORATION (herein called “the Company”) BE IT ENACTED and it is hereby enacted as a general by-law of the Company as follows:- 1 – Interpretation 1.1 Definitions and Interpretations – In this by-law, and all other by-laws of the Company, unless the context otherwise specifies or requires: (a) “Act” means the Companies Act Chapter 308 as from time to time amended and every statute substituted therefor and, in the case of such substitutions, any references in the by-laws of the Company to provisions of the Act shall be read as references to the substituted provisions therefor in the new statute; (b) “BCSDI” means the Barbados Central Securities Depository Inc or its successor; (c) “by-laws” means any by-law of the Company from time to time in force; (d) “dollars” or “$” means Barbados currency and in respect of any other currency a conversion thereto as at the relevant date; (e) “non-business day” means Saturday, Sunday or a day that is a public holiday in Barbados; (f) “number of directors” means the number of directors provided for in the articles or, where a minimum and maximum number of directors is provided for in the articles, the number of directors determined by a special resolution or resolution passed pursuant to section 59 of the Act; (g) “recorded address” means the latest address of a person as shown in the records of the Company; (h) (i) (j) (k) (l) “Regulations” means any regulations made under the Act and every regulation substituted therefor and, in the case of such substitution, any references in the by-laws of the Company to provisions of the Regulations shall be read as references to the substituted provisions therefor in the new regulations; “Securities Act” means the Securities Act, 2001-13 as from time to time amended and every statute substituted therefor and, in the case of such substitutions, any references in the by-laws of the Company to provisions of the Securities Act shall be read as references to the substituted provisions therefor in the new statute; all terms contained in the by-laws and defined in the Act or the Regulations shall have the meanings given to such terms in the Act or the Regulations; the singular includes the plural and the plural includes the singular; the masculine gender includes the feminine and neuter genders; the word “person” includes bodies corporate, companies, partnerships, syndicates, trusts and any association of persons; and the word “individual” means a natural person; the headings used in the by-laws are inserted for reference only and are not to be considered or taken into account in construing the terms or provisions thereof or to be deemed in any way to clarify, modify or explain the effect of any such terms or provisions. 158 Sagicor Financial Corporation 2 – Business of the Company 2.1 2.2 2.3 2.4 2.5 Registered Office – The registered office of the Company shall be in Barbados at such address as the directors may fix from time to time by resolution. Head Office – The head office of the Company shall be in Barbados at such address as the directors may fix from time to time by resolution. The Company may also maintain other offices at such other places both within and outside Barbados as the directors may from time to time determine. Seal – The common seal of the Company shall be such as the directors may by resolution from time to time adopt. Execution of Instruments – Deeds, debentures, mortgages, transfers, assignments, contracts, obligations, certificates, documents and other instruments executed under seal may be signed on behalf of the Company by any two directors or by a director together with the secretary or the assistant secretary. In addition, the directors may from time to time direct the manner in which any particular instrument or class of instruments may or shall be signed. The directors shall have power from time to time by resolution to appoint any officer or person on behalf of the Company either to sign contracts, documents and instruments in writing generally or to sign specific contracts, documents or instruments in writing. Signatures – The signature of a Chairman, a Vice-Chairman, a Managing Director, a President, a Vice-President, the Secretary, Assistant Secretary or any director of the Company or any officer or person appointed pursuant to by-law 2.4 hereof by resolution of the directors, may be printed, engraved, lithographed or otherwise mechanically reproduced upon any contract, document or instrument in writing, certificate, bond, debenture or other security of the Company executed or issued by or on behalf of the Company. Any document or instrument in writing on which the signature of any such officer or person is so reproduced shall be deemed to have been manually signed by such officer or person whose signature is so reproduced and shall be as valid to all intents and purposes as if such document or instrument in writing is delivered or issued. 2.6 Financial Year – The financial year of the Company shall terminate on such day in each year as the directors may from time to time by resolution determine. 3 – Directors 3.1 3.2 Number – The number of directors or the minimum and maximum number of directors of the Company is set out in the articles of the Company. Powers – Subject to any unanimous shareholder agreement, the directors shall manage the business and affairs of the Company and may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not by the Act, the articles, the by-laws, any special resolution of the Company, a unanimous shareholder agreement or by statute expressly directed or required to be done in some other manner. 3.3 Borrowing Powers – The directors may from time to time: (a) borrow money upon the credit of the Company; (b) issue, re-issue, sell, or pledge debentures of the Company; (c) subject to section 53 of the Act, give a guarantee on behalf of the Company to secure performance of an obligation of any person; (d) mortgage, charge, pledge or otherwise create a security interest in all or any property of the Company owned or subsequently acquired to secure any obligation of the Company; 159 Sagicor Financial Corporation (e) by resolution delegate to any officer of the Company all or any of the powers conferred on the directors by this by-law to the full extent thereof or such lesser extent as the directors may in any such resolution provide. The powers conferred by this by-law shall be in supplement to and not in substitution for any powers to borrow money for the purposes of the Company possessed by its directors or officers independently of a borrowing by-law. 3.4 Qualification – No person shall be qualified to hold the office of director if: (a) subject to by-law 3.10, he is less than 25 or more than 70 years of age; (b) he is found to be of unsound mind; (c) he has the status of a bankrupt, is insolvent or compounds with his creditors; (d) being a corporation, it enters into liquidation; or (e) he holds less than 1,000 Series A common shares in the Company. 3.5 3.6 3.7 3.8 Corporate Director – A person who is a director of the Company but who is not an individual shall, by such procedure as may be appropriate for the management of the affairs of such person, appoint an individual to act as such person’s representative as a director of the Company with power to exercise all of the powers of a director of the Company but the person appointing any such individual shall remain fully liable as a director of the Company notwithstanding such appointment. A duly certified copy of the resolution or document whereby any such appointment is made shall be filed with the Company before any such individual acts as representative as aforesaid. Any person appointing an individual under the provisions of this paragraph may from time to time revoke the appointment of such individual and appoint another in his place. Executive Directors – Not more than two directors, including the president or managing director of the Company, may be officers or employees of the Company or its affiliates. Eligibility for Election – Except as otherwise provided by the by-laws, no person shall be eligible for election as a director at any meeting of shareholders unless: (a) nominated by the board, or (b) not more than 60 days after the end of the financial year, written notice, signed by persons holding in aggregate not less than 5% of the issued and outstanding shares in the capital of the Company, has been given to the Company of the intention to propose a person for election together with a letter of consent signed by that person confirming his willingness to be appointed and to serve as a director if elected, provided however that no person as defined in the articles and the by-laws may nominate more than one director for election under this paragraph. Rotation of Directors – Unless otherwise provided in the by-laws, at the annual general meeting held each year at least one third or the number nearest thereto of the directors shall be required to retire. A director shall not be required to retire unless he has been in office for three years except for the directors retiring at the first and second annual general meetings who shall be required to retire after one year and two years in office respectively. The retiring directors shall be eligible for re-election if qualified and shall be those who have been longest in office. As between two or more who have been in office an equal length of time, the directors or director to retire shall in default of agreement between them be determined by lot. The length of time a director has been in office shall be computed from the date of commencement of his last unbroken service as a director. 3.9 Compulsory Retirement – A director shall retire from office at the annual general meeting following the attainment of age 70 and shall not be eligible for re-election. Any director who is age 70 at the date of incorporation of the Company shall retire from office at the annual general meeting following the attainment of age 72 and shall not be eligible for re-election. 160 Sagicor Financial Corporation 3.10 3.11 Tenure of Office – Unless his tenure is sooner determined a director shall hold office from the close of the meeting at which he is elected or appointed until the close of the third annual general meeting of shareholders next following or until his successor is elected or appointed, whichever shall first occur. Removal of Directors – Subject to the provisions of the Act the shareholders may by resolution passed at an annual or special meeting remove any director from office and the vacancy created by such removal may be filled at the same meeting failing which it may be filled by the directors. 3.12 Vacation of Office – A director shall cease to be a director when: (a) he dies; (b) he is removed from office by the shareholders; (c) he ceases to be qualified for election as a director; 3.13 3.14 (d) his written resignation is sent or delivered to the Company or if a time is specified in such resignation at the time so specified, whichever is later; or (e) if he is an officer of the Company, his appointment as an officer is revoked, his services are terminated by the directors or he resigns his office. Vacancies – Subject to the Act, a quorum of the board may fill a vacancy in the board except a vacancy resulting from an increase in the number of directors or in the maximum number of directors or from a failure of the shareholders to elect the number of directors. In the absence of a quorum of the board, or if the vacancy has arisen from a failure of the shareholders to elect the number of directors, the directors shall forthwith call a special meeting of shareholders to fill the vacancy. If the directors fail to call such meeting or if there are no such directors then in office the secretary or any shareholder may call the meeting. Remuneration and Expenses – Subject to the articles or any unanimous shareholder agreement, the directors shall be paid such remuneration for their services as the shareholders may from time to time determine. Such remuneration may be in addition to the salary paid any officer or employee of the Company who is also a director. The directors shall also be entitled to be reimbursed for travelling and other expenses properly incurred by them in attending meetings of the directors or any committee thereof. The directors may also award special remuneration to any director undertaking any special services on the Company’s behalf other than the routine work ordinarily required of a director and any such special remuneration shall be disclosed at the next meeting of shareholders immediately following the award and to such regulatory authorities as may be required. Nothing herein contained shall preclude any director from serving the Company in any other capacity and receiving remuneration therefor. If any director or officer of the Company is employed by or performs services for the Company otherwise than as a director or officer or is a member of a firm or a shareholder, director or officer of a body corporate which is employed by or performs services for the Company, the fact of his being a shareholder, director or officer of the Company shall not disentitle such director or officer or such firm or body corporate, as the case may be, from receiving proper remuneration for such services. 3.15 Conflict of Interest – A director or officer who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or proposed material contract with the Company shall disclose the nature and extent of his interest at the time and in the manner provided by the Act. Any such contract or proposed contract shall be referred to the directors or shareholders for approval even if such contract is one that in the ordinary course of the Company’s business would not require approval by the directors or shareholders. A director interested in a contract so referred to shall not vote on any resolution to approve the same except as provided by the Act. Disclosure of such contract or proposed contract shall however be made at the next meeting of shareholders immediately following the disclosure and to such regulatory authorities as may be required. 3.16 Submission of Contracts or Transactions to Shareholders for Approval – The directors in their discretion may submit any contract, act or transaction for approval or ratification at any annual meeting of the shareholders or at any special meeting of the shareholders called for the purpose of considering the same and subject to the 161 Sagicor Financial Corporation provisions of section 89 of the Act any such contract, act or transaction that is approved or ratified or confirmed by a resolution passed by a majority of the votes cast at any such meeting (unless any different or additional requirement is imposed by the Act or by the Company’s articles or any other by-law) shall be as valid and as binding upon the Company and upon all the shareholders as though it had been approved, ratified or confirmed by every shareholder of the Company. 4 – Meetings of Directors 4.1 4.2 4.3 Place of Meetings – Meetings of the directors and of any committee of directors may be held at any place within or outside Barbados. Calling of Meetings – Meetings of the directors shall be convened at any time as the chairman, vice-chairman or any two directors may determine or by the Secretary when so directed or authorized. Notice of Meetings – Notice of the time and place of each meeting of the directors shall be given in the manner provided in by-law 12.1 to each director not less than 48 hours before the time when the meeting is to be held. Subject to section 76(1) of the Act, the notice of a meeting of directors need not specify the purpose of or the business to be transacted at the meeting. It shall not be necessary to give notice of a meeting of the directors to a newly elected or appointed director for a meeting held immediately following the election of directors by the shareholders or the appointment to fill a vacancy among the directors. 4.4 Quorum – The quorum for the transaction of business at any meeting of the directors shall consist of a majority of the number of directors and, notwithstanding any vacancy among the directors, a quorum may exercise all the powers of the directors. No business may be transacted at a meeting of directors unless a quorum is present. 4.5 Meetings by Telephone – If all the directors consent, a director may participate in a meeting of the directors or of a committee of the directors by means of such telephone or other communication facilities as permit all persons participating in the meeting to hear each other and a director participating in such a meeting by such means is deemed to be present at the meeting. Any such consent shall be effective whether given before or after the meeting to which it relates and may be given with respect to all meetings of the directors and of committees of the directors held while a director holds office. 4.6 4.7 4.8 4.9 Adjourned Meetings – Notice of an adjourned meeting of the directors is not required if the time and place of the adjourned meeting is announced at the original meeting. Regular Meetings – The directors may appoint a day or days in any month or months for regular meetings of the directors at a place and hour to be named. A copy of any resolution of the directors fixing the place and time of such regular meetings shall be sent to each director forthwith after being passed but no other notice shall be required for any such regular meeting except where the Act requires the purpose thereof or the business to be transacted thereat to be specified. Chairman – The chairman of any meeting of the directors shall be the chairman and in his absence the vice- chairman. If no such officer is present the directors present shall choose one of their number to be chairman. Votes to Govern – At all meetings of the directors every question shall be decided by a majority of the votes cast on the question. In case of an equality of votes the chairman of the meeting shall, in addition to his original vote, have a second or casting vote. 4.10 Resolution in lieu of Meeting – Notwithstanding any of the foregoing provisions of this by-law a resolution in writing signed by all the directors entitled to vote on that resolution at a meeting of the directors or any committee of the directors is as valid as if it had been passed at a meeting of the directors or any committee of the directors. 5.1 Committee of Directors – The directors may appoint a committee of directors, however designated, and delegate to such committee any of the powers of the directors except those which, under the Act, a committee of directors has no authority to exercise. 5 – Committees 162 Sagicor Financial Corporation 5.2 5.3 5.4 5.5 6.1 6.2 Transaction of Business – The powers of a committee of directors may be exercised by a meeting at which a quorum is present or by resolution in writing signed by all the members of such committee who would have been entitled to vote on that resolution at a meeting of the committee. Meetings of such committee may be held at any place within or outside Barbados. Procedure – Unless otherwise determined by the directors each committee shall have the power to fix its quorum at not less than a majority of its members, to elect its chairman and to regulate its procedure. Audit and Governance Committees – Notwithstanding by-law 5.1 the directors shall elect annually from among their number an audit committee and a governance committee, each comprising not less than three directors. No employee of the Company or its affiliates shall be a member of either committee but may be invited to attend meetings. A member of any such committee shall serve during the pleasure of the directors and in any event only so long as he is a director. Audit Committee – The audit committee shall have power to fix its quorum at not less than a majority of its members and to determine its own rules of procedure subject to any regulations imposed by the board of directors from time to time. The auditor of the Company is entitled to receive notice of every meeting of the audit committee and at the expense of the Company to attend and be heard at the meeting. If so requested by a member of the audit committee, the auditor shall attend every meeting of the committee held during his term of office. Any member of the audit committee may call a meeting of the committee. 6 – Officers Appointment – The directors shall as often as may be required appoint a secretary and may as often as may be required appoint a chairman and vice-chairman of the board both of whom shall be directors and, subject to any unanimous shareholder agreement, a president or managing director, and one or more vice-presidents (to which title may be added words indicating seniority or function), and such other officers as the directors may determine, including one or more assistants to any of the officers so appointed. Duties – If appointed, the chairman and vice-chairman shall, subject to the provisions of the Act, the articles or any unanimous shareholder agreement, have such other powers and duties as the directors may specify and during the absence or disability of the chairman his duties shall be performed and his powers exercised by the vice-chairman. The directors may from time to time specify the duties of and, in accordance with this by-law and subject to the provisions of the Act, delegate to such officers powers to manage the business and affairs of the Company. 7.1 Limitation of Liability – No director or officer shall be liable for: 7 – For the Protection of Directors and Officers (a) the acts, receipts, neglects or defaults of any other director or officer or employee or for joining in any receipt or other act for conformity; (b) any loss, damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired for or on behalf of the Company; (c) the insufficiency or deficiency of any security in or upon which any of the moneys of the Company shall be invested; (d) any loss or damage arising from the bankruptcy, insolvency or tortuous acts of any person with whom any of the moneys, securities or effects of the Company shall be deposited; (e) any loss occasioned by any error of judgement or oversight on his part or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto; unless the same are occasioned by his own wilful neglect or default or happens through his failure to exercise the powers and to discharge the duties of his office honestly and in good faith with a view to the best interests of the Company. Except 163 Sagicor Financial Corporation as provided by law, the directors for the time being of the Company shall not be under any duty or responsibility in respect of any contract, act or transaction whether or not made, done or entered into in the name of the Company, except such as is submitted to or authorized or approved by the directors. Nothing herein shall relieve any director or officer from the duty to act in accordance with the Act and the Regulations or from liability for any breach thereof. 7.2 Indemnity – Subject to the limitations contained in the Act the Company shall indemnify a director or officer, a former director or officer or a person who acts or acted at the Company’s request as a director or officer of a body corporate of which the Company is or was a shareholder or creditor (or a person who undertakes or has undertaken any liability on behalf of the Company or any such body corporate) and his heirs and legal representatives against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgement, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Company or such body corporate if: (a) he acted honestly and in good faith with a view to the best interests of the Company; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty he had reasonable grounds for believing that his conduct was lawful. 7.3 Insurance – Subject to the limitations contained in the Act the Company may purchase and maintain such insurance for the benefit of its directors and officers, as the directors may from time to time determine. 8 – Meetings of Shareholders 8.1 8.2 Annual Meetings – Subject to the provisions of section 105 of the Act, the annual meeting of the shareholders shall be held not later than six months after the end of the financial year of the Company on such day in each year and at such time as the directors may by resolution determine at any place within Barbados or, if all the shareholders entitled to vote at such meeting so agree, outside Barbados. Special Meetings – Special meetings of the shareholders may be convened by order of the directors at any date and time and at any place within Barbados or, if all the shareholders entitled to vote at such meeting so agree, outside Barbados. Whenever and as soon as there is not a quorum of directors in office it shall be the duty of the secretary to call a special meeting of shareholders to elect directors to fill the vacancies, provided that if such lack of quorum shall occur within a month before the regular time for the annual meeting the secretary may call the annual meeting instead of a special meeting. 8.3 Special Meetings on Requisition of Shareholders – The directors shall, on the requisition of the holders of not less than 5% of the issued shares of the Company that carry a right to vote at the meeting requisitioned, forthwith convene a meeting of shareholders, and in the case of such requisition the following provisions shall have effect: (a) The requisition must state the purposes of the meeting and must be signed by the requisitionists and deposited at the registered office of the Company and may consist of several documents in like form, each signed by one or more of the requisitionists. (b) If the directors do not, within 21 days from the date of the requisition being so deposited, proceed to convene a meeting, the requisitionists or any of them may themselves convene the meeting but any meeting so convened shall not be held after three months from the date of such deposit. (c) Unless subsection (3) of section 129 of the Act applies the directors shall be deemed not to have duly convened the meeting if they do not give such notice as is required by the Act within 21 days from the deposit of the requisition. (d) Any meeting convened under this by-law by the requisitionists shall be called as nearly as possible in the manner in which meetings are to be called pursuant to the by-laws and Divisions E and F of Part I of the Act. (e) A requisition by joint holders of shares must be signed by all such holders. 164 Sagicor Financial Corporation 8.4 8.5 8.6 8.7 8.8 8.9 8.10 Notice of Meetings – Notice of the time and place of each meeting of shareholders shall be given in the manner provided in by-law 12.1 not less than 21 nor more than 50 days before the date of the meeting to each director, to the auditor and to each shareholder who at the close of business on the record date, if any, is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of a meeting of shareholders at which special business is to be transacted shall state the nature of such business in sufficient detail to permit the shareholder to form a reasoned judgement thereon and shall state the text of any special resolution to be submitted to the meeting. List of Shareholders Entitled to Notice – For every meeting of shareholders the Company shall prepare a list of shareholders entitled to receive notice of the meeting, arranged in alphabetical order and showing the number of shares entitled to vote at the meeting held by each shareholder. The list shall be available for examination by any such shareholder during usual business hours at the registered office of the Company or at the place where the securities register is kept. Record Date for Notice – The directors may fix in advance a record date, preceding the date of any meeting of shareholders by not more than 50 days and not less than 21 days, for the determination of the shareholders entitled to notice of the meeting provided that notice of any such record date is given not less than seven days before such record date by newspaper advertisement in the manner provided in the Act. If no record date is so fixed the record date for the determination of the shareholders entitled to notice of the meeting shall be the close of business on the day immediately preceding the day on which the notice is given or, where no such notice is given, the day on which the meeting is held. Chairman, Secretary and Scrutineers – The chairman of any meeting of shareholders shall be the chairman and in his absence the vice-chairman. If no such officer is present within 15 minutes from the time fixed for holding the meeting the persons present and entitled to vote shall choose one of the directors present to be chairman. If the secretary of the Company is absent the chairman shall appoint some person, who need not be a shareholder, to act as secretary of the meeting. If desired, one or more scrutineers, who need not be shareholders, may be appointed by resolution of the directors or by the chairman with the consent of the meeting. Persons Entitled to be Present – The only persons entitled to be present at a meeting of the shareholders shall be those entitled to vote thereat, the directors and auditors of the Company and others who, although not entitled to vote, are entitled or required under any provision of the Act or the articles or by-laws to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. Quorum – Subject to by-law 8.21, a quorum for the transaction of business at any meeting of shareholders shall be 100 shareholders present in person or by proxy. If a quorum is present at the opening of any meeting of shareholders, the shareholders present or represented may proceed with the business of the meeting notwithstanding that a quorum is not present throughout the meeting. If a quorum is not present within 30 minutes of the time appointed for a meeting of shareholders, the meeting stands adjourned to the same day two weeks thereafter at the same time and place and if at the adjourned meeting a quorum is not present within 30 minutes of the appointed time the shareholders present constitute a quorum. Right to Vote – Subject to the provisions of the Act as to authorized representatives of any other body corporate, at any meeting of shareholders in respect of which the Company has prepared the list referred to in by-law 8.5, every person who is named in such list shall be entitled to vote the shares shown thereon opposite his name except where the Company has fixed a record date in respect of such meeting pursuant to by-law 8.6 to the extent that such person has transferred any of his shares after such record date and the transferee, upon producing properly endorsed certificates evidencing such shares or otherwise establishing that he owns such shares, demands not later than ten days before the meeting that his name be included to vote the transferred shares at the meeting. In the absence of a list prepared as aforesaid in respect of a meeting of shareholders every person shall be entitled to vote at the meeting who at the time is entered in the securities register as the holder of one or more shares carrying the right to vote at such meeting. 8.11 Proxies – Every shareholder entitled to vote at a meeting of shareholders may appoint a proxyholder or one or more alternate proxyholders, who need not be shareholders, to attend and act at the meeting in the manner and 165 Sagicor Financial Corporation to the extent authorized and with the authority conferred by the proxy. A proxy shall be in writing executed by the shareholder or his attorney and shall conform to the requirements of the Act. 8.12 Time for Deposit of Proxies – The directors may specify in a notice calling a meeting of shareholders a place and a time, preceding the time of such meeting by not more than 48 hours exclusive of non-business days, before which time proxies to be used at such meeting must be deposited. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Company or an agent thereof specified in such notice or, if no such time is specified in such notice, unless it has been received by the secretary of the Company or by the chairman of the meeting or any adjournment thereof prior to the time of voting. 8.13 Form of Proxy – Subject to the provisions of Part V of the Regulations, a proxy may be in the following form: I,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , the undersigned, being a shareholder of the Company, hereby appoint. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . or failing him. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . of. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , as my proxy to attend and act for me and on my behalf at the. . . . . . . . . . . meeting of the shareholders of the Company to be held on the. . . . . . day of. . . . . . . . , and at any adjournment thereof in the same manner, to the same extent and with the same powers as if the undersigned were present at the meeting or such adjournment. Dated this. . . . . . . . . day of. . . . . . . . . . . . ,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signature of Shareholder 8.14 Bodies Corporate and Associations – A body corporate or association which is a shareholder may by resolution authorize an individual to represent it and vote for it at meetings of shareholders. 8.15 8.16 8.17 Joint Shareholders – If two or more persons hold shares jointly any one of them present in person or represented by proxy at a meeting of shareholders may, in the absence of the other, vote the shares; but if two or more of those persons are present in person or represented by proxy and vote they shall vote as one on the shares jointly held by them. Votes to Govern – At any meeting of shareholders every question shall, unless otherwise required by the articles or by-laws or by law, be determined by the majority of the votes cast on the question. In case of an equality of votes either upon a show of hands or upon a poll the chairman of the meeting shall be entitled to a second or casting vote. Show of Hands – Subject to the provisions of the Act, any question at a meeting of shareholders shall be decided by a show of hands unless a ballot thereon is required or demanded as hereinafter provided. Upon a show of hands every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question and the result of the vote so taken shall be the decision of the shareholders upon the said question. 8.18 Ballots – On any question proposed for consideration at a meeting of shareholders and, whether or not a show of hands has been taken thereon, any shareholder or proxyholder entitled to vote at the meeting may require or demand a ballot. A ballot so required or demanded shall be taken in such manner and at such time as the chairman shall direct. A requirement or demand for a ballot may be withdrawn at any time prior to the close or adjournment of the meeting at which the ballot was required or demanded. If a ballot is taken each person present shall be entitled, in respect of the shares which he is entitled to vote at the meeting upon the question, to that number of votes provided by the Act or the articles, and the result of the ballot so taken shall be the decision of the shareholders upon the said question. 166 Sagicor Financial Corporation 8.19 Adjournments – Without prejudice to the right of the chairman to adjourn a meeting of shareholders for reasons of disorder, the chairman of any meeting may, with the consent of the meeting, adjourn the same from time to time to a fixed time and place. If the meeting is adjourned for less than 30 days it shall not be necessary to give notice of the adjourned meeting other than by announcement at the earliest meeting that is adjourned. If a meeting of shareholders is adjourned by one or more adjournments for an aggregate of 30 days or more notice of the adjourned meeting shall be given as for an original meeting. 8.20 Resolution in Writing – Notwithstanding any of the foregoing provisions of this by-law, a resolution in writing signed by all of the shareholders entitled to vote on that resolution at a meeting of shareholders is, subject to section 128 of the Act, as valid as if it had been passed at a meeting of the shareholders. 8.21 Only One Shareholder – Where the Company has only one shareholder or only one holder of any class or series of shares the shareholder present in person or by proxy constitutes a meeting. 9 – Securities 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 Allotment – Subject to the Act, the articles and any unanimous shareholder agreement, the directors may from time to time allot, issue and grant options to purchase any part of the authorized and unissued shares of the Company at such times and to such persons or class of persons and for such consideration and on such terms and conditions as the directors shall determine provided that no share shall be issued until it is fully paid as prescribed by the Act. Commissions – The directors may from time to time authorise the Company to pay a commission to any person in consideration of his purchasing or agreeing to purchase shares of the Company, whether from the Company or from any other person, or procuring or agreeing to procure purchasers for any such shares. Registers – Securities registers issued by the Company shall be kept at the registered office of the Company or such other place within or outside Barbados as may from time to time be designated by the directors. Registration and Deposit of Securities – Without prejudice to the Company’s discretion to keep its securities registers in such format as it deems fit, the Company may register or deposit securities issued by it with the BCSDI under the provisions of the Securities Act. The Company may also register or deposit its securities in such other depositaries as it deems fit and may issue and transfer all or any part of such securities referred to in this Bylaw by book entries. Security Certificates – Any issue or transfer of securities may be automatically credited to accounts maintained for security holders in the register of security holders of the Company and the form of security certificate shall be in the form of a security holding statement, depositary receipt or such other document showing details of a holder’s interest in the capital of the Company as may be approved by the directors. Effect of Later Security Holding Statement – The issue of a security holding statement bearing a later date cancels and replaces any security holding statement in favour of the same person bearing an earlier date. Joint Security Holders – If two or more persons are registered as joint holders of any securities the Company shall not be bound to issue more than one certificate in respect thereof and delivery of such certificate to one of such persons shall be sufficient delivery to all of them. Any one of such persons may give effectual receipts for the certificate issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such securities. Deceased Security Holders – In the event of death of a holder or of one of the joint holders of any securities the Company shall not be required to make any entry in the securities register in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Company and its transfer agents. 9.9 Transfers of Securities – Subject to the provisions of the Act and the articles, the directors may from time to time prescribe the form of transfer constituting a valid instrument of transfer of the securities in the capital of the 167 Sagicor Financial Corporation Company and may authorise the same for registration as a valid transfer of the number of securities specified therein. 9.10 Transfer Agents and Registrars – The directors may from time to time appoint a registrar to maintain the securities register and a transfer agent to maintain the register of transfers and may also appoint one or more branch registrars to maintain branch securities registers and one or more branch transfer agents to maintain branch registers of transfers but one person may be appointed both registrar and transfer agent. The directors may at any time terminate any such appointment. 9.11 – Disclosure of Interests 9.11.1 The Company may by notice in writing require any security holder within such reasonable time as is specified in the notice to indicate in writing the capacity in which he holds any shares in the capital of the Company, and if he holds them otherwise than as a beneficial owner, to indicate in writing so far as it lies within his knowledge, the person who has an interest in them (either by name and address or by other particulars sufficient to enable that person to be identified) and the nature of that person’s interest. 9.11.2 Where the Company is informed in pursuance of a notice given to any person under by-law 9.11.1, that any other person has an interest in any shares in the capital of the Company, the Company may by notice in writing require that other person within such reasonable time as specified in the notice to indicate in writing the capacity in which he holds that interest, and if he holds it otherwise than as a beneficial owner, to indicate in writing so far as it lies within his knowledge, the person who has an interest in it (either by name and address or by other particulars sufficient to enable him to be identified) and the nature of that person’s interest. 9.11.3 The Company may by notice in writing require any member of the Company to indicate in writing, within such reasonable time as is specified in the notice, whether any of the voting rights carried by any shares comprised in the capital of the Company held by him are the subject of an agreement or arrangement under which another person is entitled to control his exercise of those rights and, if so, to give, so far as it lies within his knowledge, written particulars of the agreement or arrangement and the parties to it. 9.11.4 Where the Company is informed, in pursuance of a notice given to any person under by-law 9.11.3 or this by-law, that any other person is a party to such agreement or arrangement as is mentioned in by-law 9.11.3, the Company may by notice in writing require that other person within such reasonable time as is specified in the notice to give, so far as it lies within his knowledge, written particulars of the agreement or arrangement and the parties to it. 10 – Dividends and Rights 10.1 Dividends – Subject to the provisions of the Act and the articles, the directors may from time to time declare and the Company may pay dividends on the issued and outstanding shares in the capital of the Company to shareholders according to their respective rights and interests in the Company. Dividends may be paid in money or property or by issuing fully paid shares of the Company. 10.2 Payment of Dividends – A dividend payable in cash shall be paid either: (a) by cheque drawn on the Company’s bankers or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address unless such holder otherwise directs; in the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the first named joint holder on the register and mailed to the recorded address of the joint holders; or (b) electronically to each registered holder of shares of the class or series in respect of which it has been declared and by deposit into a bank account designated by such registered holder for the payment of dividends unless such holder otherwise directs; in the case of joint holders payment by deposit shall, unless such joint holders otherwise direct, be made to the order of the first named joint shareholder on the register. 168 Sagicor Financial Corporation 10.3 Good Receipt – The mailing of such cheque, unless the same is not paid on due presentation, or the electronic payment as aforesaid shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Company is required to and does withhold. 10.4 Non-Receipt of Dividend – In the event of non-receipt of any dividend by the person to whom it is sent as aforesaid the Company shall effect payment to such person for a like amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the directors may from time to time prescribe, whether generally or in any particular case. 10.5 Record Date for Dividends and Rights – The directors may fix in advance a date, preceding by not more than 50 days the date for the payment of any dividend or the date for the issue of any warrant or other evidence of right to subscribe for securities of the Company, as a record date for the determination of the persons entitled to receive payment of such dividend or to exercise the right to subscribe for such securities provided that notice of any such record date is given not less than 14 days before such record date by newspaper advertisement in the manner provided in the Act. Where no record date is fixed in advance as aforesaid the record date for the determination of the persons entitled to receive payment of any dividend or to exercise the right to subscribe for securities of the Company shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the directors. 10.6 Unclaimed Dividends – Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Company. 11 – Information Available to Shareholders 11.1 Shareholder Information – Except as provided by the Act, no shareholder shall be entitled to any information respecting any details or conduct of the Company’s business which in the opinion of the directors it would be inexpedient in the interests of the Company to communicate to the public but the directors may, from time to time, subject to the rights conferred by the Act, determine whether and to what extent and at what time and place and under what conditions or regulations the documents, books and registers and accounting records of the Company or any of them may be open to the inspection of shareholders and no shareholder shall have any right to inspect any document or book or register or accounting record of the Company except as conferred by statute or authorized by the directors or by special resolution of the shareholders. 12 – Notices 12.1 Method of Giving Notice – Any notice (which term includes any communication or document) to be given (which term includes sent, delivered or served) pursuant to the Act, the Regulations, the articles, the by-laws or otherwise to a shareholder, debenture holder, director, officer, auditor or member of a committee of the directors shall be sufficiently given if: (a) delivered personally to the person to whom it is to be given; (b) delivered to his recorded address; (c) mailed to him at his recorded address by prepaid ordinary or air mail; (d) sent to him at his recorded address by any means of prepaid transmitted or recorded communication; or (e) in the case of a director, sent by facsimile or other means of electronic transmission. A certificate of an officer of the Company in office at the time of the making of the certificate or any transfer agent of shares or debentures of any class of the Company as to the facts in relation to the delivery or sending of any notice shall be conclusive evidence of those facts. 12.2 Computation of Time – In computing the date when notice must be given under any provision requiring a specified number of days or other period of notice of any meeting or other event the date of giving the notice and the date of the meeting or other event shall not be counted and: 169 Sagicor Financial Corporation (a) where the notice is delivered personally to the person to whom it is addressed or delivered to his recorded address service shall be deemed to have been effected at the time of delivery of such notice; (b) where the notice is sent by post service of the notice shall be deemed to be effected on the day of posting; (c) where the notice is sent by facsimile or other means of electronic transmission service is deemed to be effected on the date on which the notice was sent. 12.3 Notice to Joint Shareholders – If two or more persons are registered as joint holders of any shares or debentures any notice shall be addressed to the first named of such joint holders and notice to such persons shall be sufficient notice to all of them. 12.4 Undelivered Notices – If any notice given to a shareholder or debenture holder pursuant to by-law 12.1 is returned on three consecutive occasions because he cannot be found the Company shall not be required to give any further notices to such shareholder or debenture holder until he informs the Company in writing of his new address. 12.5 Omissions and Errors – The accidental omission to give any notice to any shareholder, director, officer, auditor or member of a committee of the directors or the non-receipt of any notice by any such person or any error or irregularity in any notice not affecting the substance thereof shall not invalidate any resolution passed or action or proceedings taken at any meeting held pursuant to such notice or otherwise founded thereon. 12.6 Persons Entitled by Death or Operation of Law – Every person who, by operation of law, transfer, death of a shareholder or any other means whatsoever, shall become entitled to any shares shall be bound by every notice in respect of such shares which shall have been duly given to the shareholder from whom he derives his title to such shares prior to his name and address being entered on the securities register (whether such notice was given before or after the happening of the event upon which he became so entitled) and prior to his furnishing the Company the proof of authority or evidence of his entitlement prescribed by the Act. 12.7 Waiver of Notice – Notice may be waived or the time for the notice may be waived or abridged at any time by any person entitled thereto. Any such waiver or abridgement shall be in writing except a waiver of notice of a meeting of directors which may be given in any manner. The attendance of such person at a meeting shall constitute a waiver of notice of the meeting unless he attends for the express purpose of objecting to the transacting of any business on the grounds that the meeting is not lawfully called. This By-law was made by resolution of the Directors on December 6, 2002 and confirmed by resolution of the Shareholders on June 30, 2004, and amended by resolution of the Directors made on March 16, 2007. Chairman Secretary 170 Sagicor Financial Corporation 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 Fourth Annual Meeting of Shareholders of Sagicor Financial Corporation (“the Company”) to be held on June 26, 2007 at 5:30 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 not later than 5:30 pm on June 24, 2007. 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, under its corporate seal or by any officer or attorney thereof duly authorized, at any time up to and including the last business day preceding the day of the Meeting or any adjournment thereof with: (cid:129) (cid:129) (cid:129) the Corporate Secretary at the registered office of the Company at Sagicor Corporate Centre, Wildey, St Michael, Barbados, or the Corporate Secretary, Sagicor Financial Corporation, c/o Sagicor Life Inc, Sagicor Financial Centre, 16 Queen’s Park West, Port of Spain, Trinidad, or the Branch Registrar, Computershare Investor Services (Channel Islands) Limited, Ordinance House, 31 Pier Road, St Helier, Jersey, Channel Islands. 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 10, 2007 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: the election of Directors the re-appointment of the incumbent Auditors and Directors’ authorization to fix their remuneration, (i) (ii) (iii) the confirmation without amendment of amendments made to Bylaw No 1 of the Company on March 16, 2007, (iv) the fixing of Directors’ fees. 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 common share is entitled to one vote for each share held. As at May 10, 2007, there are 266,985,336 common shares of the Company outstanding. 171 Sagicor Financial Corporation PRESENTATION OF FINANCIAL STATEMENTS AND AUDITORS’ REPORT The Financial Statements of the Company for the year ended December 31, 2006 and the Auditors’ Report thereon are included in the 2006 Annual Report. ELECTION OF DIRECTORS The Board of Directors consists of twelve members. The number of Directors to be elected at the Meeting is three. Mr David Walter Allan, Mr Terrence Anthony Martins and Mr Dodridge Denton Miller will retire at the end of the Meeting and will be seeking re-election. 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: (cid:129) Mr DAVID WALTER ALLAN (cid:129) Mr TERRENCE ANTHONY MARTINS (cid:129) Mr DODRIDGE DENTON MILLER Mr David Allan, aged 69, is a Barbadian and a former President and Chief Executive Officer 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 a director of Life of Jamaica Limited and Sagicor Life Inc and is a director of Barbados registered exempt insurance companies. Mr Allan, with more than 50 years’ experience in the life insurance industry, is a former West Indies cricketer. He is a member of the Audit Committee of the Board. Mr Terrence Martins, aged 64, is the non-executive Vice Chairman who is a citizen and resident of Trinidad and Tobago. He has brought a wealth of knowledge to Sagicor, with over 40 years of experience within the financial services industry both in the Caribbean and the United Kingdom. His areas of expertise include banking, finance, administration, corporate governance, and risk management. Mr Martins has previously held the position of Group Chief Executive Officer of RBTT Financial Holdings Limited. He is currently the Chairman of Caribbean Information and Credit Rating Services Ltd (CariCRIS), a Caribbean rating agency. He previously held several directorships within the RBTT Financial Holdings Group, in and outside of Trinidad and Tobago and is also a former member of the Integrity Commission of Trinidad and Tobago. In addition to being Vice Chairman of the Board, Mr Martins chairs the Corporate Governance Committee and is a member of the Human Resource Committee. Mr Dodridge Miller, FCCA, MBA, LLM, is 49 years of age. He was appointed President and Chief Executive Officer of The Mutual Group of Companies, now Sagicor, on July 1, 2002, having previously held the positions of Treasurer and Vice President, Finance and Investments, Deputy Chief Executive Officer and Chief Operating Officer. Mr Miller, a Barbadian, joined the Group in 1989. He was elected a director of The Mutual Group, in 2001. He is the Chairman of the Group’s main operating subsidiaries, Sagicor Life Inc, Life of Jamaica Limited and Sagicor Life Insurance Company. Mr Miller Is a Fellow of the Association of Chartered Certified Accountants (UK), and obtained his MBA from the University of Wales and Manchester Business School, United Kingdom, and holds an LLM in Corporate and Commercial Law from the University of the West Indies. He has more than 20 years’ experience in the insurance and financial services industries. Messrs Allan, Martins and Miller 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. 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 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 Shareholders vote FOR the re-appointment of PricewaterhouseCoopers and the authorization of Directors to fix the Auditors’ remuneration. 172 AMENDMENT TO BYLAW NO. 1 (“THE BYLAWS”) Sagicor Financial Corporation The Sagicor Group has been successfully executing a business strategy to be the leading insurance company within the Caribbean and to use this strong market position to expand internationally. During the past 15 years, the Sagicor Group has doubled its size approximately every 5 years, when measured in terms of total assets. We intend to continue our growth and expansion in order to maintain our position in the top tier of major regional financial institutions, a position we believe is critical to Sagicor’s long-term viability. Our business strategy comprises four key components: 1. 2. 3. 4. Further expanding the scale of our operations by participating in the consolidation of the financial services industry in the Caribbean, while continuing to streamline existing and acquired operations to extract synergies, and deliver a high quality of service to our customers. Expanding into new product markets to offer a wider range of financial products and services. Expanding into new geographic markets which offer the Sagicor Group attractive opportunities to profitably grow and expand its business operations. Rigorous financial management to ensure optimization of the use of capital and the delivery of competitive returns to Shareholders. Through the careful implementation of this strategy, Management has built a strong financial Group and has delivered exceptional returns to Shareholders. An important aspect of this strategy is the strengthening of our Corporate Governance framework. In this connection, a review of the Bylaws was conducted. These Bylaws relate generally to the conduct of the affairs of the Company and were enacted on incorporation of the Company on December 6, 2002 and confirmed by Shareholders at the first annual meeting held on June 30, 2004. Pursuant to their power under Section 61(1) of the Act, Directors unanimously amended the By-laws on March 16, 2007. The amendments took immediate effect and remain in effect until the amendments are confirmed, amended or rejected by Shareholders pursuant to Section 61(2) of the Act. Under Section 61(2) of the Act, Directors are required to submit any amendment or repeal of a Bylaw made under Section 61(1) to the Shareholders at the next meeting of Shareholders after such amendment or repeal for confirmation, amendment or rejection. Bylaw 3.6 - Nationality and Residence Bylaw 3.6 provided for certain nationality qualifications for Directors. A majority of the Board had to be citizens or permanent residents of and ordinarily resident in Barbados and at least one director had to be a citizen of and ordinarily resident in Jamaica, Trinidad and Tobago and any country in the Eastern Caribbean respectively. As the Company pursues the strategy outlined above it is necessary to select Directors from a suitable pool of regional and international candidates with the requisite knowledge and experience, and to include on the Board persons who reflect the geographic and business diversity of the Group and who can make meaningful contributions to our growth and development into a global financial services Group. Accordingly, Bylaw 3.6 has been repealed. The full text of the Bylaw 3.6 (which has been repealed) is set out in Schedule 2 to the Notice of the Meeting. Bylaw 9 – Shares; Bylaw 12.3 - Recorded Address An integral part of our strategy also involves listing on an international stock exchange in order to gain access to capital in more established markets to pursue our strategy of expansion, create a footprint in an international capital market and enhance our ability to compete in a global environment. Accordingly, on February 14, 2007, all of the issued common shares of the Company were admitted to trading on the main market for listed securities of the London Stock Exchange. The Directors consider it expedient to make amendments to Bylaw 9 and repeal Bylaw 12.3 in order to facilitate the listing of the Company’s shares on the London Stock Exchange. The amendments to Bylaw 9 and the repeal of Bylaw 12.3 are intended principally to: (a) permit the setting up of a branch register outside Barbados (b) permit the deposit of Sagicor shares in depositaries other than the Barbados Central Securities Depositary (c) remove any references applicable to share restrictions 173 Sagicor Financial Corporation (d) permit Directors to prescribe the form of share transfer constituting a valid transfer (which may vary from jurisdiction to jurisdiction), and recognize both the regional and international origin of our Shareholders. (e) The full text of the original Bylaw 9 (which has been repealed and replaced) is set out in Schedule 2 to the Notice of the Meeting. The full text of the new Bylaw 9 is set out in Schedule 1 to the Notice of the Meeting. The full text of the Bylaw 12.3 (which has been repealed) is set out in Schedule 2 to the Notice of the Meeting. Recommendation In order to facilitate the current business strategy of the Company, the Board of Directors recommends that Shareholders confirm without amendment the Bylaws as amended on March 16, 2007, specifically: (a) (b) (c) the repeal of Bylaw 3.6; the repeal and replacement of Bylaw 9 as set out in Schedule 1 to the Notice of the Meeting; and the repeal of Bylaw 12.3. FIXING OF DIRECTORS’ REMUNERATION Directors’ Compensation Project In implementing the international business strategy of the Group, the Board of Directors has commissioned several strategic initiatives designed to enhance the operating capability of the Group. One of these initiatives includes a review of the management structure to ensure that it is aligned with the business strategy, is appropriately staffed and provides adequate resources for the future. Another initiative involves the total review of the Corporate Governance architecture to ensure that it reflects international best practice and provides the level of governance required for a company of its size, diversity and geographical reach. The Board reviewed Directors’ remuneration as part of the strengthening of the Corporate Governance framework. International best practice suggests that in order to attract Directors with the requisite knowledge and experience who can make meaningful contributions to the growth and development of a global financial services organization, Directors’ remuneration should be sufficient to attract, retain and motivate Directors of the quality required to ensure the Company is managed successfully, and should reflect the time, commitment, accountability, risk, impact of decisions and responsibilities of the role, having regard to relevant market comparability. Directors’ fees were first fixed in 2004 at US $20,000 per annum for the Chairman and US $12,500 per annum for Directors. Over the last three years as the Company continues to grow and expand, the time, commitment and responsibilities required of their role as Directors has increased. Accordingly in 2006, the Corporate Governance Committee commissioned the independent firm of Ernst and Young of Atlanta (“the Consultants”) to review director compensation. The objectives of the exercise were to: (i) Review competitive market practices for director total compensation, including best global practices and trends. (ii) Review all components of total compensation for the Non-Executive Chairman and Non-Executive Directors in terms of annual retainer, board meeting fees, committee meeting fees, board chair and committee chair fees, equity compensation, and other relevant Items. (iii) Recommend a competitive level and structure of Board compensation for the Company and its main operating subsidiaries. Project Methodology In order to achieve the above mentioned objectives, the Consultants adopted the following methodology: (i) Board compensation data was gathered from comparable organizations in the Caribbean region and the United States. Caribbean data was sourced from a custom survey conducted by Economic Resources Limited and US data was sourced from the following multiple, nationally recognized published surveys: 174 Sagicor Financial Corporation – Investor Responsibility Research Center, Board Practices/Board Pay – National Association of Corporate Directors, Director Compensation Report – The Conference Board, Directors’ Compensation and Board Practices – Buck Consultants, Board of Directors Compensation and Governance Practices Survey – Korn/Ferry International, Annual Board of Directors Study. (ii) Data comparability was matched along the size of the Sagicor Financial Group in terms of revenue, premium income and type of organization (financial services). International Best Practices and Trends Best practices and trends in the United Kingdom, Europe and the United States were reviewed in areas such as board, director and chief executive officer performance evaluations, succession planning, time spent by directors on company business, frequency of Board meetings, terms of office of non-executive directors, the number of executives serving on boards, and the growing importance of governance committees as the third most prevalent committee behind audit and human resource committees. (a) The following best practices and trends on the operation of boards and director compensation emerged from the review: the trend towards eliminating or reducing separate board and committee meeting fees and providing higher retainer fees with some companies, in some cases, cutting retainer compensation for unsatisfactory meeting attendance; the significant increase in cash compensation for audit, investment and human resource/compensation chairs and committee members, compared to other board committees, based on the fact that these committees are meeting more frequently and for longer periods of time; (b) the average board had 4 to 6 committees; (c) on average boards met between 10 to 12 times per year and committees met 3 to 6 times per year; (d) (e) non-executive directors served on an average of 2 committees; (f) total direct compensation for non-executive directors generally included two main components: (i) total cash compensation comprised a combination of annual retainer for service, fees for attending full- board meetings, and fees for serving as either chairman or member of a committee and fees for attending committee meetings, and total equity compensation comprised an initial allocation upon election to serve and annual equity grants. (ii) Recommendations Total cash compensation currently paid to the Chairman and Directors of the Company was then compared to US market data using the 50th percentile and Caribbean market data using the 90th percentile. On the basis of the approach set out above, the Consultants made the following recommendations: (i) Cash compensation should reflect accountability, risk, impact of decisions and market comparability. (ii) Annual retainers for Board and Committee service should be paid with no separate meeting fees. (iii) Increased retainers should be paid for Board and Committee Chairs. (iv) No director compensation should be paid to Executives serving on subsidiary boards. (v) No equity compensation should be paid at this time and transition to equity compensation should be considered as the organization evolved and would include target ownership and pay-for-performance. (vi) No other benefit or perquisite programs should be paid at this time. (vii) Board and individual Director performance evaluations should be implemented and a tool and process should be developed to evaluate effectively overall Board performance and individual contribution. (viii) Cash retainers to compensate Non-Executive Board and Committee Chairs and Members should be recommended for approval by Shareholders as follows: Board/Committee Board Board Committees Non-Executive Chair US $45,000 per annum US $7,000 per annum Non-Executive Member US $40,000 per annum US $5,000 per annum 175 Sagicor Financial Corporation The Corporate Governance Committee considered and accepted the above recommendations which were approved by the Board on November 8, 2006. The Board of Directors considers that the above recommendations for Director Compensation are consistent with comparable companies in the region, reflect international best practice and trends and are reasonable and appropriate for the Company having regard to the number of board and committee meetings held, the time required to read and otherwise prepare for meetings, commitment, accountability, risk, impact of decisions and market comparability. The Board of Directors therefore recommends Directors’ remuneration be fixed as set out above. 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 David Walter Allan, Mr Terrence Anthony Martins and Mr Dodridge Denton Miller. (b) The re-appointment of the incumbent Auditors, PricewaterhouseCoopers, and the authorization of Directors to fix their remuneration. (c) Confirmation without amendment of the Bylaws amended on March 16, 2007 as set out in the Notice of the Meeting. (d) The fixing of Directors’ remuneration as set out in 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 June 1, 2007. Sandra Osborne Corporate Secretary 176 SHAREHOLDER PROXY FOURTH 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 matters that may properly come before the FOURTH ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON JUNE 26, 2007 and any adjournments thereof. The Directors and Management recommend Shareholders vote FOR items numbered 1, 2, 3 and 4 below: 1 Election as Directors of the Nominees listed below: Vote FOR WITHHOLD from Voting DAVID WALTER ALLAN TERRENCE ANTHONY MARTINS DODRIDGE DENTON MILLER 2 3 4 Re-appointment of Incumbent Auditors and Authorization of Directors to fix their Remuneration: Confirmation of Amendments to Bylaw No 1: (Please refer to Item 4 of the Notice of the Meeting for the full text of the Resolution) Fixing of Directors’ Remuneration: (Please refer to Item 5 of the Notice of the Meeting for the full text of the Resolution) Vote FOR Vote FOR Vote FOR WITHHOLD from Voting WITHHOLD from Voting WITHHOLD from Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 5.30 PM ON JUNE 24, 2007, OR AT LEAST 48 HOURS BEFORE THE TIME APPOINTED FOR HOLDING THE MEETING OR ADJOURNED MEETING, TO: THE CORPORATE SECRETARY, SAGICOR CORPORATE CENTRE, WILDEY, ST MICHAEL, BARBADOS THE CORPORATE SECRETARY, SAGICOR FINANCIAL CORPORATION, C/O SAGICOR LIFE INC, SAGICOR FINANCIAL CENTRE, 16 QUEEN’S PARK WEST, PORT OF SPAIN, TRINIDAD, OR THE BRANCH REGISTRAR, COMPUTERSHARE INVESTOR SERVICES (CHANNEL ISLANDS) LIMITED, ORDINANCE HOUSE, 31 PIER ROAD, ST HELIER, JERSEY, CHANNEL ISLANDS. –

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