Sagicor Financial Company Ltd. Annual Report 2007

Plain-text annual report

WISE FINANCIAL THINKING FOR LIFE Annual Report and Accounts 2007 Wise Financial Thinking for Life Over the last 168 years, we at Sagicor are proud that we have shared with generations of people the wisdom we have gained to help them make prudent decisions to achieve their goals in life . “ KNOWLEDGE IS OF THE PAST, WISDOM IS OF THE FUTURE.” “ KNOWLEDGE IS OF THE PAST, WISDOM IS OF THE FUTURE.” Contents 01 02 03 04 05 06 07 08 Overview 7 Directors’ Report 11 Chairman’s Statement 12 Chief Executive Ofﬁ cer’s Report 14 Operating and Financial Review 18 Corporate Citizenship 30 Governance 33 Board of Directors 34 Corporate Governance Report 40 Financial Statements 47 Index to Financial Statements 48 Auditors’ Report 50 Actuary’s Report 52 Financial Statements 53 Notes to the Financial Statements 58 Executive Management 161 Advisors and Bankers 167 Sagicor Ofﬁ ces 169 Shareholder Information 173 Shares 174 Dividends 174 Analysis of Shareholding 175 Notice of Meeting 177 Management Proxy Circular 178 3 “ HAPPINESS IS NOT THE MERE POSSESSION OF MONEY, IT LIES IN THE JOY OF ACHIEVEMENTS, IN THE THRILL OF CREATIVE EFFORT.” “ MAKING MONEY IS EASY. KEEPING IT IS THE HARD PART.” 01 Overview 7 Sagicor is synonymous with world-class ﬁ nancial services. Our vision is “To be a great company committed to improving the lives of the people in the communities in which we operate.” With a proud history dating back to 1840, Sagicor is a dynamic, indigenous Group which has been redeﬁ ning ﬁ nancial services in the Caribbean, building a strong base, from which it has expanded into the international ﬁ nancial services market. Sagicor now operates in 22 countries in the Caribbean, Latin America, the UK and the US. In 2002, after 162 years as the Barbados Mutual Life Assurance Society, the company demutualised with the overwhelming support of its policyholders and Sagicor Financial Corporation was formed as a publicly listed holding company. Sagicor, the new company name, means “wise judgment” and reﬂ ects a new vision for ﬁ nancial advice and services. For over 167 years, we have worked to help families by providing the assurance and peace of mind needed, especially during their most challenging times. This will never change. Our name and identity draw on the strength, stability and ﬁ nancial prudence that are our heritage, but this identity also represents the freedom that wise ﬁ nancial thinking can bring to our Customers throughout their lives. Through a wide range of ﬁ nancial products and services, Sagicor offers “wise judgment” throughout the entire life cycle - whether it is the purchase of a new home, planning a child’s future and higher education, retirement, or simply providing security for loved ones. Sagicor will meet ﬁ nancial needs now and for the future. Sagicor has developed an incomparable reputation because of its ﬁ nancial stability. That solid reputation is based on the Company’s excellent ﬁ nancial performance and ﬁ nancial prudence over the years. Our insurance subsidiaries, Sagicor Life Inc, Sagicor Capital Life and Life of Jamaica, are consistently rated “A” (Excellent) by A.M Best and Company and Sagicor Life Inc, has a ﬁ nancial strength rating of BBB+ from Standard and Poor’s. Our new US subsidiary, Sagicor Life Insurance Company is rated “A-” (Excellent) by A.M Best. Sagicor’s objective is to create a leading international ﬁ nancial services group which provides world class products and services to Customers, while generating excellent returns for Shareholders. The Company’s strategy to achieve this objective is to: (cid:129) Streamline new and existing operations to improve efﬁ ciency and deliver value to Customers; (cid:129) Expand and develop products to offer a wider range of ﬁ nancial products and services; (cid:129) Expand internationally and in the Caribbean and (cid:129) Optimise the use of capital to maximise Shareholder returns. 8 “ TO ACCOMPLISH GREAT THINGS, WE MUST NOT ONLY ACT, BUT ALSO DREAM, NOT ONLY PLAN, BUT ALSO BELIEVE.” “ OPPORTUNITIES MULTIPLY AS THEY ARE SEIZED.” 02 Directors’ Report 11 TERRENCE A. MARTINS Chairman CHAIRMAN’S STATEMENT YEAR END RESULTS TO DECEMBER 31, 2007 I am delighted to report to you for the ﬁ rst time as Chairman of the Sagicor Group of Companies. The Group recorded yet another period of solid performance for the ﬁ nancial year 2007. Net Income for the year was US$108.7 million, compared with US$86.6 million for the previous year. Total assets of the Group amounted to US$3.6 billion, while shareholders’ capital reached US$455.2 million. The Board accordingly approved a ﬁ nal dividend of BDS 8 cents (US 4 cents) for a total dividend for the year of BDS 14 cents (US 7 cents). The share price as quoted on the Barbados Stock Exchange ended the year at BDS $5.20 (US$2.60) increasing from BDS $ 4.13 (US$2.065) at the start of the year. This amounted to an appreciation of approximately 25.9% for the year, for a total return to shareholders of 29.3%. During 2007, the Group continued to implement its strategic vision by expanding into new geographies and new product lines. In this regard, on September 1, 2007, Sagicor acquired a managing agency of a Lloyd’s syndicate, now re-branded to Sagicor at Lloyd’s, and its associated capital and services providers, and immediately followed this with an acquisition of a distribution network which supports the Sagicor at Lloyd’s business. The acquisition of Sagicor at Lloyds will allow the Sagicor Group to further diversify its range of products and services, and will also provide additional geographic diversiﬁ cation. On February 14, 2007, Sagicor became the ﬁ rst Caribbean company to have its shares admitted to trading on the main market of the London Stock Exchange. This is a signiﬁ cant milestone in our journey to become an international ﬁ nancial services group. The listing on the London Stock Exchange will enhance our ability to access capital when required. Through the implementation of our vision to expand, grow and diversify, ﬁ rst in our Caribbean home markets and then internationally, it is to be noted that the Sagicor Group has doubled its size approximately every ﬁ ve years for the last ﬁ fteen years. 12 We have moved from a single line, single company operation to a Group with multiple lines of business, operating in 22 countries in the Caribbean, and in Latin America, the UK and the US. As expected, this has increased the complexity of our operations requiring an effective and proactive response from the Board and Management. In recognition, during 2007 a new and enhanced governance architecture was implemented reﬂ ecting best practice. Policies and measures to identify the principal risks to our various operations are an important oversight responsibility of the Board, which requires continuous attention as we seek to ensure that our business initiatives and plans are prudent, properly aligned with our risk proﬁ le, and create sustainable shareholder value. We hold the view that a primary responsibility of the Board of Directors is to create an environment for management which builds trust and demands integrity in all facets of our enterprise. In this regard, we are committed to the provision of sound and timely advice to management in a manner which consistently facilitates the attainment of our shared strategic and development goals. We will continue to focus on the fundamentals of efﬁ ciency, cost containment and the acquisition of quality assets within a framework of adherence to our Corporate Governance principles and the imperative of value creation for our Customers and Shareholders. My predecessor, Mr. Arthur Bethell, retired as Chairman and Director of Sagicor Financial Corporation after our Annual Meeting on June 26, 2007. Mr. Bethell has served the Sagicor Group with distinction for more than 40 years as an Agent, Executive, President and Chairman. On behalf of the Board, Management and Staff, we thank him for his many years of service and wish him a healthy and happy retirement. Dr Jeannine Comma was appointed to ﬁ ll the vacancy created by Mr. Bethell’s retirement. Dr Comma is Chief Executive Ofﬁ cer and Director of the Cave Hill School of Business at the University of the West Indies. She is a Director of our principal operating subsidiary Sagicor Life Inc, and brings a wealth of experience and expertise in the area of human resource management. We welcome her to the Board of Sagicor Financial Corporation. Mr David Allan will retire at the end of the ﬁ fth Annual Meeting. He has made an outstanding contribution to the Group for over 50 years, having begun his career at Sagicor, then The Mutual, in 1956. He has served, with equal distinction, in several capacities, including Agent, Agency Manager, General Manager and President. The Board, Management and Staff thank him sincerely for his pivotal role in the development of Sagicor over the last half century and wish him well in his retirement. The Sagicor Group continues to enjoy strong industry and ﬁ nancial ratings. Our insurance subsidiaries, Sagicor Life Inc, Sagicor Capital Life and Life of Jamaica, are consistently rated “A” (Excellent) by A.M Best and Company. Our new US subsidiary, Sagicor Life Insurance Company was recently upgraded to “A-” (Excellent). Our principal operating subsidiary, Sagicor Life Inc, enjoys a BBB+ ﬁ nancial strength rating from Standard and Poor’s. I wish to thank my fellow Directors, Management and Staff for their contribution to the 2007 results, and especially to thank our Customers and Shareholders who continue to place conﬁ dence in the Sagicor Group. TERRENCE A. MARTINS Chairman 13 DODRIDGE D. MILLER President and Chief Executive Ofﬁ cer CHIEF EXECUTIVE OFFICER’S REPORT In 2007, the Sagicor Group continued to execute on a business strategy which is designed to transform the Group from a domestic Caribbean insurance entity to an international ﬁ nancial services Group. We consequently recorded another proﬁ table and successful year as we continue to build on an already sound ﬁ nancial footing. Key components of the strategy include: 1. Continuing to extract cost synergies and efﬁ ciencies from existing and acquired operations; 2. Expanding on the portfolio of products and services to become a fully integrated ﬁ nancial institution; 3. Expanding into new markets that offer attractive valuations and sustainable opportunities for growth; and 4. Optimising the use of capital to maximise Shareholder returns. The careful execution of this strategy has produced very strong results for the Group over the last ﬁ fteen years and we believe that this strategic platform remains the best ﬁ t for the Group at this time. Performance Review* All of our main operating companies, except for Sagicor USA and Sagicor General, met or exceeded performance expectations. Life of Jamaica Group: In Jamaica, the Life of Jamaica Group, exceeded performance expectations for the ﬁ nancial year 2007. The Group comprises Life of Jamaica Limited (LOJ), our insurance subsidiary, and Pan Caribbean Financial Services Limited, (PCFS), our banking and asset management subsidiary. LOJ, which is the dominant insurance company in Jamaica with more than 50% market share in all lines of business, recorded net proﬁ t for the year of US $49.8 million, of which US $43.0 million was attributable to LOJ Shareholders. All lines of business enjoyed increased growth with Individual Life recording increase in revenue of 17% while Employee Beneﬁ ts enjoyed a growth of 10%. Funds under Management also experienced solid growth of 10% for the year moving from US $2.1 billion to US $2.3 billion. The banking and asset management division, through PCFS, also experienced increased revenue, growing to US $37.3 million, a growth of 13% over 2006. Net income of PCFS grew by 4% to US $17.6 million in 2007. *This review is based on the respective subsidiaries’ ﬁ nancial statements. Consequently, these cannot be referenced to the Group’s audited ﬁ nancial statements. 14 Sagicor Life Inc: Sagicor Life Inc is our Barbados based insurance subsidiary. It is the most geographically diverse of our insurance subsidiaries, and owns and operates branches or companies in 19 of the 22 countries in which the Group operates. Sagicor Life also produced a solid ﬁ nancial performance during 2007. Overall revenue grew by 15% when compared to last year. Net Proﬁ t for the year was US $36.3 million, compared to US $37.8 million for the same period last year. Sagicor Life enjoys strong market share in most of the territories in which it operates. Funds under Management grew by 7% to reach US $1.5 billion. Sagicor USA: In the case of Sagicor USA, longer than anticipated product approvals in the 44 States and the District of Columbia, and a slower build-out of our distribution network, adversely impacted our revenue targets for 2007. However, the net loss for the year at US $1.5 million was signiﬁ cantly lower than the projected loss for the year at US $3.5 million. Revenues for the last quarter of 2007 and the ﬁ rst quarter of 2008 are in line with expectation. During the ﬁ rst quarter of 2008, A.M. Best & Company upgraded the ﬁ nancial strength rating from B++ (Good) to “A-“ (Excellent). This has had a positive impact on both sales and the quality of distribution which we are now able to attract. Sagicor General: Sagicor General is our Caribbean Property & Casualty insurance subsidiary. In 2006, it expanded its operations in Trinidad & Tobago and experienced exceptional growth in that market in 2006 and 2007. This rapid growth proved burdensome for the size of the initial operations in that country, and as a result the Company’s overall performance suffered and fell short of expectations. Management has strengthened the operations and addressed the deﬁ ciencies, and this subsidiary is now expected to meet or exceed expectations during the current ﬁ nancial year. Signiﬁ cant Milestones London Stock Exchange Listing: In November of 2006, Sagicor Shareholders removed all constrained share ownership provisions in the Company’s Articles, thereby clearing the way for Sagicor to list on the London Stock Exchange (LSE). Sagicor applied to the Financial Services Authority for all Sagicor Common Shares to be admitted to the Ofﬁ cial List, and to trading on the market for listed securities of the London Stock Exchange. In February 2007, all of the Common Shares were admitted to trading on the main market of the LSE. Sagicor’s listing is a major achievement for the Group. A presence in the international capital markets is an integral part of our business strategy. More importantly, the listing was a signiﬁ cant milestone, not just for our Company, but the Caribbean, since it is the ﬁ rst company from the region to have its shares admitted to trading on the main market of the LSE. Sagicor at Lloyd’s: In the latter part of 2007, the Group acquired Sagicor at Lloyd’s Limited, the managing agency of Lloyd’s Syndicate 1206, and its associated capital and service providers. The Group also purchased Byrne and Stacey Underwriting Limited (BSU), a marketing agency in the Lloyd’s market. These were our ﬁ rst acquisitions in Europe since obtaining a secondary listing on the LSE and extended our operating base to the important London market. They provide a platform for the Group to expand its operations into new geographies and markets, and is in furtherance of its business strategy to diversify earnings by risk and currency. The syndicate is part of the Lloyd’s of London franchise, a specialist insurance market consisting of independent syndicates. The key features of the market are that risks are accepted in syndicates with members having several but not joint liability. Syndicate 1206, now known as Sagicor at Lloyd’s, writes property and casualty business. The Management and Staff of Sagicor at Lloyd’s and BSU have many years’ experience in the London Market and we have no doubt that through these acquisitions we will be able to spearhead the development of the Group as a competitive ﬁ nancial institution in the European market place. In accordance with International Financial Reporting Standards (IFRS), the Group recorded a gain on this acquisition of US $26.4 million, of which US $23.7 million is attributable to Shareholders’ interests. 15 Allnation: During the year, Management disposed of its international health company Sagicor Allnation. Allnation specialised in the provision of Individual and Group Health coverage to international groups and clients, including Third Country Nationals. As Sagicor has continued to expand its base of operations, this line of business often overlapped with our domestic markets and accordingly became less strategic to the Group. Barbados Farms: In January 2008, Sagicor acquired a controlling interest in Barbados Farms Limited, the principal business of which is the operation of sugar cane plantations, the cultivation of various other crops and the development of non- productive land. The acquisition permits the Group to participate in an important economic activity in Barbados, and also facilitates the orderly transition of non-productive lands into their next viable alternative, whereby lands not suitable for agriculture will be transitioned in an orderly manner to their next best use, including residential developments. Management: During the year, as part of a general restructuring, the Group established a Group Executive Committee to oversee the effective management of the Group across all geographies and lines of business. Speciﬁ cally, the purpose of the Committee is to assist the Group CEO in the development and implementation of strategy, operational plans and policies; monitoring operating and ﬁ nancial performance; assessment and control of risk; prioritisation and allocation of resources; and monitoring competitive and environmental forces. This Committee, called EXCOM, comprises the President & CEO of the Group, the CEOs of the main operating subsidiaries, the Chief Financial Ofﬁ cer, Chief Risk Ofﬁ cer, General Counsel and Secretary, Group Chief Internal Auditor and the Vice President, Corporate Communications. EXCOM meets on a monthly basis. Human Resources As an employer, Sagicor is committed to providing the highest quality of work life and the opportunity for personal and professional development of all its Staff in the countries in which we operate. To this end, we have engaged the services of the Human Resource Development section of Ernst & Young, Atlanta, USA, to assist us with implementing Human Resources Best Practice across the Group. During the past year, the Sagicor Group continued to pursue a series of initiatives aimed at optimising the development of key business skills, and attracting and retaining the best talent in the Group. By the end of 2007, we had undertaken several initiatives. A comprehensive pay for performance programme was implemented for Management and Staff, using the Balanced Score Card methodology. This methodology was ﬁ rst introduced in 2005, for the administration of the Executive Long Term Incentive Programme and the Employee Stock Option Programme. It is now being used to determine the performance of employees at all levels in the Group. Ernst & Young is in the process of completing a comprehensive succession plan which identiﬁ es the key positions vital for the sustainability of our success and a development matrix for potential leaders. In this regard, we have begun a robust programme of training and development. The aim of the programme is to ensure an executive team with not only the technical abilities speciﬁ c to their disciplines, but with the critical skills and abilities necessary in a global environment. The Wharton School of Business and the Cave Hill School of Business of the University of the West Indies have been identiﬁ ed as two of the institutions to provide such training. Both Life of Jamaica (LOJ) and Sagicor Life Inc continue to focus on the strategic issues of employee engagement and have completed, with the assistance of LOMA, surveys to determine the level of employee morale. This ﬁ rst-year survey data will be the benchmark from which the companies will develop initiatives for improvements and Staff development during the coming year. We continued to sponsor industry training for all Staff through LOMA, with increasing numbers of Staff completing the LOMA and AHIP designations. We also introduced an eLearning programme. Group companies facilitated a number of workshops in Customer Service, Customer Retention Strategies, and Health and Safety for our Managers and Supervisors through the Cave Hill School of Business in Barbados and the Leadership Management Institute in Trinidad and Tobago. 16 A new Corporate Induction Programme was launched to ensure that all new members of the Sagicor team have a common understanding of our Corporate Goals, Values, Code of Ethics, Performance Expectations and HR Policies and Procedures. Other employee initiatives in 2007 included a series of lunch-time learning sessions, which were introduced to assist our employees to recognise the importance of a balanced work life, and to improve the management of health and wellness. In keeping with our mission to provide “Wise Financial Thinking for Life”, we also facilitated a series of workshops on retirement planning. Life of Jamaica continued its commitment to provide an enriched after-school facility for children of employees. In addition, 55 children of employees at primary and secondary schools were awarded scholarships. Similar programmes will be introduced across the Group in 2008. Conclusion The outlook for the global economy for 2008 is one of lower or negative growth. The fallout of the credit crisis and the almost certain recession in the US economy will present its challenges across the global ﬁ nancial landscape. We, at Sagicor, enjoy strong market share in most of our operations, a geographically diversiﬁ ed portfolio of businesses, and a strong well-capitalised balance sheet with quality assets. We are conﬁ dent of our future and remain optimistic about our performance for 2008. I wish to thank the Board of Directors, Management and Staff for their continued support over the past year. DODRIDGE D. MILLER President and Chief Executive Ofﬁ cer 17 OPERATING AND FINANCIAL REVIEW Introduction The Group produced strong results in 2007. Net income reached US $108.7 million, an increase of US $22.1 million or 25.5% over 2006. The net income allocated to Shareholders was US $86.3 million, producing a 22.1% return on Shareholders’ equity, and earnings per share of US 32.3 cents. Comparable amounts for 2006 were US $67.7 million, 19.0% and US 25.4 cents respectively. The main highlight of the year has been the acquisition, effective September 1, 2007, of the corporate entity participating in Lloyd’s of London insurance syndicate 1206. The acquisition resulted in a gain of US $26.4 million, of which US $23.7 million is allocable to Shareholders. This gain has been computed in accordance with International Financial Reporting Standards (IFRS), which require the recognition of the fair value of the net tangible and intangible assets acquired. The capacity of the syndicate is an intangible asset and, with the assistance of an independent professional accounting ﬁ rm, was valued at US $23.7 million as of September 1, 2007. The capacity of a syndicate has to be supported by capital, and determines how much premium the syndicate can generate. On acquisition, Sagicor provided US $66.8 million in new capital to support the capacity of the syndicate. The acquisition of the interest in syndicate 1206, the managing agency and associated companies, augments considerably the Group’s geographical spread of business to the Lloyd’s of London insurance market, which writes property and casualty insurance business across the world. In addition, the Group has made some additional charges, in accordance with IFRS, to write down certain intangible assets which were acquired with two prior acquisitions. These charges amounted to US $3.7 million, of which US $3.1 million is allocable to Shareholders. Overall, the performance of the Group was very sound and is comparable to that recorded in 2006. This performance is discussed in greater detail in the sections which follow. With the increase in income allocable to Shareholders, the Directors have increased the ﬁ nal dividend to Barbados 8 cents (US 4 cents) per share to be paid in May 2008. Together with the interim dividend of Barbados 6 cents (US 3 cents) per share paid in October 2007, this makes a total dividend of Barbados 14 cents (US 7 cents) per share, an increase of 7.7% over the previous year. Accordingly, the total dividends declared for 2007 and 2006 respectively are illustrated in the following chart. TOTAL DIVIDENDS DECLARED 2007 ﬁ nal - US $11.1 million 2007 interim - US $8.0 million 2006 ﬁ nal - US $9.3 million 2006 interim - US $8.0 million 18 Overall Results The results for the year ended December 31, 2007 are set out below, with recurring operating activities being separated from the IFRS adjustments outlined in the foregoing section. These adjustments are set out in the non- operating column in the table below. 2006 results consisted wholly of operating activities. 2007 US$ millions 2006 US$ millions Operating Non-operating Revenue Beneﬁ ts Expenses Net income before income taxes Income taxes Net income for the year Net income attributable to: Shareholders Participating policyholders Minority interests 746.5 (384.6) (256.1) 105.8 (19.8) 86.0 65.7 (0.2) 20.5 86.0 Earnings per share in US cents 24.6 c 26.4 - (3.7) 22.7 - 22.7 20.6 - 2.1 22.7 7.7 c Total 772.9 (384.6) (259.8) 128.5 (19.8) 108.7 86.3 (0.2) 22.6 108.7 32.3 c Total 662.3 (346.0) (215.8) 100.5 (13.9) 86.6 67.7 (0.3) 19.2 86.6 25.4 c Operating revenue grew by 12.7% to reach US $746.5 million in 2007. Beneﬁ ts and operating expenses also increased by 11.1% and 18.7% respectively. As a result, operating net income before taxation has increased by US $5.3 million or 5.3%, to reach US $105.8 million in 2007. The effective income tax rate on operating income has increased to 18.7% from 13.8% in 2006. The increase is attributed largely to a change in the distribution of taxable income within the Group, with increased taxable income emerging in a country within the Other Caribbean Region where income tax is computed at the rate of 34.5% of net income. The net income attributable to minority interest primarily arises from income generated by the Life of Jamaica Group (including the Pan Caribbean Group), Sagicor at Lloyd’s and Sagicor General, all of which are majority, but only part- owned by Sagicor. Results by Segment Sagicor results by segment are reported by its operations in Barbados, Jamaica, Trinidad and Tobago, United Kingdom, United States and Other Caribbean. The following table presents the overall contribution of each segment to Group net income and Shareholders’ net income respectively for 2007 and 2006. 19 Barbados Jamaica Trinidad & Tobago UK USA Other Caribbean Not allocated to segments Net income for the year Group net income US$ millions Shareholders’ net income US$ millions 2007 2006 2007 2006 12.1 45.8 13.3 29.6 0.6 31.9 17.6 42.1 21.6 - 8.5 16.5 12.3 27.9 13.4 26.7 0.6 29.5 18.0 26.3 21.6 - 8.5 12.0 (24.6) (19.7) 108.7 86.6 (24.1) (18.7) 86.3 67.7 Barbados operations comprise the Barbados Branch operations of Sagicor Life Inc and Sagicor General Insurance respectively, and the operations of Sagicor Asset Management and Globe Finance Inc. Group net income from Barbados operations totalled US $12.1 million in 2007, as compared with US $17.6 million in 2006. The decline in results in 2007 as compared with 2006 can be attributed to a relative increase in the reserve for life and annuity beneﬁ ts. Jamaica operations comprise the operations of Life of Jamaica Limited and of the Pan Caribbean Group of Companies. Group net income from Jamaica operations totalled US $45.8 million in 2007, as compared with US $42.1 million in 2006. Revenue from Jamaica operations grew by 6.5% in 2007, resulting in an overall increase in net income. Since Sagicor owns 59% of Life of Jamaica and 64% of the Pan Caribbean Group and the Group net income is shared with the minority interest, the net income contribution to Shareholders amounted to US $27.9 million and US $26.3 million in 2007 and 2006 respectively. Trinidad and Tobago operations comprise the Trinidad Branch operations of Sagicor Life Inc and Sagicor General Insurance respectively, and the operations of Nationwide Insurance Company and Sagicor Merchant Limited. Group net income from Trinidad operations totalled US $13.3 million in 2007, as compared with US $21.6 million in 2006. The decline in results in 2007, as compared with 2006 can be attributed to a relative increase in the reserve for life and annuity beneﬁ ts. United Kingdom operations, comprise the Sagicor at Lloyd’s operations, which was acquired effective September 1, 2007. After deducting the gain that arose on this acquisition of US $26.4 million, the contribution to Group net income was US $3.2 million for the four months . The United States of America operations comprise the operations of Sagicor Life Insurance Company, Sagicor Allnation and Laurel Life Insurance Company. Group net income from USA operations totalled US $0.6 million in 2007, as compared with US $8.5 million in 2006. During 2007, Sagicor Life Insurance Company incurred additional costs as it ﬁ led a number of new products with insurance regulators prior to distribution and established additional distribution capacity. By the end of the year, Sagicor Life Insurance Company had appointed a total of 588 independent and managing general agents to distribute its products. Other Caribbean operations comprise various branch operations of Sagicor Life Inc and Sagicor General Insurance respectively, and the operations of Sagicor Capital Life Insurance Company, Capital Life Insurance Company Bahamas Limited, Sagicor Panamá SA, Sagicor Life of the Cayman Islands, Sagicor General Insurance (Cayman) Limited and Sagicor Finance Inc (formerly Mutual Finance Inc). Group net income from these operations totalled US $31.9 million in 2007, as compared with US $16.5 million in 2006. The signiﬁ cant improvement in results in 2007, as compared with 2006, can be attributed to a reduction in the reserve for life and annuity beneﬁ ts in Sagicor Life Inc and Sagicor Capital Life Insurance Company. This change in reserve arose from the re-organisation of branch and head ofﬁ ce operations, which resulted in lowering overall policy maintenance expenses. Group activities which are not allocated to segments comprise ﬁ nance costs and Group corporate costs. Group net expenses from these operations totalled US $24.6 million in 2007, as compared with US $19.7 million in 2006. 20 REVENUE BY GEOGRAPHICAL SEGMENT Barbados Jamaica Trinidad UK United States Other Caribbean 17% 39% 13% 8% 6% 17% Operating Revenue The following table summarises the composition of operating revenue for 2007 and 2006 respectively. Net premium revenue Net investment income Income from associates Fees and other revenue Total 2007 2006 US$ millions % US$ millions 430.4 261.2 4.2 50.7 57.6 35.0 0.6 6.8 377.6 238.4 2.7 43.6 % 57.0 36.0 0.4 6.6 746.5 100.0 662.3 100.0 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, 2007 and 2006 respectively. Life insurance Annuities Health insurance Property and casualty insurance Total premium revenue Reinsurance premiums Net premium revenue 2007 2006 US$ millions % US$ millions 46.5 10.0 23.0 20.5 100.0 249.5 53.4 123.2 109.7 535.8 (105.4) 430.4 231.6 56.1 113.5 67.5 468.7 (91.1) 377.6 % 49.4 12.0 24.2 14.4 100.0 Life insurance continues to be the largest class of insurance business written by Sagicor. Life insurance premiums increased by US $17.9 million or 7.7% to US $249.5 million in 2007. Annuity premiums declined by US $2.7 million in 2007. This class of premium often includes single premiums, as opposed to recurring premiums, which can inﬂ uence the total premium written. Individual life and annuity new business premium continues to be strong in the Caribbean markets. New business annualised premium income amounted to US $4.3 million from the Barbados market ,US $18.1 million from the Jamaica market, US $5.9 million from the Trinidad market, and US $8.1 million from the Other Caribbean markets. Health insurance premiums increased by US $9.7 million or 8.5% to reach US $123.2 million for the year. 21 The addition of the Sagicor at Lloyd’s syndicate to the Group from September 1, 2007 has materially augmented the premium revenue generated from property and casualty insurance. During this 4-month period, the syndicate generated premiums of US $34.0 million, adding to the property and casualty insurance from Caribbean operations of US $75.7 million in 2007. On an annualised basis, property and casualty insurance premium as of December 31, 2007 was approximately US $177.7 million, becoming the second largest class of insurance written by Sagicor. Net Investment Income Investment income by asset class is summarised in the following table. Investment property Debt securities Equity securities Loans and ﬁ nance leases Deposits and other items Total investment income Investment expenses Net investment income 2007 2006 % 5.8 59.9 10.0 17.0 7.3 100.0 US$ millions 15.1 157.4 26.4 44.6 19.3 262.8 (1.6) 261.2 % 6.1 63.4 6.9 16.7 6.9 100.0 US$ millions 14.7 153.2 16.8 40.3 16.7 241.7 (3.3) 238.4 As the largest asset class, debt securities provide the largest source of investment income. Debt securities generated interest income of US $148.3 million in 2007 and US $143.7 million in 2006, representing an average interest yield of 9.4% in both years. Debt securities also generated investment gains of US $9.1 million in 2007 and US $9.5 million in 2006. Equity securities generated investment gains of US $19.7 million in 2007 as compared with US $10.5 million in 2006. After taking into account dividend income of US $6.7 million in 2007 and US $6.3 million in 2006, the total return from equity securities increased by US $9.6 million, or 57.2% in 2007. The Group advances mortgage loans, policy loans, ﬁ nance loans and ﬁ nance leases to Customers and Policyholders. Interest income from these ﬁ nancial instruments totalled US $44.6 million in 2007, as compared with US $40.3 million in 2006, representing an increase of US $4.3 million or 10.7% in 2007. The average investment yield on loans and ﬁ nance leases totalled 8.8% in 2007 and 8.7% in 2006. Income from Associates and Other Revenue The associated companies of the Group performed well, generating income before tax to the Group of US $4.2 million in 2007. Other revenue items, comprising fee income, commission income and other operating income, totalled US $50.7 million in 2007, an increase of US $7.1 million or 16.3% over the previous year. Fee income includes income generated from assets under administration, the latter totalling US $1,507 million as of December 31, 2007. REVENUE BY BUSINESS SEGMENT 49% Individual Insurance 24% Group Insurance Property & Casualty Insurance 12% Banking & Investment Management 15% 22 Beneﬁ ts The following table summarises the composition of beneﬁ t expenses for 2007 and 2006 respectively. Net policy beneﬁ ts Net change in actuarial liabilities Interest – policy contracts Interest – deposit and security liabilities 2007 2006 US$ millions 272.8 27.7 19.5 320.0 64.6 % 70.9 7.2 5.1 83.2 16.8 384.6 100.0 US$ millions 254.7 9.0 20.2 283.9 62.1 346.0 % 73.6 2.6 5.8 82.0 18.0 100.0 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. 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, 2007 and 2006 respectively. Life insurance beneﬁ ts Annuity beneﬁ ts Health insurance claims Property and casualty insurance claims Total policy beneﬁ ts Reinsured beneﬁ ts and claims Net policy beneﬁ ts 2007 2006 US$ millions % US$ millions 38.9 25.2 26.7 9.2 100.0 130.1 84.4 89.2 30.8 334.5 (61.7) 272.8 129.4 82.4 82.8 16.3 310.9 (56.2) 254.7 % 41.6 26.5 26.6 5.3 100.0 As the largest insurance class of business at Sagicor, life insurance provides the largest quantum of beneﬁ ts to insured persons and beneﬁ ciaries. Life insurance beneﬁ ts include death and disability claims, policy surrenders and withdrawals, policy bonuses and dividends. The level of beneﬁ ts incurred totalled US $130.1 million and was comparable to the previous year’s total. The level of annuity beneﬁ ts was also comparable the previous year, and amounted to US $84.4 million. Consistent with the increase in premiums from health insurance, the level of incurred claims increased to US $89.2 million in 2007, as compared with US $82.8 million in 2006. The addition of the Sagicor at Lloyd’s syndicate to the Group from September 1, 2007 has signiﬁ cantly augmented the property and casualty insurance operations of Sagicor. During this 4-month period, the syndicate generated incurred claims of US $8.5 million which, when added to the incurred claims from property and casualty insurance, Caribbean operations resulted in a total expense of US $30.8 million in 2007. 23 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 overall increase in actuarial liabilities after accounting for the impact of reinsurance was US $27.7 million for 2007. Gross actuarial liabilities in respect of the Barbados, Jamaica and Trinidad segments increased overall, whilst the corresponding liabilities decreased in the USA and Other Caribbean segments. The decline in the USA is a reﬂ ection of the large maturing inforce block of policies of Sagicor Life Insurance Company, but is offset by the release in corresponding liabilities ceded to reinsurers. The decline in gross actuarial liabilities in the Other Caribbean Region is a result largely of the policy maintenance expense savings, arising from the transfer of certain administrative functions from branch ofﬁ ces to head ofﬁ ce. Interest expense Interest expense arising from investment policy contracts and from policy dividends on deposit totalled US $19.5 million in 2007, a slight decrease in the expense incurred in 2006. The interest expense on other operating ﬁ nancial liabilities totalled US $64.6 million, an increase of US $2.5million or 4.0% for the year. The average interest yields on these operating ﬁ nancial liabilities totalled 8.4% in 2007 and 8.3% in 2006. Operating expenses The following table shows an analysis of expenses for the years ended December 31, 2007 and 2006 respectively. Administrative expenses Commissions and related compensation Premium taxes Finance costs Depreciation and amortisation 2007 2006 US$ millions 142.2 77.9 7.3 12.3 16.4 % 55.5 30.4 2.9 4.8 6.4 US$ millions 125.4 57.1 6.6 9.4 17.3 % 58.1 26.5 3.1 4.3 8.0 Total 256.1 100.0 215.8 100.0 Total operating expenses have increased to US $256.1 million from US $$215.8 million in 2006. Compensation is the most signiﬁ cant component of operating expenses. Compensation costs for Administrative Personnel and Directors are included in administrative expenses. Commissions and related compensation are incurred and are payable to Sagicor Advisors, Independent Agents and Brokers who distribute insurance products on behalf of Sagicor. Salaries, bonuses, fees and short-term employer beneﬁ ts schemes for Administrative Personnel and Directors totalled US $63.9 million in 2007 and US $55.8 million in 2006. Employer contributions to social security and pension schemes on behalf of Administrative Personnel and Sagicor Advisors totalled US $9.8 million in 2007 and US $8.0 million in 2006. 24 The addition of the Sagicor at Lloyd’s syndicate to the Group from September 1, 2007 has signiﬁ cantly augmented the insurance distribution capacity of Sagicor. During this 4- month period, the syndicate incurred commissions of US $12.0 million, adding to the insurance distribution costs from other operations of US $65.9 million in 2007. Finance costs have increased to US $12.3 million in 2007 from US $9.4 million in 2006, the increase being attributed to the ﬁ nancing cost of the Sagicor 7.5% senior notes which were issued from May 12, 2006. Cash Flows Cash ﬂ ows generated or used by the Group are summarised into categories of operating, investing, or ﬁ nancing activities. Summary cash ﬂ ows for the years ended December 31, 2007 and 2006 respectively are set out in the following table. Operating activities Investing activities Financing activities Effect of exchange rates Net change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year 2007 (71.7) (18.3) (30.0) 8.8 (111.2) 224.7 113.5 2006 56.0 (13.3) 56.0 (11.2) 87.5 137.2 224.7 Cash used in operating activities totalled US $71.7 million for the year ended December 31, 2007. Within this total, US $83.9 million was generated by income ﬂ ows, US $268.1 million was used to acquire additional operating investments and US $90.4 million was provided by operating ﬁ nancial liabilities. Other movements in receivables, payables and insurance liabilities generated net cash ﬂ ows of US $22.1 million. Cash used in investing activities in 2007 totalled US $18.3 million. Within this total, US $16.6 million was used to acquire additional property, plant, equipment and software. Cash used in ﬁ nancing activities in 2007 totalled US $30.0 million. Within this total are dividends paid to Shareholders of US $17.1 million, dividends paid to minority interests of US $8.2 million and net repayment of loans payable of US $8.0 million. The overall reduction in cash and cash equivalents is a result of two main factors. Firstly, the investment of the remaining proceeds from the 2006 issue of senior notes in assets to support the capital requirements of the Sagicor at Lloyd’s syndicate and secondly, the re-investment of call deposits and other liquid balances at the beginning of the year in longer-term operating investments. With cash and cash equivalents amounting to US $113.5 million at balance sheet date, the Group has adequate resources to meet its ongoing obligations. 25 Assets As of December 31, 2007, the Group’s assets totalled US $3,649.7 million, 78.7% of which was represented by investments and cash. The principal components of the Group’s assets as of December 31, 2007 and 2006 respectively are summarised in the following table. 2007 2006 US$ millions % US$ millions % Investments and cash 2,872.7 78.7 2,703.1 80.4 Property, plant equipment and intangible assets Reinsurance assets Receivables and other assets Total 231.5 320.1 225.4 6.3 8.8 6.2 193.2 321.7 145.3 5.7 9.6 4.3 3,649.7 100.0 3,363.3 100.0 Investments and cash Investment property Debt securities Equity securities Loans and ﬁ nance leases Deposits and cash Total 2007 US$ millions 97.5 1,750.5 188.7 566.2 269.8 % 3.4 60.9 6.6 19.7 9.4 2006 US$ millions 90.6 1,650.8 187.1 496.7 277.9 % 3.3 61.1 6.9 18.4 10.3 2,872.7 100.0 2,703.1 100.0 Debt securities remain the largest asset class in the investment portfolio, comprising 60.9% of the total portfolio as of December 31, 2007. Debt securities comprise US $1,074.5 million in government securities, US $394.9 million in corporate securities, US $229.4 million in mortgage-backed securities and US $51.7 million in other securities. Loans and ﬁ nance leases comprise ﬁ nancial instruments originated by the Group and consist of US $294.0 million in mortgage loans, US $126.4 million in policy loans and US $145.8 million in ﬁ nance loans and ﬁ nance leases. 26 Liabilities As of December 31, 2007, the Group’s liabilities totalled US $3,063.0 million. The principal components of the liabilities as of December 31, 2007 and 2006 respectively are summarised in the following table. Policy liabilities Deposit and security liabilities Payables and other liabilities Total operating liabilities Notes and loans payable Total 2007 2006 US$ millions % US$ millions % 1,920.6 790.6 199.1 2,910.3 152.7 62.7 25.8 6.5 95.0 5.0 1,747.2 745.4 167.9 2,660.5 160.5 62.0 26.4 5.9 94.3 5.7 3,063.0 100.0 2,821.0 100.0 The Group considers notes and loans payable to be debt ﬁ nancing, whilst the other liability classes are considered to arise from operating activities. Policy Liabilities Actuarial liabilities – individual Actuarial liabilities – group Other insurance liabilities Investment contract liabilities Total 2007 2006 US$ millions % US$ millions % 1,183.2 181.1 313.9 242.4 61.6 9.4 16.3 12.7 1,197.0 176.6 152.7 220.9 68.5 10.1 8.7 12.7 1,920.6 100.0 1,747.2 100.0 Actuarial liabilities arising from life, annuity and health insurance contracts with individuals comprise the largest proportion of policy liabilities. These liabilities include US $288.1 million in participating policies, US $795.6 million in other life and annuity policies and US $93.1 million in unit linked policy funds. Actuarial liabilities arising from life, annuity and health insurance contracts with groups (i.e. employers or associations) totalled US $181.1 million as of December 31, 2007. These liabilities include US $131.7 million arising from annuity contracts. The addition of the Sagicor at Lloyd’s syndicate to the Group from September 1, 2007, has signiﬁ cantly augmented the property and casualty insurance liabilities of Sagicor. As of December 31, 2007, the syndicate’s insurance liabilities totalled US $138.4 million, thereby accounting for much of the increase in these liabilities from 2006. Investment contract liabilities arise from policy 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. As of December 31, 2007, these liabilities included US $487.3 million in securities sold under agreements to repurchase, US $163.7 million in loans from banks and other ﬁ nancial institutions, and US $136.6 million in customer deposits. 27 Capital Resources The principal capital resources of the Group as of December 31, 2007 and 2006 respectively are summarised in the table below. Shareholders’ equity Minority interest Notes and loans payable Total balance sheet capital resources Off balance sheet resources – letter of credit facility Total capital resources 2007 455.2 122.1 152.7 730.0 80.0 810.0 2006 413.8 118.6 160.5 692.9 - 692.9 The Group’s debt to total equity ratio was 26.0% at the end of the year, a reduction of 3.6% during the year. Consequent to the Sagicor at Lloyd’s acquisition, the Group replaced the initial capital support of US $66.8 million with a partially secured letter of credit facility of US $80.0 million. The utilisation of this facility represents a more efﬁ cient use of capital, while still maintaining an adequate amount of collateral which is available for capital support. The Group is subject to a number of capital adequacy standards for its insurance, banking and securities operations. In addition, in some Caribbean jurisdictions where there are no prevailing international capital adequacy insurance standards, the Group has voluntarily adopted a standard for its subsidiaries operating in those countries. The Group comfortably meets the prevailing capital adequacy standards and the standards it has voluntarily adopted. These are discussed and disclosed in note 45.2 of the ﬁ nancial statements. Risk Management 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, expose the Group to various insurance, ﬁ nancial and operational risks. Insurance risks include pricing, claims and lapse risk. Financial risks include credit, liquidity, interest rate, foreign exchange and equity price risks. Exposure to and sensitivity to insurance and ﬁ nancial risks are discussed and disclosed in notes 41 to 44 of the ﬁ nancial statements. Operational risks include the loss of Management control, the valuation of assets and liabilities requiring the signiﬁ cant exercise of judgement, technology failure, business interruption, money laundering, fraud and theft. The Group has a number of policies and controls in place to mitigate sources of operational risks, and it continues to develop and strengthen policies and controls to address additional risks that are identiﬁ ed. 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 will undergo constant monitoring. 28 Conclusion 2007 was a year of sound performance with an exceptional gain. The economic environment in 2008 is proving to be a challenging one. The sub-prime mortgage crisis has generated adverse effects in the USA and in many international ﬁ nancial institutions. The price increases in oil and food are having adverse effects across many countries, which are likely to continue for some time. The economies in the Caribbean are exposed in varying ways to these price increases, which will affect inﬂ ation and economic growth and limit consumer spending. There has been a slow-down in economic growth in the USA which, with the sub-prime mortgage crises, is also likely to limit consumer spending. The increasing diversiﬁ cation of the Sagicor Group helps us to mitigate potential sectoral and/or country downturns. In addition, the company is in a strong ﬁ nancial position and could take advantage of many opportunities which may arise. In conclusion, the company continues to consolidate its operations, extracting efﬁ ciencies wherever feasible. Our marketing and sales thrust in the USA market and the growth and development of the Sagicor at Lloyd’s business are expected to contribute signiﬁ cantly to the future development of the Sagicor Group. 29 CORPORATE CITIZENSHIP Sagicor is committed to being an outstanding corporate citizen with a focus on providing ﬁ nancial services that create value for Customers; generating excellent returns to Shareholders; providing the highest quality of work life and the opportunity for personal and professional development of its Staff; and the development of youth, education, health and sports in the community. Sagicor recognises that its corporate social responsibility must go hand in hand with its vision and reputation for Wise Financial Thinking for Life. Sagicor maintains its belief that social investment is at the heart of wealth creation and wealth protection. Over the years, Sagicor has proven its ability to impact the communities in which it operates, and 2007 was no exception. During the year, Sagicor continued to support the development of sport through its continuing contribution to the Sagicor Cricket Operations and Research Enterprise (SCORE) at the 3W’s Oval, a project undertaken at the Cave Hill Campus of the University of the West Indies. SCORE was designed to give tangible sustenance and visibility to the development of regional cricket. SCORE focuses on cricket research and the development of appropriate playing and training facilities at the Cave Hill Campus. The Group viewed the support of the 3W’s Oval, the Walk of Fame, the Indoor Cricket School and the Cricket Library and Research Centre as an important development to help empower the cricket fraternity of the region and beyond. The four facets of SCORE are interrelated facilities, and will be used to deliver a series of innovative, practical, training and academic programmes to assist cricketers at all levels throughout the region in pursuit of attaining excellence at their craft. Speciﬁ c to the development of cricket in Barbados, the Sagicor Cup and the Sagicor Shield tournaments, for ﬁ rst and second division teams, are sponsored by Sagicor General, our regional Property and Casualty company. These sponsorships are now in their 30th and 29th consecutive years respectively. Within the Group, we supported other areas of sport across the Caribbean region. These include Junior Squash, Junior Tennis, Chess, Game Fishing, Golf, Netball, Football and Swimming. In the area of Health, the Group has provided funding for the purchase of a mobile HIV/AIDS unit, a medical bed, a special scale and testing supplies to assist the Jamaica AIDS Support for Life. This was done through its Life of Jamaica subsidiary, Pan Caribbean Financial Services’ Sigma Run. Since the inception of the Run in 1999, organisations with an excellent track record of impacting the lives of people in the Jamaican community have been the beneﬁ ciaries of the funds raised. LOJ partnered with the Jamaica Cancer Society, Jamaica Business Council on HIV/AIDS, Jamaica Society for the Blind, the Urology Development Fund and St. Christopher’s School for the Deaf. Sagicor is also a Gold Star Donor to the Chronic Disease Research Centre (CDRC) of the University of the West Indies. The CDRC focuses on the major chronic diseases (hypertension, diabetes, obesity and heart disease) which cause most of the morbidity and mortality in the Caribbean today. They carry out research to ﬁ nd the best and most cost-effective prevention and treatment strategies. The Group has also supported other community activities in several countries which encourage a healthy lifestyle. Sagicor employees demonstrate a deep personal commitment to very important causes, and they are to be commended for being the driving force behind several projects. In Trinidad and Tobago, employees raised funds to provide medical attention for children in need, while in Barbados, they partnered with the YWCA to provide and serve breakfast to school children. In Jamaica, Life of Jamaica employees were active in the community, contributing to the improvement in the lives of citizens of all ages, as they assisted projects like the Environmental Health Foundation. 30 In the United States, Sagicor Life Insurance Company (SLIC) Management and Staff became involved with three projects. The ﬁ rst was the Christmas in July project, an “Americans for a Better Tomorrow” programme. They helped package and donate gifts to needy children during the holiday season. The programme also gives children the opportunity to develop social skills, such as learning to respect authority, leadership, and coping with peer pressure issues including resisting drugs, gangs, alcohol and tobacco. The other two projects were the Kids Café Open, a food bank programme to feed needy children, and the Children’s Angel Foundation Thrift Store, which raises funds to help pay for patients of low-income families to go on excursions, obtaining toys, games and clothes, and purchasing specialised equipment not covered by health care plans. Finally, in the area of Education, the Sagicor Group provides several scholarships tenable at the University of the West Indies, and in addition, has continued to assist schools at both the primary and secondary level throughout the Caribbean. The Group also supports international and regional institutions, such as the Pan American Health Organisation (PAHO) and the Caribbean Broadcasting Union, sponsoring their competitions to improve the standard of health journalism and ﬁ nancial reporting respectively. 31 “ WISDOM CONSISTS OF KNOWING WHAT TO DO WITH WHAT YOU KNOW.” 03 Governance 33 BOARD OF DIRECTORS TERRENCE A. MARTINS Age 66 / Citizen of Trinidad and Tobago / Director since January 2004 / Independent Director Terrence Martins was appointed non-executive Chairman on June 26, 2007. He has brought a wealth of knowledge to Sagicor, with over 40 years of experience within the ﬁ nancial services industry both in the Caribbean and the United Kingdom. His areas of expertise include banking, ﬁ nance, administration, corporate governance and risk management. Mr Martins previously held the position of Group Chief Executive Ofﬁ cer of RBTT Financial Holdings Limited. He was appointed a Director of Sagicor Life Inc in 2004 and 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. He was elected a Director of Sagicor Life Inc in 2004. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS CORPORATE GOVERNANCE COMMITTEE HUMAN RESOURCE COMMITTEE RISK MANAGEMENT COMMITTEE POSITION Chairman Chairman Member Chairman ATTENDANCE RECORD 100% 6 of 6 100% 5 of 5 100% 6 of 6 100% 3 of 3 DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 70,000 NIL 100,000 Nil Nil Nil STEPHEN D. R. MCNAMARA Age 57 / Citizen of St Lucia / Director since December 2002 / Independent Director Stephen McNamara was appointed non-executive Vice-Chairman on June 26, 2007. He is the 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, Sagicor Finance Inc (formerly Mutual Finance Inc). BOARD/BOARD COMMITTEES BOARD OF DIRECTORS CORPORATE GOVERNANCE COMMITTEE RISK MANAGEMENT COMMITTEE POSITION Vice-Chairman Member Member ATTENDANCE RECORD 83% 5 of 6 100% 5 of 5 100% 3 of 3 DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 2,011 Nil 2,011 Nil Nil Nil 34 ANDREW ALEONG Age 47 / Citizen of Trinidad and Tobago / Director since June 2005 / Independent Director 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. He was elected a Director of Sagicor Life Inc in 2005. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS AUDIT COMMITTEE DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director Member ATTENDANCE RECORD 83% 5 of 6 100% 5 of 5 SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 484,003 216,169 484,003 216,169 Nil Nil DAVID W. ALLAN Age 70 / Citizen of Barbados / Director since December 2002 / Independent Director David Allan is a former President and Chief Executive Ofﬁ cer of The Mutual Group, now Sagicor, a position he held for 23 years. He joined the Group in 1956 and was elected Director of The Mutual, now Sagicor Life Inc, in 1986. Mr Allan retired as President and Chief Executive Ofﬁ cer in 1995. He also serves as a Director of Life of Jamaica Limited 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 BOARD OF DIRECTORS AUDIT COMMITTEE RISK MANAGEMENT COMMITTEE POSITION Director Member Member ATTENDANCE RECORD 33% 2 of 6 40% 2 of 5 33% 1 of 3 DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 1,705 Nil 1,705 Nil Nil Nil 35 SIR HILARY BECKLES, K.A. Age 52 / Citizen of Barbados / Director since June 2005 / Independent Director Sir Hilary 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 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. Sir Hilary 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 was elected a Director of Sagicor Life Inc in 2005 and is also a Director of Life of Jamaica Limited. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS HUMAN RESOURCE COMMITTEE DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director Member ATTENDANCE RECORD 66% 4 of 6 50% 3 of 6 SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 9,579 Nil 9,579 Nil Nil Nil MARJORIE M. CHEVANNES-CAMPBELL Age 56 / Citizen of Jamaica / Director since June 2005 / Independent Director 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 a former President and Chief Executive Ofﬁ cer of the Urban Development Corporation (the UDC Group), Jamaica, a large property-owning company that is involved in development and manages several entities such as hotels, attractions, a maintenance company, a water supply company, a shopping centre, a conference centre and a golf course. Mrs Chevannes-Campbell is a Director of Life of Jamaica Limited, and of several other private sector companies within Jamaica. She is currently pursuing a Doctorate in Business Administration. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director ATTENDANCE RECORD 83% 5 of 6 SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 1,087 Nil 1,087 Nil Nil Nil 36 DR L. JEANNINE COMMA Age 57 / Citizen of Trinidad and Tobago / Director since June 2007 / Independent Director Dr Jeannine Comma holds a PhD from George Washington University, Washington, DC, USA, and is also a graduate of the University of the Virgin Islands. She is a member of The American Society for Training and Development and the Commonwealth Association of Public Administration and Management (CAPAM). Dr Comma is CEO/Director of the Cave Hill School of Business of the University of the West Indies, where she specialises in organisational development, strategy and leadership development, and has made signiﬁ cant contributions to the sustainable development of human capital within the regional business community. Dr Comma has extensive experience in Total Quality Management, Leadership Development, Organisational Strategic Planning and Change Management. She has also taught at the undergraduate and graduate levels at George Washington University, Howard University, Washington, DC, and the University of the West Indies. Dr Comma was elected a Director of Sagicor Life Inc in 2006. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS HUMAN RESOURCE COMMITTEE DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director Member ATTENDANCE RECORD 100% 2 of 2* 50% 1 of 2* SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 11,523 Nil 11,523 Nil Nil Nil * Dr Comma was appointed to the Board on June 26, 2007 and was appointed as a Member of the Human Resource Committee on September 18, 2007. JOYCE E. DEAR Age 64 / Citizen of Barbados / Director since August 2006 / Independent Director Joyce Dear is a Fellow of the Association of Chartered Certiﬁ ed 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 ﬁ nancial services to a wide variety of industries, including public companies, tourism and hospitality entities, manufacturing companies, statutory corporations and international funding agencies/government-ﬁ nanced programmes 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 BOARD OF DIRECTORS AUDIT COMMITTEE DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director Member ATTENDANCE RECORD 83% 5 of 6 80% 4 of 5 SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 5,000 Nil 5,000 Nil Nil Nil 37 CHRISTOPHER D. DECAIRES Age 52 / Citizen of Barbados / Director since June 2005 / Independent Director Christopher deCaires is a Chartered Accountant and holds an MBA from Henley Management College, United Kingdom. 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 ﬁ nance, international taxation, ﬁ nancial management, mergers and acquisitions, information systems, organisational design and business planning. Mr deCaires is Chairman of World Cup Barbados and is a former Partner of PricewaterhouseCoopers, Barbados, where he was responsible for corporate ﬁ nance, business advisory, corporate secretarial and trust services. He was elected a Director of Sagicor Life Inc in 2005. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS HUMAN RESOURCE COMMITTEE DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL POSITION Director Chairman ATTENDANCE RECORD 50% 3 of 6 100% 6 of 6 SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 22,368 Nil 22,368 Nil Nil Nil DR OSCAR W. JORDAN, G.C.M. Age 69 / Citizen of Barbados / Director since December 2002 / Independent Director 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 the 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 BOARD OF DIRECTORS CORPORATE GOVERNANCE COMMITTEE POSITION Director Member ATTENDANCE RECORD 33% 2 of 6 100% 5 of 5 DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 18,381 Nil 18,381 Nil Nil Nil 38 WILLIAM P. LUCIE-SMITH Age 56 / Citizen of Trinidad and Tobago / Director since June 2005 / Independent Director William Lucie-Smith holds an MA 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 was elected a Director of Sagicor Life Inc in 2005 and is also a Director of a number of other subsidiaries within the Group. Since his retirement, Mr Lucie-Smith has been an independent Consultant. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS AUDIT COMMITTEE RISK MANAGEMENT COMMITTEE POSITION Director Chairman Member ATTENDANCE RECORD 100% 6 of 6 100% 5 of 5 66% 2 of 3 DIRECTOR’S INTEREST SHARES AS AT 31-DEC-07 BENEFICIAL NON-BENEFICIAL SHARES AS AT 8-MAY-08 BENEFICIAL NON-BENEFICIAL GRANTS/OPTIONS AS AT 31-DEC-07 AS AT 8-MAY-08 22,000 Nil 22,000 Nil Nil Nil DODRIDGE D. MILLER Age 50 / Citizen of Barbados / Director since December 2002 / President and Chief Executive Ofﬁ cer Dodridge Miller is a Fellow of the Association of Certiﬁ ed Chartered 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 Ofﬁ cer 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 Ofﬁ cer and Chief Operating Ofﬁ cer. Mr Miller joined the Group in 1989. He was elected a Director of Sagicor Life Inc 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 ﬁ nancial services industries. BOARD/BOARD COMMITTEES BOARD OF DIRECTORS AUDIT COMMITTEE CORPORATE GOVERNANCE COMMITTEE HUMAN RESOURCE COMMITTEE RISK MANAGEMENT COMMITTEE POSITION Director By invitation By invitation By invitation By invitation ATTENDANCE RECORD 100% 6 of 6 100% 5 of 5 100% 5 of 5 100% 5 of 5 100% 3 of 3 DIRECTOR’S INTEREST AS AT 31-DEC-07 SHARES BENEFICIAL 576,395* NON-BENEFICIAL Nil AS AT 8-MAY-08 SHARES BENEFICIAL 576,395 NON-BENEFICIAL Nil RESTRICTED STOCK GRANTS RESTRICTED STOCK GRANTS VESTED & ISSUED 563,077 UNVESTED 98,994 VESTED & ISSUED 563,077 UNVESTED 98,994 STOCK OPTIONS STOCK OPTIONS VESTED 42,282 EXERCISED NIL * Includes vested and issued restricted stock UNVESTED 422,784 VESTED 42,282 EXERCISED NIL UNVESTED 422,784 39 CORPORATE GOVERNANCE REPORT Board of Directors The Board consists of twelve Directors, eleven of whom are independent non-executive Directors, including the Chairman. The twelfth Director is the President and Chief Executive Ofﬁ cer. Biographical information on the Directors and details of their interests in the Company as at December 31, 2007 and as at the record date, May 8, 2008, are set out earlier in this Report. Rotation and Re-election of Directors The Company’s Bylaws provide for the appointment of a Director by the Board to ﬁ ll the vacancy on the Board, and the Companies Act Chapter 308 of the Laws of Barbados provides that the appointee shall hold ofﬁ ce for the unexpired term of his or her predecessor. Dr Jeannine Comma was appointed on June 26, 2007 to ﬁ ll the vacancy occasioned by the resignation of Arthur Bethell, which followed immediately after the 2007 annual meeting. The Bylaws also provide that a Director shall retire from ofﬁ ce at the annual meeting following the attainment of age 70 and shall not be eligible for re-election. David Allan, having attained the age of 70 on November 5, 2007, will retire at the ﬁ fth annual meeting and is not eligible for re-election. The Bylaws provide further that at least one third of the Board shall retire by rotation each year. Professor Sir Hilary Beckles, Andrew Aleong and Christopher deCaires will also retire at the ﬁ fth annual meeting and have offered themselves for re-election. John F Shettle, Jr, has been proposed as a new Director. The Corporate Governance and Ethics Committee considered the candidates who are standing for election or re-election at the ﬁ fth annual meeting of shareholders and recommends to Shareholders that all the nominees be elected or re-elected. Proﬁ les of the nominees are contained in the Management Proxy Circular at the back of the Annual Report. In making this recommendation, the Committee had regard to the core competency requirements of the Board as a whole, the skills and experience of each nominee, their independence as deﬁ ned by the Board and their willingness and ability to devote the time necessary to fulﬁ l their role as Directors. Building a Corporate Governance Architecture During 2007, the Board gave its unanimous approval to the adoption of a Group-wide risk-based corporate governance architecture that conforms to international best practice. The project was sponsored by the Corporate Governance and Ethics Committee, which remains responsible for its implementation. Corporate Governance has been deﬁ ned as the task of a company’s board of directors in providing entrepreneurial leadership, guidance and oversight with a view to maximising shareholder wealth within the bounds of law and community standards of ethical behaviour. The Corporate Governance project was designed to create a formal structure for the establishment, operation and monitoring of Corporate Governance standards and practices throughout the Group. Implementation commenced towards the end of 2007. When fully implemented, the architecture will provide the Group with a comprehensive, consistent and integrated governance model. The governance framework and reporting philosophy are linked to the Group’s Enterprise Risk Management discipline, currently being developed to achieve a more rational allocation of economic capital and to mitigate unexpected adverse effects of ﬁ nancial, business and operating risks. This focus on risks will re-shape the internal control framework for the ultimate purpose of enhancing shareholder value. A Group level Internal Audit function was created to manage and coordinate the various internal audit activities throughout the Group. Internal Audit’s purpose is to provide a risk-based, independent, objective assurance regarding adequacy of the system of internal controls for managing risk both at subsidiary and Group levels. More speciﬁ cally, the Internal Audit activity evaluates the adequacy and effectiveness of controls relating to the organisation’s governance, operations, and information systems, including (a) reliability and integrity of ﬁ nancial information; (b) effectiveness and efﬁ ciency of operations; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts. 40 The Board also approved a Sarbanes-Oxley Internal Controls compliance certiﬁ cation program for the Group, which forms part of the overarching Corporate Governance architecture. The objective of the program is to create a framework for identifying and correcting internal control weaknesses. The Corporate Governance architecture reﬂ ects the legal and regulatory external environment that governs Sagicor entities and deals with (a) the ethical and business values that shape and guide Sagicor; (b) policies and procedures governing essential undertakings and operations, in particular the management of risk; (c) the structure, composition and internal operation of the Board; (d) the respective roles and responsibilities of Board and Management in supervising and running Sagicor entities; (e) plans and programmes that form the essential subject matter for the operating relationship between Board and Management; and (f) issues of accountability and performance for both the Board and Management in the way they discharge their respective responsibilities. The principles governing composition of the Board of Directors are (a) size, which reﬂ ects a balance between the need for industry, professional and other representation on the one hand, and the need to be small enough to facilitate effective dialogue and decision making on the other; (b) membership structure, which is determined by core competency requirements of the Board as a whole (reviewed annually); and (c) Directors, who are chosen for their individual core competencies, knowledge, experience, skills, personal qualities and independence. Roles have been deﬁ ned for the Board, specifying items reserved for Board decision which cannot be delegated to Board Committees or Management, as well as the role of the Chairman, Board Committees, Chairman of a Board Committee, President and other functional corporate executive positions. Performance evaluation of each of the above roles is to be done annually to ensure effective execution. Corporate Values The Group’s corporate value system embraces legal, moral and ethical conduct, accountability, corporate social responsibility and leadership. The Code of Business Conduct and Ethics: · · · · · governs the behaviour of Directors, Management and Employees; gives assurances to various stakeholders of how business is conducted; guides the management of conﬂ icts of interest; deters corporate opportunity; and addresses issues of conﬁ dentiality, fair dealing, protection and use of assets and compliance with legal and regulatory requirements. The Code is based on the concept of the moral, ethical and legal obligation owed by Directors, Management and Employees to: · · · · · · · Self - to act with personal integrity, professionalism and loyalty to the Group in the performance of business responsibilities; Uphold the Law – to comply with the law both in letter and spirit; the Company - to act honestly and in good faith with a view to the best interests of the Company above all other persons; Investors - to maximise the wealth of the Company for their ultimate beneﬁ t; Customers - to provide transparent service solutions that address their real needs and service entitlements, within an institutional environment that protects their conﬁ dentiality and privacy; Employees - to respect the human and civic rights of colleagues and to enhance their business well-being; Society - to harmonise the operation of the Company with the aims of the communities in which it operates. 41 The business management values are also identiﬁ ed in the values framework and comprise nine pillars for guiding behaviour, namely: · · · · · · · · · Values and Standards; Corporate Governance; Strategic and Business Planning; Enterprise Risk Management; Market Management; Human Resource Management; Performance and Accountability Management; Internal Controls Management; and Investor Relations. Board Mandate and Governance The role of the Board is to provide entrepreneurial leadership, guidance and oversight to the Company within a framework of prudent and effective controls that enable risk to be assessed and managed, with a view to maximising shareholder wealth within the bounds of law and community standards of ethical behaviour. The Board has six main responsibilities: · · · · · · Strategic Planning; Enterprise Risk Management; Succession Planning and Performance Evaluation for Executives; Oversight of shareholder communications and public disclosure; Internal controls; and Corporate Governance. The Board performs its role essentially through decision-making and oversight. The decision-making function is exercised through formulating with Management and approving corporate policies and strategic goals. The oversight function is executed by (a) the review of management decisions; (b) ongoing monitoring of corporate business performance, plans and strategies, corporate governance, internal controls, risk assessment, Management’s compliance with legal requirements and corporate policies; (c) the review of the quality of ﬁ nancial and other reports to Shareholders; (d) succession planning and performance evaluation of Executive Management; and (e) oversight of shareholder communications and public disclosures. An important aspect of oversight extends to subsidiary governance, and a number of steps have been identiﬁ ed to ensure adequate stewardship. These include fostering corporate governance policies, procedures and practices in the subsidiaries, which are aligned to the Group, ensuring subsidiary boards contain a sufﬁ cient number of Directors who lead and oversee subsidiary affairs within the context of Group objectives and plans, selecting Executives with the ability and willingness to operate with a Group perspective, and establishing an oversight relationship for managing risk. All this is to be achieved without compromising the subsidiary’s long-term viability and in recognition of the subsidiary’s legal obligations to its own regulators and minority shareholders, as the case may be. To assist the new Directors in expediting his or her effectiveness as a Director, an induction program is being designed to enhance institutional, boardroom and interpersonal comfort. 42 Board Operations During 2007, the Board met 6 times and also approved a number of items by round robin. The attendance record of Directors is set out under their respective proﬁ les. The principal business at meetings was to: · approve the listing of the Company’s shares on the London Stock Exchange and the prospectus issued in connection therewith, and approve the amendment of Bylaw No 1 to facilitate the listing; · approve the Corporate Governance architecture; · approve the internal controls compliance certiﬁ cate program; · consider and approve the Strategic Plan and Projections of the Group for the period 2007 to 2009; · consider and approve strategic acquisitions and divestments in furtherance of Group strategy; · receive and consider various reports and presentations from Management on the performance of various subsidiaries in the Group and the Group on a consolidated basis; · review the strategic and business development initiatives forming part of the Strategic Plan; · review and approve unaudited interim and audited annual consolidated ﬁ nancial statements; · approve interim and ﬁ nal dividends; and · receive reports on work being carried out by Board Committees, and consider and approve their recommendations as required. Committee Reports The four Committees of the Board, (1) Audit, (2) Corporate Governance and Ethics, (3) Human Resource and (4) Risk Management, play an integral role in the governance process, in that they assist the Board with the proper discharge of its functions by providing an opportunity for more in-depth discussions on areas not reserved speciﬁ cally for the Board. The mandates of all the Committees have been revised to accord with best practice. 2007 Report of Corporate Governance and Ethics Committee Role of Committee Under the revised charter of the Corporate Governance and Ethics Committee, its mandate is to: · develop and recommend to the Board policies and procedures to establish and maintain best practice standards of corporate governance; · · · · · · · · manage the process for director succession, nomination and recommendation to Shareholders for election or re- election as Directors; establish and direct the processes for assessing the performance of the Board, its Committees and individual Directors; supervise the operation of the President and CEO; recommend the composition of Committees and Committee Chairs; review and approve any amendments to the Company’s Code of Business Conduct and Ethics; obtain reasonable assurance that the Company has processes to ensure adherence to its standards of business conduct and ethical behaviour; assess procedures to resolve conﬂ icts of interest and ensure procedures are established to deal with insider dealing; and oversee the processes relating to Shareholder communications and public relations and the enhancement of the Company’s corporate image. Membership The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current members are Terrence Martins (appointed Chairman on August 24, 2005), Dr Oscar Jordan (appointed a Member on March 9, 2004), and Stephen McNamara (appointed a Member on March 9, 2004). All Members had a perfect attendance record during 2007. With effect from January 1, 2007, the Chairman and Members were paid fees for serving on the Committee. 43 2007 Activities In order to ensure that the Group was capable of meeting the highest corporate standards, the Committee sponsored the project to build a Group-wide comprehensive Corporate Governance architecture and considered in detail every proposal forming part of the framework. In addition to this project, the Committee attended to the following business during the year: (a) approval of the Corporate Governance Policy; (b) Director nomination for the parent and subsidiary boards; (c) Committee appointments; (d) Director and Ofﬁ cer liability cover; and (e) Management of conﬂ icts of interest. 2007 Report of Audit Committee Role of Committee The mandate of the Audit Committee is to oversee the audit process, including recommending the appointment or reappointment of the external auditors, ﬁ xing their audit fees, being satisﬁ ed with their independence, evaluating their internal quality-control procedures and approving non-audit services provided by the Auditors. The Committee is required to review the annual audit plan and the audited and interim ﬁ nancial statements and International Financial Reporting Standards having a signiﬁ cant impact on the statements. It also reviews actuarial reports and recommendations. The Committee oversees the internal audit function, reviewing internal audit’s assessment of the adequacy and effectiveness of the Group’s internal controls, compliance with legal, statutory and regulatory requirements, and management of risk. Membership The Committee meets the independence and skill requirements of the Group’s Corporate Governance Policy. All members are ﬁ nancially literate and two members, William Lucie-Smith and Joyce Dear, both Chartered Accountants, have recent and relevant accounting expertise. The current members are William Lucie-Smith (appointed Chairman on June 28, 2006 and a Member on August 24, 2005), Andrew Aleong (appointed a Member on June 28, 2006), David Allan (appointed a Member on November 23, 2005) and Joyce Dear (appointed a Member on August 11, 2006). The Chairman and one other Member had a perfect attendance record during 2007, while overseas business commitments resulted in the remaining two Members having an 80% and 40% record respectively. With effect from January 1, 2007, the Chairman and Members were paid fees for serving on the Committee. 2007 Activities The 2007 activities of the Committee involved approving non-audit services to be carried out by the External Auditors and reviewing and approving the external audit plan and timetable, the External Auditors’ 2006 management letter and 2007 audit engagement letter. The Committee also considered and approved interim and annual audited ﬁ nancial statements, the valuation of intangible assets, and dividend recommendations. It reviewed new International Financial Reporting Standards having a signiﬁ cant impact on the Company, goodwill impairment tests, actuarial reports and reports from the External Auditors on key audit issues. The Committee also approved the 2007 Internal Audit Plan and exercised oversight of the implementation of an enterprise-wide internal audit program. 2007 Report of Human Resource Committee Role of Committee The role of the Human Resource Committee, under its revised mandate, is to advise the Board with respect to (a) compensation policies, programmes and plans to motivate and align the interests of all Employees with those of the Group’s; (b) Human Resource policies and practices to attain Group strategic goals; (c) Executive Management succession plans; (d) Executive Management’s compensation and performance evaluation; and (e) Management of pension plans. 44 Membership The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current members are Christopher deCaires, (appointed Chairman on June 28, 2006 and a Member on October 26, 2005), Sir Hilary Beckles (appointed a Member on June 28, 2006), Dr Jeannine Comma (appointed September 18, 2007) and Terrence Martins (a former Committee Chairman appointed a Member on October 26, 2005). The Chairman and one other member had a perfect attendance record during 2007 while overseas business commitments resulted in the remaining two members having a 50% record. With effect from January 1, 2007, the Chairman and Members were paid fees for serving on the Committee. 2007 Activities During 2007 the Committee’s main activities were centred around monitoring progress on the implementation of a comprehensive Human Resource development strategy. The main aspects of the strategy were the structure, composition, recruitment, compensation and succession planning at the Group Executive level. The Committee also made awards to qualiﬁ ed participants under the annual cash incentive, long-term incentive and employee share ownership plans. 2007 Report of Risk Management Committee Role of Committee The former Board Investment Committee has been re-designated the Risk Management Committee and a new charter has been approved with the objective of ensuring the Group manages risk within its deﬁ ned philosophy and appetite, and in compliance with policy risk parameters. The Committee’s speciﬁ c mandate is to (a) ensure an appropriate Enterprise Risk Management framework is implemented throughout the Group; (b) approve risk policies, with emphasis on insurance, liquidity, credit, market, capital management and operational risks; (c) approve risk undertakings and exposures reserved for Board decision; (d) continually monitor the effectiveness with which risks are managed, including asset/liability coordination; and, (e) regularly monitor the effectiveness of the system of internal controls for managing risk. Committee Members are foremost required to understand the enterprise’s signiﬁ cant inherent risks and the policies and controls used by Management to assess, manage and report these risks. The Committee regularly reviews the Group risk proﬁ le and assesses Management’s plans for maintaining a sound risk proﬁ le. Membership The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current members are Terrence Martins (appointed Chairman on June 24, 2005 and a Member on January 9, 2004), David Allan (appointed a Member on October 26, 2005), William Lucie-Smith (appointed a Member on October 26, 2005) and Stephen McNamara (appointed a Member on November 26, 2003). The Chairman and one other member had a perfect attendance record during 2007 while overseas business commitments resulted in the remaining two members having a 66% and 33% record respectively. With effect from January 1, 2007, the Chairman and Members were paid fees for serving on the Committee. 2007 Activities In 2007 the Committee considered and approved (a) recommendations for signiﬁ cant business acquisitions and divestments; (b) a Group Risk Assessment Model for identifying and diagnosing inherent risks and internal controls; and (c) an Enterprise Risk Management Policy. By Order of the Board of Directors. Sandra Osborne, QC Corporate Secretary May 30, 2008 45 “ WE ALL HAVE THE MEANS TO BECOME PROSPEROUS. WE JUST HAVE TO FIND THE BALANCE BETWEEN OUR WEALTH AND OUR NEEDS.” Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 04 Financial Statements 47 Sagicor Annual Report and Accounts 2007 Index to Financial Statements NOTE PAGE INDEPENDENT AUDITORS’ REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 - 51 APPOINTED ACTUARY’S REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 CONSOLIDATED BALANCE SHEET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 CONSOLIDATED INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY . . . . . . . . . . . . . . . . . . . . . 55 - 56 CONSOLIDATED CASH FLOW STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 INCORPORATION AND PRINCIPAL ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . 58 - 61 ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 - 81 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS . . . . . . . . . . . . . . . . . . . . . 82 - 84 1 2 3 4 SEGMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 - 86 INVESTMENT PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 - 87 PROPERTY, PLANT AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 - 90 INVESTMENT IN ASSOCIATED COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 - 94 FINANCIAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 - 96 REINSURANCE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 INCOME TAX ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 MISCELLANEOUS ASSETS AND RECEIVABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 - 98 ACTUARIAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 - 102 OTHER INSURANCE LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 - 104 INVESTMENT CONTRACT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 NOTES AND LOANS PAYABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 DEPOSIT AND SECURITY LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 INCOME TAX LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 SHARE CAPITAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 - 108 PARTICIPATING ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 PREMIUM REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 NET INVESTMENT INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 - 111 FEES AND OTHER REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES . . . . . . . . . . . . . . . . . . . . 112 INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 EMPLOYEE COSTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 EMPLOYEE EQUITY COMPENSATION BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . 113 - 117 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 48 Sagicor Annual Report and Accounts 2007 Index to Financial Statements NOTE 31 32 33 34 35 36 37 38 39 PAGE EMPLOYEE RETIREMENT BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 - 119 INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 EARNINGS PER COMMON SHARE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 DIVIDENDS PER COMMON SHARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 - 124 ACQUISITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 - 127 EVENTS AFTER THE BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 - 128 COMMITMENTS AND CONTINGENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 129 - 130 40 RELATED PARTY TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 - 131 41 42 43 44 45 46 47 FINANCIAL RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 - 148 INSURANCE RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 - 152 SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 152 - 154 DEVELOPMENT OF PROPERTY AND CASUALTY CLAIMS . . . . . . . . . . . . . . . . . . . . 154 - 155 CAPITAL MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 - 158 STATUTORY RESTRICTIONS ON ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 FIDUCIARY RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 49 50 51 52 As of December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Consolidated Balance Sheet Notes 2007 2006 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 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 Total equity and liabilities 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 97,522 92,938 30,334 138,524 2,683,007 320,155 23,622 171,459 92,140 90,578 80,528 26,836 112,708 2,524,822 321,689 18,333 100,101 87,682 3,649,701 3,363,277 1,364,304 1,373,584 313,915 242,376 1,920,595 152,719 790,565 23,542 15,107 160,466 152,701 220,855 1,747,140 160,488 745,435 20,565 18,678 128,666 3,062,994 2,820,972 231,695 21,735 201,744 455,174 9,396 122,137 586,707 230,235 48,106 135,509 413,850 9,902 118,553 542,305 3,649,701 3,363,277 These ﬁ nancial statements have been approved for issue by the Board of Directors on March 31, 2008. Director Director 53 Year Ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Consolidated Income Statement Notes 2007 2006 24 24 25 26 37.1 27 27 28 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 acquisition Total revenue BENEFITS Policy beneﬁ ts and change in actuarial liabilities Policy beneﬁ ts and change in actuarial liabilities reinsured Net policy beneﬁ ts and change in actuarial liabilities Interest expense Total beneﬁ ts EXPENSES Administrative expenses Commissions and related compensation Premium taxes Finance costs Depreciation and amortisation Total expenses 535,871 468,703 (105,485) 430,386 (91,081) 377,622 261,212 238,379 4,224 50,734 26,398 2,727 43,602 - 772,954 662,330 333,601 293,390 (33,028) (29,698) 300,573 263,692 84,063 82,277 384,636 345,969 142,190 125,371 77,932 7,269 12,276 20,101 57,066 6,620 9,420 17,350 259,768 215,827 INCOME FROM ORDINARY ACTIVITIES 128,550 100,534 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 54 32 (19,824) (13,909) 108,726 86,625 86,289 (226) 22,663 108,726 67,663 (303) 19,265 86,625 34 34 32.3 cents 25.4 cents 32.3 cents 25.4 cents Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Consolidated Statement of Changes in Equity Year ended December 31, 2007 Share capital Reserves Retained earnings Par (1) accounts Minority interest Total Note 21 Note 22 Note 23 Balance, beginning of year 230,235 48,106 135,509 9,902 118,553 542,305 Net gains / (losses) recognised directly in equity Net income / (loss) for the year Total recognised gains and income for the year - - - (30,777) (78) (20) (10,171) (41,046) - 86,289 (226) 22,663 108,726 (30,777) 86,211 (246) 12,492 67,680 Issue of shares 484 - Value of employee services rendered (net) - 1,705 Net disposal of treasury shares 976 Disposal of equity interest Dividends declared (note 35) Other movements - - - - - - - (17,321) - - - - - 2,675 3,159 87 - 1,792 976 (3,593) (3,593) (8,167) (25,488) - - - 2,701 (2,655) (260) 90 (124) Balance, end of year 231,695 21,735 201,744 9,396 122,137 586,707 1,460 (26,371) 66,235 (506) 3,584 44,402 (1) Participating 55 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Consolidated Statement of Changes in Equity Year ended December 31, 2006 Share capital Reserves Retained earnings Par (1) accounts Minority interest Total Note 21 Note 22 Note 23 Balance, beginning of year 229,226 53,264 82,665 10,460 100,754 476,369 Net gains / (losses) recognised directly in equity Net income / (loss) for the year Total recognised gains and income for the year - - - (5,938) (22) 1 3,960 (1,999) - 67,663 (303) 19,265 86,625 (5,938) 67,641 (302) 23,225 84,626 Issue of shares Value of employee services rendered (net) 2,826 - - 1,472 Purchase of treasury shares (1,817) Dividends declared (note 35) Other movements - - - - - (15,991) - - - - 2,061 4,887 - - 1,472 (1,817) (7,241) (23,232) - - (692) 1,194 (256) (246) - Balance, end of year 230,235 48,106 135,509 9,902 118,553 542,305 1,009 (5,158) 52,844 (558) 17,799 65,936 (1) Participating 56 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Consolidated Cash Flow Statement CASH FLOWS FROM OPERATING ACTIVITIES Income from ordinary activities 128,550 100,534 Adjustments for non-cash items, interest and dividends 36 (138,815) (73,271) Notes 2007 2006 Interest and dividends received Interest paid Income taxes paid Changes in operating assets Changes in operating liabilities Net cash (used in) / from operating activities CASH FLOWS FROM INVESTING ACTIVITIES 207,016 192,160 (95,857) (86,366) (17,023) (13,524) (275,300) (115,856) 119,673 (71,756) 52,293 55,970 36 36 Property, plant and equipment, net 36 (10,532) (11,345) 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 Common shares issued Net disposal / (purchase) of treasury shares Dividends paid to shareholders Shares issued to minority interest Dividends paid to minority interest Notes and loans payable, net Net cash (used in) / from ﬁ nancing activities Effects of exchange rate changes Net (decrease) / increase in cash and cash equivalents Cash and cash equivalents, beginning of year (1,315) (4,120) 310 (2,228) (2,289) - (18,256) (13,263) 27 898 - (1,817) (17,137) (15,797) 2,348 (8,157) (7,952) (29,973) 1,767 (7,269) 79,150 56,034 8,803 (11,238) (111,182) 224,674 87,503 137,171 36 Cash and cash equivalents, end of year 36 113,492 224,674 57 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Insurance Annuities Pensions Pension fund management Mutual fund management Corporate trust services Securities dealing Currency dealing Merchant banking Loan ﬁ nance and deposit taking The Group operates across the Caribbean, in the United States of America (USA) and in the United Kingdom (UK). The table below identiﬁ es 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 Country of Incorporation Effective Shareholders’ Interest Sagicor Life Inc Life and health insurance, annuities and pension administration services Barbados 100% Life of Jamaica Limited Life and health insurance and annuities Jamaica 59% Sagicor Life Insurance Company Life insurance and annuities Texas, USA 100% Sagicor Capital Life Insurance Company Limited Life and health insurance, annuities and pension administration services The Bahamas 100% Capital Life Insurance Company Bahamas Limited Life insurance The Bahamas 100% 58 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) Subsidiary Companies Principal Activities Country of Incorporation Effective Share- holders’ Interest Sagicor Panamá, SA (formerly Capital de Seguros, SA) Life and health insurance Panamá Nationwide Insurance Company Limited Life insurance Sagicor Life of the Cayman Islands Limited Life insurance Laurel Life Insurance Company Life insurance Sagicor Allnation Insurance Company Health insurance Sagicor Corporate Capital Limited (formerly Gerling Corporate Capital Limited) (1) Trinidad & Tobago The Cayman Islands Texas, USA Delaware, USA - Lloyd’s of London corporate underwriting member participating in Syndicate 1206 Property and casualty insurance UK Sagicor General Insurance Inc Sagicor Re Insurance Limited Sagicor General Insurance (Cayman) Limited (2) Property and casualty insurance Property and casualty insurance Property, casualty and health insurance Barbados The Cayman Islands The Cayman Islands LOJ Pooled Investment Funds Limited Pension fund management Jamaica Employee Beneﬁ ts Administrator Limited Pan Caribbean Financial Services Limited Pension administration services Development banking and investment management Jamaica Jamaica Pan Caribbean Merchant Bank Limited Merchant banking Jamaica Pan Caribbean Asset Management Limited Investment management Jamaica Manufacturers Investments Limited Investment management Jamaica Sagicor Merchant Limited Globe Finance Inc Mutual Finance Inc Investment management Loan and lease ﬁ nancing, and deposit taking Loan and lease ﬁ nancing, and deposit taking Trinidad & Tobago Barbados St. Lucia 100% 100% 59% 100% 100% 90% 53% 59% 45% (2) 59% 59% 64% 64% 64% 64% 100% 51% 70% Sagicor Asset Management Inc Investment management Barbados 100% 59 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) Subsidiary Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest LOJ Property Management Limited Property management Jamaica 59% Sagicor Insurance Managers Limited (2) Captive insurance management services The Cayman Islands 45% (2) Sagicor International Management Services, Inc Management and business devel- opment services Florida, USA 100% Sagicor Finance Limited (3) Group ﬁ nancing vehicle The Cayman Islands LOJ Holdings Limited Insurance holding company Jamaica 100% 100% Sagicor USA Inc Insurance holding company Delaware, USA 100% Sagicor Europe Limited (4) Insurance holding company The Cayman Islands Sagicor Syndicate Holdings Limited (formerly Gerling Syndicate Holdings Limited) (1) Holding company Sagicor at Lloyd’s Limited (formerly Gerling at Lloyd’s Limited) (1) Managing agent of Lloyd’s of London syndicate Sagicor Syndicate Services Limited (formerly Gerling Syndicate Services Limited) (1) Property and casualty insurance agency Byrne & Stacey Underwriting Limited (5) Property and casualty insurance agency UK UK UK UK The Mutual Financial Services Inc Financial services holding company Barbados 90% 90% 90% 90% 90% 73% Sagicor Funds Incorporated Mutual fund holding company Barbados 100% (1) Acquired September 1, 2007. (2) Through control of Life of Jamaica Limited, the Group has a voting interest of 75% (2006 – 51%) in the subsidiary. The effective equity interest was increased from 31% in October 2007. (3) Incorporated March 30, 2006. (4) Incorporated June 28, 2007. (5) Acquired October 4, 2007. 60 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 1. INCORPORATION AND PRINCIPAL ACTIVITIES (continued) The associated companies of the Group are as follows: Associated Companies Principal Activities RGM Limited Property ownership and management Country of Incorporation Trinidad & Tobago FamGuard Corporation Limited Investment holding company Bahamas Family Guardian Insurance Company Limited Family Guardian General Insurance Agency Limited Life and health insurance and annuities Bahamas General insurance brokerage Bahamas BahamaHealth Insurance Brokers and Beneﬁ t Consultants Limited Insurance brokers and beneﬁ t consultants Primo Holding Limited (6) Property investment Bahamas Barbados Effective Shareholders’ Interest 33% 20% 20% 20% 20% 38% (6) Acquired March 30, 2007. 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. 61 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated ﬁ nancial 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 ﬁ nancial 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 speciﬁ c 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 modiﬁ cation required by IFRS 4 that rights under reinsurance contracts are measured separately. The consolidated ﬁ nancial statements are prepared under the historical cost convention except as modiﬁ ed by the revaluation of investment property, owner-occupied property, available for sale investment securities and ﬁ nancial assets held at fair value through income. The preparation of ﬁ nancial 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 signiﬁ cant to the consolidated ﬁ nancial statements, are disclosed in Note 3. All amounts in these ﬁ nancial statements are shown in thousands of United States dollars, unless otherwise stated. Where necessary, comparative ﬁ gures have been reclassiﬁ ed to conform to changes in presentation in the current year. (a) Amendments to IFRS New and revised IFRSs and revised International Accounting Standards (IASs) are effective from the 2007 reporting year. A new standard has been introduced and is as follows: IFRS 7 Financial Instruments: Disclosures The standards which have amendments for the 2007 reporting year are as follows: IFRS 4 Insurance Contracts IAS 1 Presentation of Financial Statements IAS 32 Financial Instruments: Presentation 62 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.1 Basis of Preparation (continued) IAS 30 – Disclosures in the Financial Statements of Banks and Similar Financial Institutions has been withdrawn and has been superseded by IFRS 7. The disclosure requirements of IAS 32 also have been withdrawn and have been superseded by IFRS 7. The amendments have affected the note disclosures of ﬁ nancial and insurance risk, and have introduced new disclosures for managing capital. The disclosures set out in notes 41, 42 and 45 reﬂ ect the new requirements. Comparative disclosures have been made except in instances where it is impractical to do so. (b) Amendments to International Financial Reporting Interpretations The International Financial Reporting Interpretations Committee (IFRIC) has issued new or revised interpretations which are effective from the 2007 reporting year. The new interpretations are as follows: IFRIC 7 Applying the Restatement Approach under IAS 29 (Financial Reporting in Hyperinﬂ ationary Economies) IFRIC 8 Scope of IFRS 2 (Share-based Payment) IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 7, IFRIC 8 and IFRIC 9 have no signiﬁ cant effect on these ﬁ nancial statements. IFRIC 10 requires that impairment of goodwill and equity investments recorded at interim reporting dates should not be reversed at balance sheet date if the impairment test had been conducted at balance sheet date and resulted in a lower amount of impairment. The impact of this interpretation on Sagicor is not likely to be signiﬁ cant since Sagicor tests goodwill impairment during the fourth quarter of the ﬁ nancial year, and impairment of equity instruments is relatively infrequent. The interpretation, IFRIC 11 - Group and Treasury Share Transactions, has been issued with an effective date for accounting periods beginning on or after March 1, 2007. Sagicor has early adopted this interpretation for the 2007 year, because of its applicability to equity compensation granted to employees of subsidiaries. The application of the interpretation affects the equity of the subsidiaries and does not directly affect these consolidated ﬁ nancial statements. (c) Change in presentational currency For the 2007 reporting year, the Group has changed the ﬁ nancial statement presentational currency to thousands of United States dollars. Prior to this year, the presentational currency was thousands of Barbados dollars. Accordingly, the 2006 comparative amounts have been restated in thousands of United States dollars. Throughout 2006 and 2007, the Barbados dollar was pegged to the United States dollar at a rate of 2 to 1. 2.2 Basis of consolidation (a) Subsidiaries Subsidiaries are entities over which the Group has the power to govern the ﬁ nancial 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. 63 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.2 Basis of consolidation (continued) 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. Identiﬁ able 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. (b) Investment in associated companies The investments in associated companies, which are not majority owned or controlled but where signiﬁ cant inﬂ uence exists, are included in these consolidated ﬁ nancial statements under the equity method of accounting. Investments in associated companies are originally recorded at cost and include intangible assets identiﬁ ed 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 identiﬁ ed 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 ﬁ nancial 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 ﬁ nancial 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 ﬁ nancial statements. (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. All dividends received by the Trust shall be applied towards the purchase of additional Company shares. 64 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (a) Functional and presentational currency Items included in the ﬁ nancial statements of each reporting unit of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). A reporting unit may be an individual subsidiary, a branch of a subsidiary or an intermediate holding company group of subsidiaries. The consolidated ﬁ nancial statements are presented in thousands of United States dollars, which is the Group’s presentational currency. (b) Reporting units The results and ﬁ nancial position of reporting units that have a functional currency other than the Group’s presentational currency are translated as follows: (i) Income statements, movements in equity and cash ﬂ ows 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 pegged to the United States dollar are converted dollars at the pegged rates. Currencies which ﬂ oat are converted to the United States dollar by reference to the average of buying and selling rates quoted by the respective central banks or in the case of pounds sterling, according to prevailing market rates. Exchange rates of the other principal operating currencies to the United States dollar were as follows: December 2007 closing rate 2007 average rate December 2006 closing rate 2006 average rate Barbados dollar Jamaica dollar Trinidad & Tobago dollar Pounds sterling 2.0000 70.4430 6.3114 0.5024 2.0000 68.7285 6.3110 0.4964 2.0000 66.9482 6.2946 n/a 2.0000 65.6514 6.2900 n/a 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. 65 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (continued) (c) Transactions and balances Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Translation differences on debt securities and other monetary ﬁ nancial assets measured at fair value are included in foreign exchange gains and losses. Translation differences on non-monetary items such as equities held at fair value through income are reported as part of the fair value gain or loss. Translation differences on non-monetary items such as equities held available for sale are included in the fair value reserve in equity. 2.4 Segment reporting The Group’s primary segments are geographic and the secondary segments are deﬁ ned by business activity. Geographical segments are determined by the location of the subsidiary or branch initiating the business. Except for the Sagicor at Lloyd’s Syndicate 1206 business, this segmentation is not materially different from the segmentation by location of the customers. The Group’s business segments reﬂ ect 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 speciﬁ c 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 ﬁ nance 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. Otherwise, this type of property is accounted for as an owner-occupied property. Rental income is recognised on an accruals basis. 66 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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 cumulative 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 beneﬁ ts 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 Estimated useful life 40 to 50 years Furnishings and leasehold improvements 10 years or lease term Computer and ofﬁ ce equipment Vehicles Leased equipment and vehicles 3 to 10 years 4 to 5 years 5 to 6 years 67 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.7 Intangible assets (a) Goodwill Goodwill (deﬁ ned 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 identiﬁ ed on acquisitions are recognised only if future economic beneﬁ ts attributable to the asset will ﬂ ow 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 deﬁ nite, 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 indeﬁ nite, the asset is tested annually for impairment. The estimated useful lives of recognised intangible assets are as follows: Class of intangible asset Asset Estimated useful life Customer related Customer relationships Broker relationships 4 - 20 years 10 years Marketing related Trade names 4 years, indeﬁ nite Contract based Technology based Syndicate capacity Licences Software Indeﬁ nite 15 years 2 – 10 years 68 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.8 Financial assets (a) Classiﬁ cation The Group classiﬁ es its ﬁ nancial assets into four categories: · held to maturity ﬁ nancial assets; · available for sale ﬁ nancial assets; · ﬁ nancial assets at fair value through income; · loans and receivables. Management determines the appropriate classiﬁ cation of these assets at initial recognition. Financial assets with ﬁ xed maturities and for which management has both the intent and ability to hold to maturity are classiﬁ ed as held to maturity. Loans and receivables are ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market. Financial assets in the category at fair value through income comprise: · assets designated by management on acquisition, since the assets form part of managed portfolios whose performance is evaluated on a fair value basis in accordance with documented investment strategies and comprise investment portfolios backing deposit administration and unit linked policy contracts for which the full return on the portfolios accrue to the contract-holders; · held for trading securities which are acquired principally for the purpose of selling in the short-term or if it forms part of a portfolio of ﬁ nancial assets in which there is evidence of short-term proﬁ t taking. Other ﬁ nancial assets are classiﬁ ed 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 net gains in investment income. Interest and dividend income are recorded under their respective heads in 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. (c) Fair value 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. 69 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.8 Financial assets (continued) The estimated fair values of ﬁ nancial assets are based on quoted bid prices of securities as at December 31 where available. In estimating the fair value of non-traded ﬁ nancial assets, the Group uses a variety of methods such as obtaining dealer quotes and using discounted cash ﬂ ow techniques. Where discounted cash ﬂ ow techniques are used, estimated future cash ﬂ ows are discounted at market derived rates for government securities in the same country of issue as the security; for non-government securities, an interest spread is added to the derived rate for a similar government security rate according to the perceived additional risk of the non-government security. (d) Impaired ﬁ nancial assets A ﬁ nancial 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 ﬂ ows discounted at the original effective interest rate. The carrying value of impaired ﬁ nancial assets is reduced by impairment losses. The recoverable amount for available for sale ﬁ nancial assets is the present value of expected future cash ﬂ ows discounted at the current market interest rate for a similar ﬁ nancial 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. (e) Securities purchased under agreements to resell Securities purchased under agreements to resell are treated as collateralised ﬁ nancing 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. (f) Finance leases The Group, as lessor, enters into ﬁ nance 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 ﬁ nance lease, net of unearned ﬁ nance income, is recorded as a receivable and the ﬁ nance income is recognised over the term of the lease using the effective yield method. (g) Derivative ﬁ nancial 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 ﬁ nancial asset at fair value through income. (h) Financial assets held in trust under modiﬁ ed 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. The income statement includes the interest income from these assets and a corresponding interest expense due to the reinsurer. 70 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.9 Real estate developed or held for resale Lands being made ready for resale along with the cost of infrastructural works are classiﬁ ed as real estate held for resale and are valued at the lower of cost and net realisable value. Real estate acquired through foreclosure is classiﬁ ed 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 indeﬁ nite 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 ﬂ ow statement, cash and cash equivalents comprise: · cash balances, · call deposits, · other liquid balances with maturities of three months or less from the acquisition date, · · have maturities of three months or less from origination, less bank overdrafts which are repayable on demand, less other borrowings from ﬁ nancial institutions made for the purpose of meeting cash commitments and which Cash equivalents are subject to an insigniﬁ cant risk of change in value. Cash and cash equivalents exclude balances held to meet statutory requirements. 2.12 Policy contracts (a) Classiﬁ cation The Group issues policy contracts that transfer insurance risk and / or ﬁ nancial risk from the policyholder. The Group deﬁ nes insurance risk as an insured event that could cause an insurer to pay signiﬁ cant additional beneﬁ ts in a scenario that has a discernable effect on the economics of the transaction. Insurance contracts transfer insurance risk and may also transfer ﬁ nancial risk. Investment contracts transfer ﬁ nancial risk and no insurance risk. Financial risk includes credit risk, liquidity rate risk and market risk. A reinsurance contract is an insurance contract in which an insurance entity cedes assumed risks to another insurance entity. 71 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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 beneﬁ t, additional beneﬁ ts or bonuses: · that are likely to be a signiﬁ cant portion of the total contractual beneﬁ ts; · whose amount or timing is contractually at the discretion of management; and · that are contractually based on · the performance of a speciﬁ ed pool of contracts; · investment returns on a speciﬁ ed pool of assets held by the insurer; or · the proﬁ t or loss of a fund or insurer issuing the contract. Policy bonuses and policy dividends constitute discretionary participation features which the Group classiﬁ es as liabilities. Residual gains in the participating accounts constitute discretionary participation features which the Group classiﬁ es 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. If alternative earnings patterns have been established over the term of the policy coverage, then premium revenue is recognised in accordance with that earnings pattern. 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 are established for both reported and un-reported claims. Claim reserves represent estimates of future payments of claims and related expenses less anticipated recoveries with respect to insured events that have occurred up to balance sheet date. Reserving involves uncertainty and the use of statistical techniques of estimation. These techniques generally involve projecting from past experience of the development of claims over time to form a view of the likely ultimate claims to be experienced, having regard to variations in business written and the underlying terms and conditions. The claim reserve is not discounted and is included in other insurance liabilities. 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 and are computed on a basis which is consistent with the computation of the claim liability. Proﬁ t 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. 72 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 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 recorded as deferred policy acquisition costs. Proﬁ t sharing commission payable by the Group arises from contracts between an insurer and a broker; it is accrued on an aggregate basis and it is adjusted to actual in respect of each individual contract when due. (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 ceded premium is expensed on a pro-rata basis over the term of the respective policy coverage or of the reinsurance contract as appropriate. 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 recorded as deferred policy acquisition costs. (iii) Long-term traditional insurance contracts Long-term traditional insurance contracts are generally issued for ﬁ xed terms of ﬁ ve years or more, or for the remaining life of the insured. Beneﬁ ts are typically a death or critical illness beneﬁ t, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneﬁ ciaries 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 beneﬁ ts 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 ﬁ xed 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. Policy beneﬁ ts are recognised on notiﬁ cation 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 beneﬁ t 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 notiﬁ cation. 73 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 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 ﬁ xed terms or for the remaining life of the insured. Beneﬁ ts are typically a death or critical illness beneﬁ t, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneﬁ ciaries with a proviso for a minimum number of payments. Beneﬁ ts 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 ﬁ xed at the inception of the contract or periodically thereafter but additional non-recurring premiums may be paid. Policy beneﬁ ts are recognised on notiﬁ cation 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 beneﬁ t 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 notiﬁ cation. Commissions and premium taxes payable are generally recognised only on settlement of premiums. (v) Reinsurance contracts assumed Reinsurance contracts assumed by an insurer are accounted for in a similar manner as if the insurer has issued the risk. Reinsurance contracts assumed include blocks of life and annuity policies assumed from third party insurers. In some instances, the Group also administers these policies. (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 modiﬁ ed coinsurance bases. The Group records as a receivable the reinsurer’s share of the insurer’s liabilities on these policies. The beneﬁ ts 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. 74 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) (vii) Deposit administration and other investment contracts Deposit administration contracts are issued by an insurer to registered pension schemes for the deposit of pension plan assets with the insurer. Deposit administration liabilities are recognised initially at fair value and are subsequently stated at: · amortised cost where the insurer is obligated to provide investment returns to the pension scheme in the form of interest; · fair value through income where the insurer is obligated to provide investment returns to the pension scheme in direct proportion to the investment returns on speciﬁ ed 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. Interest guarantees which may adversely affect the Group are recorded in actuarial liabilities. 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. Other investment contracts are recognised initially at fair value and are subsequently stated at amortised cost and are accounted for as deposit administration contracts which are similarly classiﬁ ed. (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 deﬁ nition of an insurance contract. Options to surrender an insurance contract for a ﬁ xed 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 ﬂ ows. If a test indicates that the carrying value of insurance contract liabilities is inadequate, then the liabilities are adjusted to correct the deﬁ ciency. The deﬁ ciency is included in the income statement under beneﬁ ts. 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 beneﬁ ts, expenses and taxes on insurance and annuity contracts. The process of calculating life insurance and annuity actuarial liabilities for future policy beneﬁ ts 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 beneﬁ ts, expenses and taxes are based on Group and industry experience and are updated annually. 75 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.13 Actuarial liabilities (continued) CALM is based on an explicit projection of cash ﬂ ows using best estimate assumptions for each material cash ﬂ ow 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 ﬁ nancial 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. (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 ﬁ nancial liabilities that expose the Group to ﬁ nancial risk. The recognition and measurement of the Group’s principal types of ﬁ nancial 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 recognised initially at fair value and are subsequently stated at amortised cost. Securities sold under agreements to repurchase are treated as collateralised ﬁ nancing 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 classiﬁ ed as notes or loans payable and the associated cost is classiﬁ ed as ﬁ nance costs. Borrowings undertaken for the purposes of providing funds for on- lending, leasing or portfolio investments are classiﬁ ed as other funding instruments and are included in deposit and security liabilities and the associated cost is included in interest expense. (d) Fair value 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 ﬁ nancial liabilities are based on market values of quoted securities as at December 31 where available. In assessing the fair value of non-traded ﬁ nancial liabilities, the Group uses a variety of methods including obtaining dealer quotes for speciﬁ c or similar instruments and the use of internally developed pricing models, such as the use of discounted cash ﬂ ows. 76 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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 outﬂ ow 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 and accrued discount and premium on ﬁ nancial 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 beneﬁ ts (a) Pension beneﬁ ts Group companies have various pension schemes in place for their employees. Some schemes are deﬁ ned beneﬁ t plans and others are deﬁ ned contribution plans. The liability in respect of deﬁ ned beneﬁ t plans is the present value of the deﬁ ned beneﬁ t 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 deﬁ ned beneﬁ t obligation is computed using the projected unit credit method. The present value of the deﬁ ned beneﬁ t obligation is determined by the estimated future cash outﬂ ows 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 beneﬁ ts become vested. Past service costs are recognised immediately if the beneﬁ ts vest immediately. For deﬁ ned contribution plans, the Group pays contributions to the pension schemes on a mandatory or contractual basis. Once paid, the Group has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in expenses in the income statement. (b) Other retirement beneﬁ ts Certain Group subsidiaries provide supplementary health, dental and life insurance beneﬁ ts to qualifying employees upon retirement. The entitlement to these beneﬁ ts 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 beneﬁ ts are accrued over the period of employment, using an accounting methodology similar to that for deﬁ ned beneﬁ t pension plans. (c) Proﬁ t sharing and bonus plans The Group recognises a liability and an expense for bonuses and proﬁ t sharing, based on various proﬁ t 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. 77 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.18 Employee beneﬁ ts (continued) (d) Equity compensation beneﬁ ts 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 reserve 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. (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 the Black-Scholes valuation model, which incorporates factors and assumptions that knowledgeable, willing market participants would consider in setting the price of the equity instruments. (e) Termination beneﬁ ts Termination beneﬁ ts 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 beneﬁ ts. The Group recognises termination beneﬁ ts 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 beneﬁ ts as a result of an offer made to encourage voluntary redundancy. Beneﬁ ts falling due more than twelve (12) months after the balance sheet date are discounted to present value. 78 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 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: Life insurance and non-registered annuities Health insurance Barbados Jamaica Trinidad and Tobago United Kingdom 3% - 5% 3% Nil n/a United States of America 0.75% - 3.5% 3% Nil 6% n/a Nil Property and casualty insurance 3.75% - 5% Nil 6% 5% Nil (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 2007 are as follows: Barbados Jamaica Life insurance and non-registered annuities 5% of gross investment income 15% of investment income (1) Trinidad and Tobago 15% of investment income United Kingdom n/a Registered annuities Nil Nil Nil n/a Other lines of business 25% of net income 331/3 % of net income 25% - 30% of net income 28% of net income United States of America 35% of net income 35% of net income 35% of net income (1) applicable also to health insurance (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 proﬁ ts 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. 79 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 2. ACCOUNTING POLICIES (continued) 2.20 Participating Accounts (a) “Closed” participating account For participating policies of Sagicor Life Inc in force at de-mutualisation, Sagicor Life Inc established a closed participating account in order to protect the guaranteed beneﬁ ts and future policy dividends, bonuses and other non-guaranteed beneﬁ ts of the afore-mentioned policies. The rules of this account require that premiums, beneﬁ ts, actuarial reserve movements, investment returns, expenses and taxes, attributable to the said policies, are recorded in a closed participating fund. Policy dividends and bonuses of the said policies are paid from the participating fund on a basis substantially the same as prior to de-mutualisation. The participating account 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. (b) “Open” participating account Sagicor Life Inc also established an open participating account for participating policies it issues after de- mutualisation. The rules of this account require that premiums, beneﬁ ts, actuarial reserve movements, investment returns, expenses and taxes, attributable to the said policies are recorded in an open participating account. The open participating account was established at de-mutualisation. 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 account. Accordingly, the liabilities of these participating policies and matching assets were transferred to the open participating account. 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 proﬁ t distribution to shareholders (see below) were also transferred to the account. Distributable proﬁ ts of the open participating account are shared between participating polices and shareholders in a ratio of 90:10. Proﬁ ts are distributed to the participating policies in the form of declared bonuses and dividends. Proﬁ ts which are distributed to shareholders are included in the allocation of Group net income to shareholders. Undistributed proﬁ ts remain in the participating account. (c) Financial statement presentation The assets and liabilities of the participating accounts are not presented separately in the ﬁ nancial statements. The revenues, beneﬁ ts and expenses of the participating accounts are also not presented separately in the ﬁ nancial 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. 80 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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 proﬁ ts or when an appropriation of retained earnings is required or permitted by law to protect policyholders, insureds or depositors. 81 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 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, beneﬁ ts and expenses. The items which may have the most effect on the Group’s ﬁ nancial statements are set out below. 3.1 Impairment of ﬁ nancial 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 ﬁ nancial condition and ﬁ nancial viability of the borrower. An available for sale equity investment is considered impaired when there is a signiﬁ cant or prolonged decline in the fair value below cost. Determination of what is signiﬁ cant or prolonged requires judgement which includes consideration of the volatility of the fair value, and the ﬁ nancial condition and ﬁ nancial viability of the investee. The determination of impairment may either be considered by individual asset or by a grouping of assets with similar relevant characteristics. 3.2 Recognition and measurement of intangible assets The recognition and measurement of intangible assets, other than goodwill, in a business combination involve the utilisation of valuation techniques which may be very sensitive to the underlying assumptions utilised. These intangibles may be marketing related, consumer related, contract based or technology based. For signiﬁ cant 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 ﬂ ows 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 ﬁ nancial projections annually and applies discounted cash ﬂ ow 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 ﬂ ows generated as a result of holding the asset. 3.4 Actuarial liabilities (a) Canadian asset liability method (CALM) The objective of the valuation of policy liabilities is to determine the amount of the insurer’s assets that, in the opinion of the Appointed Actuary (AA) and taking into account the other pertinent items on the balance sheet, will be sufﬁ cient without being excessive to provide for the policy liabilities over their respective terms. The amounts set aside for future beneﬁ ts are dependent on the asset and liability cash ﬂ ows, as well as any mismatch during the valuation period. 82 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.4 Actuarial liabilities (continued) The actuarial liabilities are determined by the amount of assets required to ensure that sufﬁ cient monies are available to meet the policy liabilities as they become due, even under adverse economic circumstances. The AA identiﬁ es 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 sufﬁ cient 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 beneﬁ ts. 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. The assumption for operating expenses and taxes is in some instances split by participating, non-participating or universal life / unit linked business. Provisions for adverse deviations are established in accordance with the risk proﬁ les of the business, and are, as far as is practicable, standardised across the major geographical segments. Provisions are determined within a speciﬁ c range established by the Canadian Standards of Practice. The principal assumptions and margins used in the determination of actuarial liabilities are summarised in note 13.3. However, the liability resulting from the application of these assumptions can never be deﬁ nitive as to the ultimate timing or the amount of beneﬁ ts payable and is therefore subject to future re-assessment. 83 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.5 Property and casualty insurance contracts (a) Policy beneﬁ ts in the course of settlement The estimation of the ultimate liability arising from claims incurred under property and casualty insurance contracts is subject to several sources of uncertainty that need to be considered in determining the amount that the insurer will ultimately pay for such claims. Claim liabilities are based on estimates due to the fact that the ultimate disposition of claims incurred prior to the balance sheet date, whether reported or not, is subject to the outcome of events that may not yet have occurred. Signiﬁ cant delays are experienced in the notiﬁ cation and settlement of certain types of claims, particularly in respect of casualty contracts. Events which may effect the ultimate outcome of claims include inter alia, jury decisions, court interpretations, legislative changes and changes in the medical condition of claimants. Any estimate of future losses is subject to the inherent uncertainties in predicting the course of future events. The two most critical assumptions made to determine claim liabilities are that the past is a reasonable predictor of the likely level of claims development and that the statistical estimation models used are fair reﬂ ections of the likely level of ultimate claims to be incurred. Consequently, the amounts recorded in respect of unpaid losses may change signiﬁ cantly in the short term. Management engages independent actuaries, either to assist in making or to conﬁ rm the estimate of claim liabilities. The ultimate liability arising from claims incurred under property and casualty insurance contracts may be mitigated by recovery arising from reinsurance contracts held. (b) Premium income Sagicor at Lloyd’s insurance syndicate writes some of its premium by delegated authority to insurance intermediaries. Due to delays in the notiﬁ cation of complete and accurate premium income written, premium income earned may have to be estimated. Accordingly, premium income written has to be re-assessed in future periods and adjustments made to earned premium. 84 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 4. SEGMENTS 4.1 Geographical Segments Year ended December 31, 2007 Total assets Total liabilities Total revenue Income from ordinary activities Total cash ﬂ ows Barbados Jamaica 606,486 571,037 131,563 13,513 (23,659) 1,105,410 861,875 298,195 58,194 (20,889) Trinidad & Tobago 441,316 333,040 101,656 15,053 (13,681) United Kingdom 248,929 154,158 59,283 30,107 13,135 USA 798,664 719,016 50,106 111 6,889 Other Caribbean 442,187 258,741 129,836 36,191 13,175 Not allocated to segments 6,709 165,127 2,315 (24,619) (86,152) 3,649,701 3,062,994 772,954 128,550 (111,182) Year ended December 31, 2006 Total assets Total liabilities Total revenue Income from ordinary activities Total cash ﬂ ows Barbados Jamaica Trinidad & Tobago USA Other Caribbean Not allocated to segments 578,045 1,057,299 399,475 840,034 410,594 77,830 539,982 805,878 279,618 769,398 259,732 166,364 126,215 280,162 83,565 56,062 116,288 19,546 51,907 25,826 6,943 16,051 38 (19,739) 3,363,277 2,820,972 662,330 100,534 23,880 (6,628) (13,539) (1,890) (5,676) 91,356 87,503 Other balances by geographical segment are disclosed in notes 6, 7, 8, 13, 41 and 47. 85 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 4. SEGMENTS (continued) 4.2 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 Total assets Total revenue 2007 2006 2007 2006 1,974,500 1,957,228 379,433 365,107 451,853 416,359 186,909 163,581 Property and casualty insurance 377,419 115,020 92,190 29,268 Banking, investment management and other ﬁ nancial services 812,647 774,944 110,660 103,549 Not allocated to segments (1) 33,282 99,726 3,762 825 3,649,701 3,363,277 772,954 662,330 (1) Includes associated company, income tax and pension plan balances attributable to more than one business segment. 5. 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 2007 90,578 1,744 - (2,532) (582) 9,332 (1,018) 97,522 2006 90,793 1,522 (1,275) (4,509) (4,489) 9,301 (765) 90,578 86 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 5. INVESTMENT PROPERTY (continued) Investment property includes $20,276 (2006 - $18,651) 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 ﬁ nancial 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 2007 908 195 2,358 39 2006 1,042 443 2,246 24 87 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 6. PROPERTY, PLANT AND EQUIPMENT Year ended December 31, 2007 Net book value, beginning of year Additions at cost Assumed on acquisitions Transfers from investment property Disposals 173 - 2,532 - Appreciation in fair values 7,715 Depreciation charge Effects of exchange rate changes (820) (309) Owner- occupied properties Furnishings & leasehold improvements Ofﬁ ce equipment & vehicles Operating lease vehicles & equipment Total 50,374 8,896 12,017 9,241 80,528 2,944 4,236 5,115 12,468 234 - (5) - 480 - - - 714 2,532 (122) (1,501) (1,628) - - 7,715 (1,174) (4,079) (2,702) (8,775) (89) (218) - (616) Net book value, end of year 59,665 10,806 12,314 10,153 92,938 Represented by: Cost or valuation 60,741 23,735 43,817 15,613 143,906 Accumulated depreciation (1,076) (12,929) (31,503) (5,460) (50,968) 59,665 10,806 12,314 10,153 92,938 88 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 6. PROPERTY, PLANT AND EQUIPMENT (continued) Year ended December 31, 2006 Net book value, beginning of year Owner- occupied properties Furnishings & leasehold improvements Ofﬁ ce equipment & vehicles Operating lease vehicles & equipment Total 45,632 5,018 13,612 9,863 74,125 Additions at cost 490 5,100 4,068 3,645 13,303 Transfers from investment property Transfers to intangible assets Disposals Appreciation in fair values Depreciation charge Effects of exchange rate changes 4,509 - (131) 790 (724) (192) - - (21) - - (1,135) - - 4,509 (1,135) (333) (1,567) (2,052) - - 790 (1,141) (4,045) (2,700) (8,610) (60) (150) - (402) Net book value, end of year 50,374 8,896 12,017 9,241 80,528 Represented by: Cost or valuation 51,396 20,727 41,042 14,077 127,242 Accumulated depreciation (1,022) (11,831) (29,025) (4,836) (46,714) 50,374 8,896 12,017 9,241 80,528 89 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 6. PROPERTY, PLANT AND EQUIPMENT (continued) Additions to and depreciation of property, plant and equipment by geographical segment are as follows: Barbados Jamaica Trinidad & Tobago United Kingdom USA Other Caribbean Not allocated to segments Additions Depreciation 2007 7,109 2,019 979 24 933 1,064 340 2006 8,296 885 1,645 - 629 1,814 34 2007 4,978 1,534 832 67 388 941 35 12,468 13,303 8,775 2006 4,997 1,585 633 - 359 1,031 5 8,610 Owner-occupied property includes $2,460 (2006 - $1,486) which represents the Group’s proportionate interest in joint ventures set out below. Description of property Belize: Percentage owned by the Group Belize Insurance Centre, North Front Street, Belize City Grenada: The Mutual / Trans-Nemwil Ofﬁ ce Complex, The Villa, St George’s 50% 50% 90 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 7. INVESTMENT IN ASSOCIATED COMPANIES Investment, beginning of year Additions Income from ordinary activities Amortisation of and other charges to intangible assets which were identiﬁ ed on acquisition Income taxes Dividends received Other movements in equity Effects of exchange rate changes Investment, end of year 2007 26,836 2,653 4,224 (2,457) (3) (1,338) 462 (43) 2006 24,915 664 2,727 (494) (8) (974) - 6 30,334 26,836 The investment in associated companies and the income from ordinary activities by geographical segment are as follows: Investment in associated companies Income from ordinary activities Barbados Jamaica Trinidad & Tobago Other Caribbean 2007 1,903 39 16,896 11,496 30,334 2006 125 41 14,064 12,606 26,836 2007 260 - 2,519 1,445 4,224 The aggregate balances and results in respect of associated companies for the period are set out below. Total assets Total liabilities Total revenue Net income for the year 2007 327,887 218,166 95,308 16,979 2006 (2) - 1,687 1,042 2,727 2006 293,024 203,368 88,264 10,976 91 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 8. INTANGIBLE ASSETS (a) Analysis and changes for the year Year ended December 31, 2007 Goodwill Customer & broker relationships Trade names Syndicate capacity & licences Software Total Net book value, beginning of year Additions at cost Assumed on acquisitions Identiﬁ ed on acquisitions: Sagicor at Lloyd’s (note 37.1) Byrne & Stacey Underwriting (note 37.2) Sagicor General Insurance (Cayman) (note 37.4) Disposals Amortisation and other charges Effects of exchange rate changes Net book value, end of year Represented by: 59,148 44,328 3,536 - - - 4,853 439 (63) - - 842 754 - - - - - - - - - - 5,696 112,708 4,120 4,120 53 491 544 25,178 1,147 27,167 - - - 499 6,106 - - 439 (63) - (2,998) (3,444) (34) (2,394) (8,870) (1,127) (1,977) (92) (302) (129) (3,627) 63,250 40,949 - 24,895 9,430 138,524 Cost 65,065 48,956 7,037 24,929 17,301 163,288 Accumulated charges and amortisation (1,815) (8,007) (7,037) (34) (7,871) (24,764) 63,250 40,949 - 24,895 9,430 138,524 92 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 8. INTANGIBLE ASSETS (continued) Year ended December 31, 2006 Goodwill Customer relationships Trade names Software Total Net book value, beginning of year 60,703 49,038 5,832 4,521 120,094 Transfer from property, plant and equipment Additions at cost - - - - - - 1,135 1,135 2,228 2,228 Amortisation and other charges (983) (3,046) (2,119) (2,099) (8,247) Effects of exchange rate changes (572) (1,664) (177) (89) (2,502) Net book value, end of year 59,148 44,328 3,536 5,696 112,708 Represented by: Cost Accumulated charges and amortisation (b) Geographical segment information Barbados Jamaica Trinidad & Tobago United Kingdom USA Other Caribbean 11,514 11,188 Not allocated to segments - - 60,131 49,637 7,389 11,016 128,173 (983) (5,309) (3,853) (5,320) (15,465) 59,148 44,328 3,536 5,696 112,708 Goodwill Additions to intangible assets Amortisation of intangible assets 2007 2006 2007 2006 2007 2006 22,633 22,633 2,022 19,406 20,411 4,902 4,916 4,795 - - - 743 693 - - 761 - 43 1,109 703 133 52 41 48 606 724 6,828 5,260 - 196 724 506 10 3 - 1,457 803 - 63,250 59,148 4,120 2,228 8,870 8,247 93 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 8. INTANGIBLE ASSETS (continued) (c) Goodwill Goodwill arising on past acquisitions is reviewed by cash generating unit (CGU). The recoverable amount of a 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 ﬂ ow projections prepared by management. Detailed cash ﬂ ow 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 ﬂ ow discount factors, residual growth rates and earnings multiples utilised in the assessment of recoverable amounts as of December 31, 2007 were as follows: Barbados Jamaica Trinidad & Tobago Other Caribbean Cash ﬂ ow discount factor Cash ﬂ ow residual growth rate 13.3% - 15.3% 4.0% – 4.5% 21.2% n/a 11.2%- 14.6% 7.0% n/a 3.5% Earnings multiples 8.7 4.8 – 5.3 8.0 8.5 – 9.0 94 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 9. FINANCIAL INVESTMENTS 9.1 Analysis of ﬁ nancial 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 ﬁ nance leases December 31, 2007 December 31, 2006 Carrying value Fair value Carrying value Fair value 3,441 3,394 3,251 3,225 1,309,824 1,309,824 1,230,746 1,230,746 162,052 162,052 163,334 163,334 1,471,876 1,471,876 1,394,080 1,394,080 85,392 26,662 85,392 26,662 112,054 112,054 351,793 293,998 126,403 145,764 344,269 291,273 131,247 145,764 15,980 161,698 87,719 23,774 111,493 329,144 247,893 125,891 122,888 22,320 167,862 87,719 23,774 111,493 330,739 247,150 125,891 122,888 22,320 167,863 Securities purchased under agreements to resell 15,980 Deposits 161,698 Total ﬁ nancial investments 2,683,007 2,677,555 2,524,822 2,525,649 1,095,636 1,090,231 1,015,998 1,016,851 Securities at fair value through income comprise: Securities designated at fair value upon initial recognition Securities held for trading Debt securities comprise: Government debt securities Corporate debt securities Collateralised mortgage obligations Other securities 2007 2006 90,706 21,348 112,054 88,889 22,604 111,493 1,074,471 1,029,059 394,871 229,436 51,672 328,590 240,226 52,985 1,750,450 1,650,860 95 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 9. FINANCIAL INVESTMENTS (continued) 9.1 Analysis of ﬁ nancial investments (continued) Debt securities include $7,168 (2006 - $7,447) that contain options to convert to common shares of the issuer. Corporate debt securities include: (i) convertible loans totalling $6,785 (2006 - $4,772) issued to the Group by an associated company. These loans can be converted into equity or bonds issued by the associated company. (ii) $13,670 (2006 - $11,917) in bonds issued by an associated company. Equity securities include $6,705 (2006 - $6,252) in mutual funds managed by the Group. 9.2 Pledged assets As of December 31, 2006, debt securities included $39,220 held in trust supporting reinsurance liabilities assumed. As of December 31, 2007, the trust was unwound and the related assets were transferred to the Group’s general investment portfolio. The Group manages these investments and bears the investment risk. Debt securities include $23,182 (2006 - $23,450) and policy loans include $29,932 (2006 - $30,412) in assets held in trust for a reinsurer (note 20). The income from these assets accrues to the reinsurer. Debt and equity securities include $17,825 (2006 - $20,497) as collateral for loans payable. Collateral for the obligation to the Federal Home Loan Bank of Dallas (FHLB) which is included in other funding instruments (note 17), consists of an equity holding in the FHLB with a market value of $5,158 (2006 - $5,311), and mortgages and mortgage backed securities having a total market value of $121,514 (2006 - $123,896). Debt securities are pledged as collateral under repurchase agreements with customers and other ﬁ nancial institutions and for security relating to overdraft and other facilities with other ﬁ nancial institutions. As of December 31, 2007, these pledged assets totalled $514,838 (2006 - $474,831). Of these assets pledged as security $237,012 (2006 – $189,075) 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. Deposits include $49,236 (2006 – nil) pledged as collateral for a letter of credit facility obtained by the Group. 9.3 Returns accruing to the beneﬁ t 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 96 2007 63,844 23,730 47,824 311 2006 65,150 22,044 43,659 2,452 135,709 133,305 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 10. REINSURANCE ASSETS Reinsurers’ share of: Actuarial liabilities (note 13.1) Policy beneﬁ ts in the course of settlement (note 14.2) Provision for unearned premiums (note 14.3) Other items 11. INCOME TAX ASSETS Deferred income tax assets (note 33) Income and withholding taxes recoverable 12. MISCELLANEOUS ASSETS AND RECEIVABLES Pension plan assets (note 31) Real estate developed or held for resale Deferred policy acquisition costs Premiums in the course of collection Amounts due from managed funds Other accounts receivable 2007 2006 247,760 34,658 31,686 6,051 320,155 2007 11,645 11,977 23,622 2007 2,048 6,116 25,917 78,299 3,709 55,370 276,471 21,001 17,943 6,274 321,689 2006 4,226 14,107 18,333 2006 1,004 12,901 3,747 27,926 3,014 51,509 171,459 100,101 (a) Real estate developed or held for resale Real estate developed for resale includes $3,964 (2006 - $8,837) which is expected to be realised after one year. Real estate developed for resale includes $2,020 (2006 - $3,161) which represents the Group’s proportionate interest in the joint ventures set out below. Description of property Barbados: Percentage owned by the Group Land at Fort George Heights, Upton, St Michael Rolling Hills Development, Byde Mill, St George 50% 81% (2006 only) 97 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 12. MISCELLANEOUS ASSETS AND RECEIVABLES (continued) (b) Deferred policy acquisition costs The movement in deferred acquisition costs for the year is as follows: Balance, beginning of year Assumed on acquisitions Expensed Additions Effect of exchange rate changes Balance, end of year Gross amount 2007 3,747 20,802 (23,590) 25,449 (491) 25,917 2006 3,088 - (9,240) 9,897 2 3,747 98 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 13. ACTUARIAL LIABILITIES 13.1 Analysis of actuarial liabilities 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 Gross liability Reinsurers’ share 2007 2006 2007 2006 288,081 279,539 2,805 3,277 795,574 817,992 199,714 220,831 4,156 3,951 1,721 1,590 93,061 89,490 2,370 6,057 - - - - 1,183,242 1,197,029 204,240 225,698 28,640 25,280 2,369 2,395 131,660 133,467 40,627 47,929 20,762 17,808 524 449 181,062 176,555 43,520 50,773 Total actuarial liabilities 1,364,304 1,373,584 247,760 276,471 The following notes are in respect of the above: Life insurance includes coverage for disability and critical illness. Actuarial liabilities include $144,958 (2006 - $152,710) in assumed reinsurance. Liabilities for reinsurance contracts held occur because the reinsurance premium costs exceed the mortality costs assumed in determining the gross liability of the policy. 99 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 13. ACTUARIAL LIABILITIES (continued) 13.2 Movement in actuarial liabilities The movement in actuarial liabilities for the year is as follows: Gross amount Reinsurers’ share 2007 2006 2007 2006 Balance, beginning of year 1,373,584 1,395,599 276,471 302,998 Transfers - 902 - - Change in actuarial liabilities (note 27) (925) (17,568) (28,709) (26,531) Effect of exchange rate changes (8,355) (5,349) (2) 4 Balance, end of year 1,364,304 1,373,584 247,760 276,471 The change in liability by geographical segment is as follows: Barbados Jamaica Trinidad & Tobago USA Other Caribbean Gross amount 2007 2006 16,579 4,085 21,389 12,660 21,646 3,603 (45,891) (45,897) (14,648) 7,981 (925) (17,568) 13.3 Assumptions – life insurance and annuity contracts (a) Process used to set actuarial assumptions and margins for adverse deviations At each date for valuation of actuarial liabilities, the Appointed Actuary (AA) of each insurer reviews the assumptions made at the last valuation date. The AA tests the validity of each assumption by reference to current data, and where appropriate, changes the assumptions for the current valuation. A similar process of review and assessment is conducted in the determination of margins for adverse deviations. Recent changes in actuarial standards and practice are also incorporated in the current valuation. (b) Assumptions for mortality and morbidity 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 2007 valuation, insurers conducted studies of their own recent mortality experience. The resulting experience was measured against an industry standard (Canadian Institute of Actuaries (CIA) 1986 – 1992 tables) and resulted in the assignment of probabilities of death by policy duration. Appropriate modiﬁ cation factors were selected and applied to underwritten and non-underwritten business respectively. Annuitant mortality was determined by reference to CIA tables or to other established scales. 100 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 13. ACTUARIAL LIABILITIES (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) Assumptions for morbidity are determined after taking into account insurer and industry experience and established guidelines from Actuarial Institutes. (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 2007 valuation, to determine the most recent experience of persistency. Appropriate rates of termination by policy duration were determined and applied in the actuarial valuations. (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 2007 URR 5.0% 7.0% 5.5% 4.0% 5.0 – 5.25% 2006 URR 5.0% 7.0% 5.0% 4.0% 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 reﬂ ected in the actuarial valuation after adjusting for expected inﬂ ation. Costs were updated for the 2007 valuations and were applied on a per policy basis. (f) Asset defaults The AA of each insurer includes a provision for asset default in the modelling of the cash ﬂ ows. The provision is based on industry and Group experience and includes a speciﬁ c margin for equity securities and a combined margin for debt securities, mortgage loans and deposits. 101 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 13. ACTUARIAL LIABILITIES (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) (g) Margins for adverse deviations Margins for adverse deviations are determined for the assumptions in the actuarial valuations. 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 2007 27,024 21,797 61,975 12,772 2006 23,240 18,451 54,286 10,488 123,568 106,465 (h) 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 signiﬁ cant 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 2007 2006 (44,722) (51,603) There have been no speciﬁ c changes in assumptions and actuarial modelling which represent more than 5% of actuarial liabilities at the beginning of the year. 13.4 Assumptions – health insurance contracts 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. 102 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 14. OTHER INSURANCE LIABILITIES 14.1 Analysis of other insurance liabilities Dividends on deposit and other policy balances Policy beneﬁ ts in the course of settlement Provision for unearned premiums 14.2 Policy beneﬁ ts in the course of settlement (a) Analysis of policy beneﬁ ts in the course of settlement 2007 63,411 141,860 108,644 313,915 2006 60,875 56,540 35,286 152,701 Gross liability Reinsurers’ share 2007 2006 2007 2006 Life insurance and annuity beneﬁ ts 40,792 35,268 11,390 10,850 Health claims 1,166 1,009 2,947 1,315 Property and casualty claims 99,902 20,263 20,321 8,836 141,860 56,540 34,658 21,001 Health claims include $797 (2006 - $824) in provisions for claims incurred but not yet reported. Property and casualty claims include $32,463 (2006 – $4,105) in provisions for claims incurred but not yet reported. (b) Movement in policy beneﬁ ts in the course of settlement Balance, beginning of year Assumed on acquisitions Policy beneﬁ ts incurred Policy beneﬁ ts paid Gross amount Reinsurers’ share 2007 2006 2007 2006 56,540 54,798 21,001 21,742 79,442 - 10,629 - 334,526 310,958 61,737 56,229 (326,800) (308,339) (58,112) (56,604) Effect of exchange rate changes (1,848) (877) (597) (366) Balance, end of year 141,860 56,540 34,658 21,001 103 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 14. OTHER INSURANCE LIABILITIES (continued) 14.3 Provision for unearned premiums (a) Analysis of provision for unearned premiums Gross liability Reinsurers’ share 2007 2006 2007 2006 Property and casualty insurance 107,383 34,013 31,686 17,943 Health insurance 1,261 1,273 - - 108,644 35,286 31,686 17,943 (b) Movement in provision for unearned premiums Balance, beginning of year Assumed on acquisitions Premiums written Premium revenue Effect of exchange rate changes Balance, end of year Gross amount Reinsurers’ share 2007 2006 2007 2006 35,286 28,484 17,943 12,331 65,681 - 5,415 - 135,852 95,266 68,183 53,921 (126,557) (88,457) (59,523) (48,318) (1,618) (7) (332) 9 108,644 35,286 31,686 17,943 15. INVESTMENT CONTRACT LIABILITIES Deposit administration liabilities Other investment contracts December 31, 2007 December 31, 2006 Carrying Value Fair Value Carrying Value Fair Value 180,882 61,494 242,376 180,882 61,405 242,287 176,194 44,661 220,855 175,836 44,103 219,939 104 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 16. NOTES AND LOANS PAYABLE 7.5% senior notes due 2016 Bank loans December 31, 2007 December 31, 2006 Carrying Value Fair Value Carrying Value Fair Value 146,883 5,836 152,719 151,875 5,836 157,711 146,514 13,974 152,977 13,974 160,488 166,951 The Group issued ten year US$150 million senior notes which are repayable in 2016 and carry a 7.5% rate of interest ﬁ xed for the period. 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. 17. DEPOSIT AND SECURITY LIABILITIES Other funding instruments: Loans from banks and other ﬁ nancial institutions Deposits: Customer deposits Securities: December 31, 2007 December 31, 2006 Carrying Value Fair Value Carrying Value Fair Value 163,719 168,065 161,556 165,057 136,641 136,641 123,157 123,157 Securities sold under agreements to repurchase 487,306 Bank overdrafts 2,899 790,565 487,306 2,899 794,911 457,741 2,981 457,741 2,981 745,435 748,936 Loans from banks and other ﬁ nancial institutions include balances of $118,376 (2006 - $120,655) due to the Federal Home Loan Bank of Dallas (FHLB). The Group participates in the FHLB program in which funds received from the Bank are invested in mortgages and mortgage backed securities. The collateral for other funding instruments and securities sold under agreements to resell is set out in note 9.2. Un-disbursed facilities in respect of other funding instruments and bank overdrafts total approximately $ nil (2006 – $1,779). 18. PROVISIONS Pension plans and other retirement beneﬁ ts (note 31) Other 2007 2006 21,648 1,894 23,542 17,963 2,602 20,565 105 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 19. INCOME TAX LIABILITIES Deferred income tax liabilities (note 33) Income taxes payable 20. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Amounts due to policyholders Amounts due to reinsurers Amounts due to managed funds Other accounts payable and accrued liabilities 2007 6,635 8,472 15,107 2007 7,718 82,351 2,105 68,292 2006 7,434 11,244 18,678 2006 1,649 67,767 3,609 55,641 160,466 128,666 Amounts due to reinsurers include $53,114 (2006 – $53,862) due to a reinsurer in respect of assets held in trust by the Group (see note 9.2). 21. 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. Year ended December 31, 2007 Year ended December 31, 2006 Number of shares ‘000 $000 Number of shares ‘000 $000 Issued and fully paid common shares of no par value: Balance, beginning of year 266,187 230,235 265,553 229,226 Allotments 238 484 1,432 2,826 Balance, end of year 266,425 230,719 266,985 232,052 Treasury shares: Net shares disposed / (ac- quired) by ESOP trustees 429 976 (798) (1,817) Total share capital 266,854 231,695 266,187 230,235 The Company’s shares are listed on the Barbados and Trinidad stock exchanges. From February 14, 2007, the Company’s shares were listed on the London stock exchange. 106 Year ended December 31, 2007 Amounts expressed in US $000 22. RESERVES Sagicor Financial Corporation Notes To The Financial Statements Fair value reserves Year ended December 31, 2007 Available for sale assets Owner occupied property Currency translation reserve Share based payment reserves Statutory reserves Total Balance, beginning of year Unrealised (losses)/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) 55,815 9,531 (22,811) 1,472 4,099 48,106 (10,847) 6,693 (17,524) - - - - - (9,099) (28,371) 6,693 (9,099) - - - - - - - 1,705 - - - - - (4,154) (17,524) (9,099) (30,777) 1,705 Other movements 873 (203) 215 - 1,816 2,701 (27,498) 6,490 (8,884) 1,705 1,816 (26,371) Balance, end of year 28,317 16,021 (31,695) 3,177 5,915 21,735 107 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 22. RESERVES (continued) Fair value reserves Year ended December 31, 2006 Available for sale assets Owner occupied property Currency translation reserve Share based payment reserves Statutory reserves Total Balance, beginning of year Unrealised (losses)/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) Other movements 56,007 8,886 (16,439) 4,689 645 (4,900) - - - - - (6,372) (211) 645 (6,372) - 19 - - - - - - - - - 1,472 4,810 53,264 - - - - - 5,334 (4,900) (6,372) (5,938) 1,472 - (711) (692) (192) 645 (6,372) 1,472 (711) (5,158) Balance, end of year 55,815 9,531 (22,811) 1,472 4,099 48,106 108 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 23. PARTICIPATING ACCOUNTS The movements in the participating accounts during the year were as follows: Balance, beginning of year Net unrealised (losses) / gains arising on available for sale investment securities Return of transfer to support proﬁ t distribution to shareholders Net income / (loss) for the year Balance, end of year Closed participating account Open participating account 2007 7,158 (20) - 1,372 8,510 2006 5,270 1 - 1,887 7,158 2007 2006 2,744 5,190 - - (260) (256) (1,598) (2,190) 886 2,744 The amounts in the ﬁ nancial statements relating to participating accounts are as follows: Assets Liabilities Revenues Beneﬁ ts Expenses Income taxes Closed participating account Open participating account 2007 2006 2007 2006 94,761 92,409 227,604 212,121 86,251 10,548 7,356 1,633 187 85,251 10,929 7,285 1,568 189 226,718 209,376 35,684 35,150 29,851 27,830 6,747 684 8,669 841 109 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 24. PREMIUM REVENUE Life insurance Annuities Health insurance Property and casualty insurance Gross revenue Reinsurance expense 2007 2006 2007 2006 249,534 231,602 39,271 37,508 53,423 56,091 123,190 113,548 109,724 67,462 535,871 468,703 240 5,312 60,662 105,485 365 5,662 47,546 91,081 Gross revenue includes $22,260 (2006 - $19,188) in reinsurance assumed. 25. NET INVESTMENT INCOME Investment income: Interest income Dividend income Rental income from investment property Net investment gains Foreign exchange gains Other investment income Investment expenses: Allowances for impairment losses Direct operating expenses of investment property Other direct investment expenses 2007 2006 206,618 194,612 6,719 5,629 38,377 3,836 1,655 6,275 5,345 29,579 2,870 2,965 262,834 241,646 (421) 1,155 888 1,622 183 1,305 1,779 3,267 Net investment income 261,212 238,379 The Group manages its ﬁ nancial investments by the type of ﬁ nancial instrument (i.e. debt securities, equity securities, mortgage loans etc) and the income there-from is presented accordingly. 110 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 25. NET INVESTMENT INCOME (continued) (a) Interest income Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell Deposits Other balances 2007 148,325 20,183 9,091 15,285 3,477 9,845 412 2006 143,735 17,921 9,185 13,212 4,028 6,395 136 206,618 194,612 Interest from debt securities includes $1,678 (2006 - $1,324) from an associated company. (b) Net investment gains / (losses) Debt securities Equity securities Investment property Other ﬁ nancial investments 26. 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 2007 9,051 19,730 9,512 84 38,377 2007 12,520 3,075 11,144 10,758 13,237 50,734 2006 9,487 10,502 9,314 276 29,579 2006 11,895 2,676 11,340 7,706 9,985 43,602 111 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 27. POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES Policy beneﬁ ts: Life insurance beneﬁ ts Annuity beneﬁ ts Health insurance claims Gross amount Reinsurers’ share 2007 2006 2007 2006 130,074 129,422 25,725 23,936 84,414 82,410 24,567 22,669 89,182 82,803 3,845 3,353 Property & casualty insurance claims 30,856 16,323 7,600 6,271 Total policy beneﬁ ts 334,526 310,958 61,737 56,229 Change in actuarial liabilities (note 13.2) Total policy beneﬁ ts and change in actuarial liabilities (925) (17,568) (28,709) (26,531) 333,601 293,390 33,028 29,698 Gross policy beneﬁ ts include $22,263 (2006 - $21,171) arising from reinsurance assumed. 28. INTEREST EXPENSE Insurance contracts Investment contracts Other funding instruments Deposits Securities Other Items 2007 2,457 17,044 9,448 9,528 42,804 2,782 84,063 2006 2,659 17,501 8,654 8,082 41,397 3,984 82,277 The Group manages its interest-bearing obligations by the type of obligation (i.e. investment contracts, securities etc) and the interest there-to is presented accordingly. 112 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 29. EMPLOYEE COSTS Included in administrative expenses, commissions and related compensation are the following: Administrative staff salaries, directors’ fees and other short-term beneﬁ ts Employer contributions to social security schemes Equity compensation beneﬁ ts Employer contribution to deﬁ ned contribution pension schemes Costs – deﬁ ned beneﬁ t pension schemes Costs – other retirement beneﬁ ts 2007 63,890 4,863 2,413 654 3,132 1,178 2006 55,770 4,270 1,718 344 2,489 878 76,130 65,469 The total number of administrative staff at December 31 was 1,807 persons (2006 – 1,764 persons). 30. EMPLOYEE EQUITY COMPENSATION BENEFITS 30.1 The Company Effective December 31, 2005, the Company introduced a Long Term Incentive (LTI) plan for designated executives of the Sagicor Group and an Employee Share Ownership Plan (ESOP) for permanent administrative employees and sales agents of the Group. A total of 26,555,274 common shares of the Company (or 10% of shares then in issue) have been set aside for the purposes of the LTI plan and the ESOP. (a) LTI plan – restricted share grants Restricted share grants have been granted to designated key management of the Group during the year. Share grants may vest over a four year period beginning at the grant date. The vesting of share grants is conditional upon the relative proﬁ tability of the Group as compared to a number of peer companies. Relative proﬁ tability is measured with reference to the ﬁ nancial year preceding the vesting date. The movement in restricted share grants during the year is as follows. B$ represents Barbados $. 2007 2006 Number of grants ‘000 Weighted average exercise price Number of grants ‘000 Weighted average exercise price Balance, beginning of year Grants issued Grants vested Balance, end of year 214 425 (218) 421 B$ 3.81 B$ 3.87 B$ 3.84 B$ 3.85 - 305 (91) 214 - B$ 3.81 B$ 3.81 B$ 3.81 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 $2,647. 113 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 30. EMPLOYEE EQUITY COMPENSATION BENEFITS (continued) 30.1 The Company (continued) (b) LTI plan – share options Share options have been granted to designated key management of the Group during the year. Options are granted at the fair market price of the shares at the time that the option is granted. 25% of the options each vest on the ﬁ rst, second, third and fourth anniversaries of the grant date. Options are exercisable up to 10 years from the grant date. The movement in share options during the year is as follows. B$ represents Barbados $. 2007 2006 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year Options granted Options exercised Balance, end of year Exercisable at the end of the year 932 2,050 (14) 2,968 219 B$ 3.95 B$ 4.01 B$ 3.95 B$ 3.99 B$ 3.95 - 932 - 932 - - 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 2007 options 2006 options B$ 4.01 B$ 0.82 19.3% B$ 3.95 B$ 1.38 35.8% 7.0 years 7.0 years 3.0% 4.8% 3.0% 6.0% The expected volatility is based on statistical analysis of monthly share prices over the two years prior to grant date. (c) ESOP During 2007 and 2006, the Company approved awards under the ESOP in respect of permanent administrative employees and sales agents of the Company and certain subsidiaries. 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 ﬁ ve years from the award date in order to qualify as a beneﬁ ciary. Shares are distributed to beneﬁ ciaries upon their retirement or termination of employment. During the year, 429,000 common shares were disposed of by the Trustees (2006 - 798,000 common shares acquired). (d) Expense The expense recorded in the income statement in respect of the LTI plan and ESOP totalled $2,000 (2006 - $1,197). 114 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 30. EMPLOYEE EQUITY COMPENSATION BENEFITS (continued) 30.2 Life of Jamaica Limited (LOJ) (a) Long-term incentive plan Effective May 1, 2003, LOJ instituted a share based long-term incentive plan for senior executives. 150,000,000 ordinary shares (or 5% of the authorised share capital at that date) have been set aside for the plan. LOJ introduced a new Long Term Incentive (LTI) plan effective January 2007. This plan replaced the previous Stock Option plan. Under the LTI plan executives are entitled but not obliged, to purchase the company stock at a pre-speciﬁ ed price at some future date, once a pre-determined performance objective is met. The options are granted each year on the date of the LOJ Board of Directors Human Resources Committee meeting, following the performance year, at which the stock option awards are approved. Stock options vest in 4 equal installments beginning the ﬁ rst December 31 following the grant date and for the next three December 31st dates thereafter (25% per year). Options are not exercisable after the expiration of 7 years from the date of grant. The number of stock options in each stock option award is calculated based on the LTI opportunity via stock options (percentage of applicable salary) divided by the Black-Scholes value of a stock option on LOJ stock on the date of grant. The exercise price of the options is the closing bid price on the grant date. Under the previous Stock Option plan, options were granted on December 31, of each year. The strike price was the closing bid price on the grant date. The number of stock options in each stock option award was calculated based on a percentage of applicable salary divided by the strike price. Options were exercisable beginning one year from the date of grant and had a contractual term of six years from the date of grant. Details of the share options outstanding are as follows. J$ represents Jamaica $. 2007 2006 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year 23,866 J$ 6.54 Options granted Options exercised Balance, end of year Exercisable at the end of the year - (4,533) 19,333 13,286 - J$ 5.50 J$ 6.79 J$ 6.45 19,470 4,396 - 23,866 13,185 J$ 5.99 J$ 9.00 - J$ 6.54 J$ 4.48 Further details of share options outstanding at December 31, 2007 are as follows: Fair value of options outstanding Share price at grant date Exercise price Standard deviation of expected share price returns Weighted average remaining contractual term Risk-free interest rate Options J$ 21,615,000 J$ 3.90 – 11.30 J$ 2.70 – 11.30 34.0% 2 years 12.0% - 26.1% The expected volatility is based on statistical analysis of daily share prices over three years. The total expense recorded in the income statement in respect of the share option plan totalled $271 (2006 – $90). 115 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 30. EMPLOYEE EQUITY COMPENSATION BENEFITS (continued) 30.2 Life of Jamaica Limited (LOJ) (continued) (b) Employee share purchase plan 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 $1,502 (2006 - $1,623). 30.3 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) 17,220,000 share options on 8 March 2004. These options expired on 31 December 2007. The exercise price for the options is J$10. The options were vested 31 December 2006. 12,668,000 of these options were vested and exercised. The balance of the 4,552,000 vested options was exercised in 2007. (ii) 1,200,000 share options on 1 March 2005. These options expire on 28 February 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 shares were forfeited and contracts for 525,000 were cancelled. 75,000 of the share options vested on 1 March 2006. (iii) 1,200,000 share options on 1 March 2006. These options expire on 28 February 2010. The exercise price for the options is J$21.75. These options vest over four years – 25% each anniversary date of the grant. (iv) 600,000 share options on 1 March 2007. These options expire on 28 February 2011. The exercise price for the options is J$19.29. These options vest over four years – 25% each anniversary date of the grant. (v) 4,074,246 share options on 1 April 2007. These options expire on 31 March 2011. The exercise price for the options is J$18.00. These options vest over four years – 25% each anniversary date of the grant. The movement in share options was as follows. J$ represents Jamaica $. 2007 2006 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year Options granted Options exercised Options lapsed / forfeited Balance, end of year Exercisable at the end of the year 5,902 4,674 (4,552) (75) 5,949 375 J$ 16.20 J$ 21.27 J$ 20.68 J$ 36.50 J$ 16.49 J$ 24.70 11,210 1,200 (5,458) (1,050) 5,902 4,702 J$ 12.70 J$ 19.29 J$ 9.71 J$ 36.50 J$ 16.20 J$ 10.85 116 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 30. EMPLOYEE EQUITY COMPENSATION BENEFITS (continued) 30.3 Pan Caribbean Financial Services Limited (PCFS) (continued) Further details of share options outstanding at December 31, 2007 are as follows: Fair value of options outstanding Weighted average share price at grant date Exercise price Standard deviation of expected share price returns Weighted average remaining contractual term Risk-free interest rate Options J$ 42,178,000 J$ 16.84 J$ 18.00 - 36.50 10.0% 5 years 13.3% The expected volatility is based on statistical analysis of daily share prices over one year. The total expense recorded in the income statement in respect of the share option plan totalled $142 (2006 – $ 182). 31. EMPLOYEE RETIREMENT BENEFITS Certain Group subsidiaries have contributory deﬁ ned beneﬁ t pension schemes in place for eligible administrative staff. Some subsidiaries also offer medical and life insurance beneﬁ ts that contribute to the health care and life insurance coverage of retirees and beneﬁ ciaries. (a) Amounts recognised in the balance sheet The amounts recognised in the balance sheet are determined as follows: Fair value of retirement plan assets Present value of retirement obligations Unrecognised actuarial losses Pension beneﬁ ts Other retirement beneﬁ ts 2007 2006 75,229 65,340 (96,016) (81,796) (20,787) (16,456) 5,869 3,303 2007 1,052 (8,063) (7,011) 2,329 2006 970 (7,211) (6,241) 2,435 Amounts recognised in the balance sheet (14,918) (13,153) (4,682) (3,806) Represented by: Asset balances Liability balances 2,048 1,004 - - (16,966) (14,157) (4,682) (3,806) (14,918) (13,153) (4,682) (3,806) Included in liability balances are interest bearing deposit administration fund balances totalling $18,929 (2006 - $16,845) representing employee pension plan funds on deposit with the Group. 117 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 31. EMPLOYEE RETIREMENT BENEFITS (continued) (b) Amounts recognised in the income statement 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 Curtailment gain Pension beneﬁ ts Other retirement beneﬁ ts 2007 2006 2007 2006 3,348 2,804 7,351 6,349 1,168 1,048 65 174 665 928 68 1,242 (1,591) 436 555 (3) - - Expected return on retirement plan assets (8,800) (7,886) (134) (110) Total cost 3,132 2,489 1,178 878 (c) Retirement plan assets The movement in the fair value of retirement plan assets is as follows: Plan assets, beginning of year Expected return on plan assets Actuarial gains and losses Contributions made by the Group Contributions made by plan participants Beneﬁ ts paid Other Effects of exchange rate changes Plan assets, end of year Pension beneﬁ ts Other retirement beneﬁ ts 2007 2006 2007 2006 65,340 60,504 8,800 7,886 97 (1,080) 3,912 2,139 2,748 1,970 (2,716) (4,165) 119 (877) (2,462) (1,646) 75,229 65,340 970 134 - - - - - (52) 1,052 - 110 989 - - - (110) (19) 970 The actual return on retirement plan assets was $9,896 (2006 – $7,244). 118 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 31. EMPLOYEE RETIREMENT BENEFITS (continued) (d) Retirement obligations The movement in the retirement obligations are as follows: Pension beneﬁ ts Other retirement beneﬁ ts Retirement obligations, beginning of year 81,796 70,986 2007 2006 Current service cost Interest cost Contributions made by employees Actuarial gains and losses Beneﬁ ts paid Past service cost Curtailments Other Effects of exchange rate changes Retirement obligations, end of year 3,348 7,351 2,175 4,805 2,804 6,349 2,043 5,362 (2,744) (3,245) 519 - 1,238 (2,472) 96,016 455 - (1,367) (1,591) 81,796 2007 7,211 665 928 - 926 (142) 1,242 (2,334) (78) (355) 8,063 2006 4,559 436 555 - 1,973 (80) - - - (232) 7,211 (e) Principal assumptions The principal actuarial assumptions used were as follows: Pension beneﬁ ts Jamaica Trinidad & Tobago Barbados & other countries Discount rate 13.0% 8.0% 7.75% Expected return on plan assets 13.0% 8.0% Future salary increases 10.0% 6.5% Future pension increases Portion of employees opting for early retirement Future changes in National Insurance Scheme Ceilings 4.5% 1.5% 0.0% 0.0% 0.0% 2.5% Long term increase in health costs n/a n/a 8.0% 6.5% 2.5% 0.0% 3.5% n/a Other retirement beneﬁ ts Jamaica 13.0% 13.0% 10.0% n/a n/a n/a 12.0% 119 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 32. 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 2007 15,861 3,960 3 2006 13,783 118 8 19,824 13,909 2007 67,323 15,504 82,827 2006 62,426 14,714 77,140 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 write down (reversal of a write down) of a deferred tax asset Tax on distribution of proﬁ ts from policyholder funds Other taxes 2007 2006 82,827 77,140 16,096 14,399 (5,319) (4,299) (143) (724) 6,227 130 (56) 1,729 325 1,559 5 982 (102) 663 (49) (979) 1,501 1,788 19,824 13,909 120 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 33. DEFERRED INCOME TAXES Deferred income tax assets and liabilities are attributable to the following items: Deferred income tax assets: Pensions and other retirement beneﬁ ts Unused tax losses Other items Total (note 11) Deferred income tax liabilities: Accelerated tax depreciation Policy reserves taxable in the future Pensions and other retirement beneﬁ ts Accrued interest Unrealised gains on available for sale investments Other items Total (note 19) Deferred income tax balances include the following: Assets to be settled after one year Liabilities to be settled after one year 2007 2006 353 11,134 158 11,645 706 3,718 (198) 4,226 2,053 1,672 - 247 661 820 2,854 6,635 11,153 3,273 186 67 686 3,500 1,323 7,434 3,767 5,918 The Group has not recognised potential deferred income tax assets of $29,055 (2006 – $22,474) arising from unrecognised tax losses of $99,490 (2006 - $74,447). Deferred income taxes have not been provided for income taxes that would be payable on the distribution of retained earnings of certain subsidiaries because either there is no intention to distribute those earnings or they are not subject to tax on receipt. 121 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 34. 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 (see note 30.1). Net income for the year attributable to shareholders 2007 86,289 2006 67,663 Weighted average number of shares in issue in thousands 266,810 266,514 LTI restricted share grants LTI share options ESOP shares Adjusted weighted average number of shares in issue Basic earnings per common share Fully diluted earnings per common share 333 23 159 70 - 6 267,325 266,590 32.3 cents 25.4 cents 32.3 cents 25.4 cents 35. DIVIDENDS PER COMMON SHARE Dividends declared and paid: A ﬁ nal dividend in respect of the prior year An interim dividend in respect of the current year Dividends declared after balance sheet date: 2007 2006 Barbados cents per share $000 Barbados cents per share 7.0 6.0 13.0 9,317 8,004 17,321 6.0 6.0 12.0 $000 8,007 7,984 15,991 A ﬁ nal dividend in respect of the current year 8.0 11,087 7.0 9,317 122 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 36. CASH FLOWS 36.1 Operating activities Adjustments for non-cash items, interest and dividends: Interest and dividend income Net investment gains Gain arising on acquisition Net increase in actuarial liabilities Interest expense and ﬁ nance costs Depreciation and amortisation Other items Changes in operating assets: Investment property Debt securities Equity securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreement to resell Deposits Other assets and receivables 2007 2006 (213,337) (200,887) (38,377) (26,398) 27,784 96,339 20,101 (4,927) (29,579) - 8,963 91,697 17,350 39,185 (138,815) (73,271) 2007 2006 (982) (125,710) 4,958 (46,620) (959) (27,590) (1,301) (69,944) (7,152) 2,999 (89,100) 28,084 (36,188) (586) (8,454) 1,751 (15,105) 743 (275,300) (115,856) The gross changes in investment property, debt securities and equity securities are as follows. Investment property Debt securities Equity securities 2007 2006 2007 2006 2007 2006 Disbursements (1,744) (1,522) (544,296) (860,567) (59,985) (29,477) Disposal proceeds 762 (982) 4,521 2,999 418,586 771,467 (125,710) (89,100) 64,943 4,958 57,561 28,084 123 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 36. CASH FLOWS (continued) 36.1 Operating activities (continued) Changes in operating liabilities: Insurance liabilities Investment contract liabilities Other funding instruments Deposits Securities Other liabilities and payables 36.2 Investing activities Property, plant and equipment Purchases Disposal proceeds 36.3 Financing activities Notes and loans payable Proceeds Repayments 36.4 Cash and cash equivalents Cash resources Call deposits and other liquid balances with maturities of three months or less from acquisition date Bank overdrafts Other borrowings for cash purposes with maturities of three months or less from origination 124 2007 2006 15,071 26,039 4,332 17,100 42,946 14,185 119,673 5,449 9,933 14,608 12,699 11,296 (1,692) 52,293 2007 2006 (12,468) (13,303) 1,936 1,958 (10,532) (11,345) 2007 2006 6,113 159,985 (14,065) (80,835) (7,952) 79,150 2007 89,771 46,305 (2,899) 2006 81,539 156,194 (2,981) (19,685) (10,078) 113,492 224,674 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 37. ACQUISITIONS 37.1 Sagicor at Lloyd’s Effective September 1, 2007, Sagicor Europe Limited acquired Gerling Corporate Capital Limited, the sole corporate member participating in Lloyd’s of London Syndicate 1206. Sagicor Europe also acquired the Syndicate’s managing agency Gerling at Lloyd’s Limited and its afﬁ liated entities Gerling Syndicate Holdings Limited and Gerling Syndicate Services Limited. Upon acquisition, the acquired entities were re-branded with ‘Sagicor’ replacing ‘Gerling’ in each of their names. The Syndicate and acquired entities constitute an ‘Integrated Lloyd’s Vehicle’ (ILV). Sagicor Europe Limited was incorporated for the purpose of being the immediate holding company of the ILV. Sagicor has a 90% interest in Sagicor Europe, with management and employees of the ILV holding the remaining 10%. Sagicor Europe intends to issue additional shares to the employees of the ILV resulting in an ultimate 85:15 ownership ratio. The Syndicate writes property and casualty insurance business in the Lloyd’s insurance market. It engages mainly in the sub-classes of personal accident and non-marine property insurances. The fair values of the net assets acquired, the purchase consideration, and the gain arising are set out below. Total fair value Acquiree’s carrying value Net assets acquired: Property, plant and equipment Intangible assets (note 8) Financial investments Reinsurance assets Miscellaneous assets and receivables Cash resources Other insurance liabilities Accounts payable and accrued liabilities Total net assets Share of net assets acquired by the Group Purchase consideration and related costs: Cash Gain arising on acquisition The gain arising on acquisition is attributable to: Shareholders Minority interest 550 27,671 54,510 16,044 85,498 9,218 (145,123) (17,316) 31,052 31,052 4,654 26,398 23,719 2,679 26,398 550 504 54,510 16,044 85,498 9,218 (145,123) (17,316) 3,885 The gain arising on the acquisition reﬂ ects the willingness of the ILV management and Sagicor to combine their resources to pursue a common strategy, and the desire of the vendor to exit the Lloyd’s market. As a result, the purchase consideration may not have been representative of an open market price for the Syndicate. (a) Details of acquiree’s net income Acquiree’s net income for the year ended December 31, 2007 Acquiree’s net income consolidated by the Group for the period September 1 to December 31, 2007 2007 3,137 1,728 125 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 37. ACQUISITIONS (continued) 37.2 Byrne & Stacey Underwriting On October 4, Sagicor Syndicate Holdings Limited acquired Byrne & Stacey Underwriting Limited (BSU), an insurance agency placing business with Syndicate 1206. The fair values of the net assets acquired, the purchase consideration, and the goodwill arising are set out below. Total fair value Acquiree’s carrying value Net assets acquired: Property, plant and equipment Intangible assets (note 8) Miscellaneous assets and receivables Cash resources 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 and deferred compensation Goodwill arising on acquisition (note 8) The goodwill arising on acquisition is attributable to: Shareholders Minority interest 163 1,293 1,307 820 (224) (2,050) 1,309 1,309 6,162 4,853 4,361 492 4,853 163 40 1,307 820 (224) (2,050) 56 BSU was acquired from its management who continue to manage the business on a day to day basis. It is common in such circumstances for the purchase consideration to compensate the vendors for the stream of future revenue which is expected from a going concern. (a) Details of acquiree’s net income Acquiree’s net loss for the year ended December 31, 2007 Acquiree’s net income consolidated by the Group for the period October 4 to December 31, 2007 2007 (8) 87 37.3 Effect of acquisitions on Group results Assuming the Sagicor at Lloyd’s and Byrne & Stacey Underwriting acquisitions were effective at the beginning of 2007, the additional total revenue of the Group would be $59,663 and the additional net income to the Group would be $1,314. 126 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 37. ACQUISITIONS (continued) 37.4 Sagicor General Insurance (Cayman) Limited On October 22, 2007, Life of Jamaica Limited took its interest in Sagicor General Insurance (Cayman) Limited (SGIC) to 75% by acquiring an additional 24% of SGIC’s issued shares from a minority interest. As a result, the Sagicor Group’s equity interest in SGIC increased by 14% to 45%. The net assets acquired, the purchase consideration, and the goodwill arising are set out below. Share of net assets acquired Purchase consideration: Cash Goodwill arising on acquisition (note 8) 2007 3,593 4,032 439 Post-acquisition net income for the additional 14% of $44 has been included in the net income attributable to shareholders. 37.5 Primo Holding Limited On March 30, 2007, the Group and a managed fund subscribed for new shares in Primo Holding Limited. After the subscription, the Group and the managed fund each had a 37.5% shareholding in Primo Holding Limited. The net assets acquired, the purchase consideration, and the goodwill arising are set out below. Share of net assets on acquisition Purchase consideration: Cash Gain arising on acquisition 2007 1,681 1,519 162 Primo Holding Limited is a property investment company in Barbados. Post-acquisition net income of $155 has been consolidated in these ﬁ nancial statements. 38. EVENTS AFTER THE BALANCE SHEET DATE 38.1 Acquisition of insurance portfolio Sagicor Capital Life Insurance Company Limited acquired from the Canadian company, Industrial Alliance Insurance and Financial Services Inc. (IA) insurance business in the Netherland Antilles, Aruba, Barbados and Cayman Islands, which was previously owned by National Life of Canada, before that company’s business operations were combined with the business operations of IA. The acquisition was effective January 18, 2008. The liabilities assumed are estimated at $44,384 which is matched by an equivalent amount of assets. The purchase consideration was $3,463 approximately. The insurance portfolio comprises approximately 9,000 inforce life and annuity contracts issued to individuals and groups. The assets consist mainly of ﬁ nancial investments. Management intends to assess the fair value of the assets and liabilities assumed after which a deﬁ nitive disclosure can be made. 127 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 38. EVENTS AFTER THE BALANCE SHEET DATE (continued) 38.2 Acquisition of Barbados Farms Limited On December 7, 2007, the Company made an offer to purchase any and all of the outstanding common shares of Barbados Farms Limited (BFL), not already owned or controlled by Sagicor. The offer was at BBD 5.00 per share to be satisﬁ ed 65% by the issue of shares of the Company and 35% by cash. The offer closed on January 9, 2008, at which time a total of 77% of the issued shares of BFL had been tendered to and accepted by Sagicor. The acquisition was completed in February 2008 for a total consideration of $39,692, which was satisﬁ ed by the issue of 10,319,819 new Sagicor shares and by cash of $13,892. The common shares of BFL are listed on the Barbados Stock Exchange. BFL engages in agriculture, primarily the production of sugar cane. BFL also owns the lands which are utilised for agriculture along with other lands which are either leased, being developed for resale or not in use. The audited ﬁ nancial statements of BFL for the year ended June 30, 2007 disclosed that its assets totalled $26,689, its annual revenue totalled $3,202 and its income after tax totalled $800. Management intends to engage independent valuers to assist in the determination of the fair value of the net assets acquired, after which a deﬁ nitive disclosure can be made. 38.3 Issue of preference shares Pan Caribbean Financial Services Limited issued a prospectus dated January 18, 2008 in the Jamaica market for the issue of up to 10 million 12.5% cumulative redeemable preference shares at a ﬁ xed price of J$ 200 per share. The offer closed on February 29, 2008 with a total subscription of 6.3 million shares. 38.4 Cancellation of insurance policies On December 20, 2007, an agreement was entered into whereby health insurance policies issued by Sagicor Allnation Insurance Company would be cancelled and new policies for the unexpired periods of and under the same terms as the cancelled policies would be issued by another insurance carrier. Sagicor Allnation’s policies were cancelled effective February 1, 2008 when the approximate gross unearned premium on these policies totalled $1,420. The net cost to the Group of completing this transaction was minimal, and will be included in the 2008 ﬁ nancial statements. During 2007, these policies generated gross premium revenue of $5,469. 128 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 39. COMMITMENTS AND CONTINGENT LIABILITIES 39.1 Commitments 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 ﬁ nancial statements. Commitments for loan disbursements, real estate expenditure, operating lease and rental payments are disclosed in note 41.2(a). (a) Participation in Lloyd’s Syndicate 44 On December 18, 2007, Sagicor Europe Limited entered into an agreement to acquire the sole corporate member participating in Syndicate 44 with effect from underwriting year 2008. In addition Sagicor at Lloyd’s Limited entered into an agreement to assume the responsibility as managing agent of Syndicate 44. These agreements are subject to the receipt of regulatory approvals by March 31, 2008. The principal activity of Syndicate 44 is the transaction of term life insurance business, issuing contracts to individuals and to groups, predominately in the United Kingdom. 39.2 Contingent liabilities Guarantee and ﬁ nancial facilities at balance sheet date for which no provision has been made in these ﬁ nancial statements include the following: Customer guarantees and letters of credit Letter of credit facility (note 45.2 (c) ) 2007 8,030 80,016 88,046 2006 4,591 - 4,591 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. (a) Legal proceedings During the normal course of business, the Group is subject to legal actions which may affect the reported amounts of liabilities, beneﬁ ts 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 ﬁ nancial statements for such potential tax assessments. 129 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 39. COMMITMENTS AND CONTINGENT LIABILITIES (continued) 39.2 Contingent liabilities (continued) (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 reﬂ ects 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 master ﬁ le as at November 2003 revealed that approximately 17,000 Universal Life policies were affected by fund values which were insufﬁ cient to cover these costs through the life of the policies. Once the problem was recognised, the Group 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. 95% of these policyholders agreed to adjustments to their policies. The Group estimated that less than 1% of the affected policyholders have ﬁ led 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 quantiﬁ ed at this time. 40. RELATED PARTY TRANSACTIONS (a) Key management Key management comprises directors and senior management of the Company and of Group subsidiaries. Key management includes those persons at or above the level of Vice President or its equivalent. Compensation of and loans to these individuals were as follows: Compensation: Salaries, directors’ fees and other short-term beneﬁ ts Equity compensation beneﬁ ts Pension and other retirement beneﬁ ts 2007 2006 13,301 2,139 694 16,134 12,172 1,362 555 14,089 130 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 40. RELATED PARTY TRANSACTIONS (continued) Balance, beginning of year Assumed on acquisitions Advances Repayments Effects of exchange rate changes Balance, end of year Mortgage loans Other loans Total loans 3,555 - 502 (334) - 3,723 174 10 209 (31) (10) 352 3,729 10 711 (365) (10) 4,075 Mortgage loans bear interest at rates from 4.5% to 8.5%. Other loans bear interest at rates from 5% to 10%. (b) Employee pension plans Certain Group subsidiaries have employee pension plans which are administered by the Group as segregated pension plans. The assets of the segregated pension plans at December 31, 2007 amounted to $74,789 (2006 - $66,499) and are included in the assets under administration referred to in note 47. (c) First Jamaica Investment Limited (First Jamaica) First Jamaica holds a 25% interest in LOJ and is a signiﬁ cant minority interest. Because of the size of this shareholding, First Jamaica is considered to be a related party of the Group. As of December 31, the Group has the following balances with First Jamaica: Financial investments Accounts receivable Accounts payable 2007 - - - 2006 4,445 1,500 3,181 41. FINANCIAL RISK The Group’s activities of issuing insurance contracts, of accepting funds from depositors, of investing insurance premium and deposit receipts in a variety of ﬁ nancial and other assets, and dealing in securities, exposes the Group to various insurance and ﬁ nancial risks. Financial risks include credit, liquidity and market risks. Market risks arise from changes in interest rates, equity prices, currency exchange rates or other market factors. The effects of these risks are disclosed in the sections below and in note 43. 41.1 Credit risk Credit risk is the exposure that the counterparty to a ﬁ nancial instrument is unable to meet an obligation, thereby causing a ﬁ nancial loss to the Group. Credit risks are primarily associated with ﬁ nancial investments and reinsurance contracts held. Credit risk from ﬁ nancial investments is minimised through holding a diversiﬁ ed portfolio of investments, purchasing securities and advancing loans only after careful assessment of the borrower, obtaining collateral before advancing loans, and placing deposits with ﬁ nancial institutions with a strong capital base. Limits may be placed on the amount of risk accepted in relation to one borrower. 131 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) The maximum exposures of the Group to credit risk without taking into account any collateral or any credit enhancements are set out in the following table. Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell Deposits Reinsurance assets Deferred policy acquisition costs Premiums in the course of collection Other accounts receivable Cash resources Total balance sheet exposures Loan commitments Customer guarantees and letters of credit Total off balance sheet exposures Total 2007 2006 $000 % $000 % 1,750,450 55.8 1,650,860 57.3 293,998 126,403 145,764 15,980 161,698 9.4 4.0 4.7 0.5 5.2 247,893 125,891 122,888 22,320 167,862 8.6 4.4 4.3 0.8 5.8 320,155 10.3 321,689 11.2 25,917 78,299 55,370 92,140 0.8 2.5 1.9 3.0 3,747 27,926 51,509 87,682 0.1 1.0 1.7 3.0 3,066,174 98.1 2,830,267 98.2 48,931 8,030 56,961 1.6 0.3 1.9 47,373 4,591 51,964 1.6 0.2 1.8 3,123,135 100.0 2,882,231 100.0 The amounts in respect of customer guarantees and letters of credit represent potential claims against customers in the event of a call on customer guarantees and letters of credit issued by the Group. 132 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) The Group’s exposures to individual counterparty credit risks exceeding 2.5% of total exposures are set out below. Debt securities: Government of Jamaica debt securities denominated in Jamaica dollars (long-term issue credit rating B by Standard & Poor’s) Government of Jamaica debt securities denominated in United States dollars (long-term issue credit rating B by Standard & Poor’s) Federal government of USA debt securities (long-term issue credit rating AAA by Standard & Poor’s) Government of Barbados debt securities denominated in Barbados dollars (long-term issue credit rating A - by Standard & Poor’s) Government of Barbados debt securities denominated in United States dollars (long-term issue credit rating BBB+ by Standard & Poor’s) Deposits & cash: The Bank of Nova Scotia (long-term issue credit rating AA - by Standard & Poor’s) FirstCaribbean International Bank (long-term issue credit rating A - by Standard & Poor’s) Reinsurance assets: Scottish Re (U.S.) Inc (ﬁ nancial strength rating B (Fair) by A.M. Best) Washington National Insurance Company (ﬁ nancial strength rating B+ (Good) by A.M. Best) 2007 2006 446,087 445,547 298,359 271,572 299,560 292,158 72,320 73,819 8,012 8,584 72,697 23,861 34,337 97,627 152,472 168,721 80,749 95,261 The reinsurers’ share of liabilities held by Scottish Re is secured by assets held in trust by a third party totalling $143,580 (2006 - $ 148,372) and by the Group (see note 9.2). Exposure to credit risk is also managed in part by obtaining collateral and guarantees for mortgage loans and ﬁ nance loans and ﬁ nance leases. For mortgage loans, the collateral is real estate property, and the approved loan limit is 75% to 95% of collateral value. For ﬁ nance loans and ﬁ nance leases, the collateral often comprises a vehicle or other form of security and the approved loan / lease limit is 80% to 100% of the collateral value. Unsecured ﬁ nance loans and ﬁ nance leases are only granted when the initial amount is less than $15. 133 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) The Group’s exposure to mortgage loans and ﬁ nance loans and ﬁ nance leases by geographic segment are as follows. Barbados Jamaica Trinidad & Tobago USA Other Caribbean 2007 148,133 126,214 100,172 27,531 37,712 2006 126,588 105,467 85,406 22,087 31,233 439,762 370,781 Policy loans are advanced on the security of the underlying insurance policy cash values. Cash loans are advanced to a maximum of 80% to 100% of the cash surrender value. Automatic premium loans are advanced to the extent of available cash surrender value. For securities purchased under agreement to resell, title to the securities are transferred to the Group for the duration of the agreement. (a) Past due and impaired ﬁ nancial investments A ﬁ nancial asset is past due when a counterparty has failed to make payment when contractually due. The Group is most exposed to the risk of past due assets with respect to its ﬁ nancial investments namely, its debt securities, mortgage loans, ﬁ nance loans and ﬁ nance leases. Debt securities are assessed for impairment when amounts are past due, when the borrower is experiencing cash ﬂ ow difﬁ culties, or when the borrower’s credit rating has been downgraded. Mortgage loans less than 90 to 120 days past due and ﬁ nance loans and ﬁ nance leases less than 90 days past due are not assessed for impairment unless other information is available to indicate the contrary. The assessment for impairment includes a review of the collateral. If the past due period is less than the trigger for impairment review, the collateral is not normally reviewed and re-assessed but is included in the totals for collateral in the following tables. The tables below summarise the carrying value of ﬁ nancial investments which are past due, but are not considered to be impaired and the estimated fair value of collateral. As of December 31, 2007 Debt securities Mortgage loans Finance loans and ﬁ nance leases Carrying values: With amounts past due up to 3 months 11,352 With amounts past due up to 12 months With amounts past due up to 5 years With amounts past due over 5 years Total Estimated fair value of collateral 813 75 594 12,834 101 35,052 6,978 11,801 5,252 59,083 135,042 33,531 328 183 244 34,286 76,538 134 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) As of December 31, 2006 Debt securities Mortgage loans Finance loans and ﬁ nance leases Carrying values: With amounts past due up to 3 months With amounts past due up to 12 months With amounts past due up to 5 years With amounts past due over 5 years Total Estimated fair value of collateral 29,503 3,965 1,454 96 35,018 3,060 27,067 8,395 9,256 2,022 46,740 128,296 32,555 590 185 244 33,574 53,762 Balances relating to impaired ﬁ nancial investments are summarised in the following tables. The accumulated allowance for impairment reﬂ ects the Group’s assessment of total individually impaired investments at balance sheet date. As of December 31, 2007 Debt securities Mortgage loans Finance loans and ﬁ nance leases Total As of December 31, 2006 Debt securities Mortgage loans Finance loans and ﬁ nance leases Total Gross carrying value Accumulated allowance for impairment Net carrying value Estimated fair value of collateral 9,977 6,514 2,847 19,338 (4,094) (1,823) (1,793) (7,710) 5,883 4,691 1,054 11,628 30 7,666 4,792 12,488 Gross carrying value Accumulated allowance for impairment Net carrying value Estimated fair value of collateral 34,773 14,264 3,379 52,416 (7,277) (3,229) (1,897) (12,403) 27,496 11,035 1,482 40,013 13,707 19,266 5,754 38,727 Interest of $1,480 (2006 - $3,987) has been accrued on impaired ﬁ nancial investments. (b) Repossessed assets The Group may foreclose on overdue mortgage loans and ﬁ nance loans and ﬁ nance leases by repossessing the pledged asset. The pledged asset may consist of real estate, equipment or vehicles which the Group will seek to dispose of by sale. In some instances, the Group may provide re-ﬁ nancing to a new purchaser on customary terms. (c) Renegotiated assets The Group may renegotiate the terms of any ﬁ nancial investment to facilitate borrowers in ﬁ nancial difﬁ culty. Arrangements to waive, adjust or postpone scheduled amounts due may be entered into. The Group classiﬁ es these amounts as past due, unless the original agreement is formally revised, modiﬁ ed or substituted, in which case, the ﬁ nancial investment is classiﬁ ed as renegotiated. The carrying value of ﬁ nancial investments at balance sheet date which were renegotiated during the year totalled $482 (2006 - $814). 135 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.2 Liquidity risk Liquidity risk is the exposure that the Group may encounter difﬁ culty in meeting obligations associated with ﬁ nancial or insurance liabilities. Liquidity risk also arises when excess funds accumulate resulting in the loss of opportunity to increase investment returns. Group companies monitor cash inﬂ ows and outﬂ ows in each operating currency. Through experience and monitoring, the Group is able to maintain sufﬁ cient liquid resources to meet current obligations. Asset liability matching is a tool used by the Group to mitigate liquidity risks particularly in operations with signiﬁ cant maturing short-term liabilities. 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. Investment property may be held to back insurance liabilities. As these assets are relatively illiquid, the insurers hold less than 10% of their total assets in investment property. (a) Financial liabilities and commitments Cash ﬂ ows payable by the Group in respect of its ﬁ nancial liabilities and commitments are summarised in the following tables. Maturity proﬁ le amounts are analysed by their earliest contractual maturity dates and consist of the contractual un-discounted cash ﬂ ows. Where the interest rate of an instrument for a future period has not been determined as of balance sheet date, it is assumed that the interest rate then prevailing continues until ﬁ nal maturity. As of December 31, 2007 Financial liabilities: Investment contract liabilities Notes and loans payable Deposit and security liabilities: Other funding instruments Deposits Securities Bank overdrafts Due within 1 year or on demand Due between 1 and 5 years Due after 5 years Total 210,022 11,250 93,784 99,196 494,263 2,899 13,650 51,670 37,835 37,349 358 - 21,695 245,367 189,375 252,295 75,331 11,803 - - 206,950 148,348 494,621 2,899 Accounts payable and accrued liabilities 115,208 13,696 31,562 160,466 Total ﬁ nancial liabilities 1,026,622 154,558 329,766 1,510,946 Off balance sheet commitments: Loan commitments Expenditure on real estate Operating lease agreements and rental payments Total off balance sheet commitments Total 136 42,914 6,276 3,084 52,274 2,690 2,215 - 11,613 14,303 - - 2,215 47,819 6,276 14,697 68,792 1,078,896 168,861 331,981 1,579,738 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) As of December 31, 2006 Financial liabilities: Due within 1 year or on demand Due between 1 and 5 years Due after 5 years Total Investment contract liabilities 201,380 6,992 13,817 222,189 Notes and loans payable 19,378 52,087 200,625 272,090 Deposit and security liabilities: Other funding instruments Deposits Securities Bank overdrafts Accounts payable and accrued liabilities 95,210 80,622 458,580 2,981 81,013 35,270 41,333 416 - 63,963 194,443 12,071 134,026 4 - 459,000 2,981 15,839 31,814 128,666 Total ﬁ nancial liabilities 939,164 151,937 322,294 1,413,395 Off balance sheet commitments: Loan commitments Expenditure on real estate Operating lease agreements and rental payments Total off balance sheet commitments 39,373 2,740 1,512 43,625 4,957 - 3,656 8,613 1,841 46,171 - 2,740 478 2,319 5,646 54,557 Total 982,789 160,550 324,613 1,467,952 (b) Insurance liabilities The maturity proﬁ les of the Group’s insurance liabilities are summarised in the following tables. Maturity proﬁ le amounts are stated at their carrying values recognised in the balance sheet and are analysed by their expected maturity dates, which have been estimated by actuarial or other statistical methods. As of December 31, 2007 Due within 1 year Due between 1 and 5 years Due after 5 years Total Actuarial liabilities 131,967 269,048 963,289 1,364,304 Other insurance liabilities 210,099 47,377 56,439 313,915 Total 342,066 316,425 1,019,728 1,678,219 137 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) As of December 31, 2006 Due within 1 year Due between 1 and 5 years Due after 5 years Total Actuarial liabilities 126,162 273,100 974,322 1,373,584 Other insurance liabilities 86,071 12,962 53,668 152,701 Total 212,233 286,062 1,027,990 1,526,285 (c) Financial assets The maturity proﬁ les of the Group’s ﬁ nancial assets are summarised in the following tables. Maturity proﬁ le amounts are stated at their carrying values recognised in the balance sheet and are analysed by their contractual maturity dates. As of December 31, 2007 Due within 1 year Due between 1 and 5 years Due after 5 years Total Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell 320,831 506,243 923,376 1,750,450 11,203 33,343 249,452 293,998 4,530 16,044 105,829 126,403 57,748 51,926 36,090 145,764 15,980 - - 15,980 Deposits 158,798 2,379 521 161,698 Reinsurance assets 91,081 85,404 143,670 320,155 Deferred policy acquisition costs Premiums in the course of collection Other accounts receivable Cash resources Total 25,917 77,425 53,049 92,140 - 874 596 - - - 25,917 78,299 1,725 55,370 - 92,140 908,702 696,809 1,460,663 3,066,174 138 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) As of December 31, 2006 Due within 1 year Due between 1 and 5 years Due after 5 years Total Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell Deposits Reinsurance assets Deferred policy acquisition costs Premiums in the course of collection Other accounts receivable Cash resources Total 269,508 532,602 848,750 1,650,860 6,437 5,086 48,530 22,320 153,569 68,169 3,747 27,926 48,957 87,682 23,295 15,889 46,859 - 12,709 93,251 - - 764 - 218,161 247,893 104,916 125,891 27,499 122,888 - 22,320 1,584 167,862 160,269 321,689 - - 1,788 - 3,747 27,926 51,509 87,682 741,931 725,369 1,362,967 2,830,267 41.3 Interest rate risk The Group is exposed to interest rate risks. Cash ﬂ ow interest rate risk is the risk that future cash ﬂ ows of a ﬁ nancial instrument will ﬂ uctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the fair value of a ﬁ nancial instrument will ﬂ uctuate because of changes in market interest rates. The occurrence of an adverse change in interest rates on invested assets may result in ﬁ nancial loss to the Group in fulﬁ lling the contractual returns on insurance and ﬁ nancial liabilities. The return on investments may be variable, ﬁ xed for a term or ﬁ xed to maturity. On reinvestment of a matured investment, the returns available on the new investment may be signiﬁ cantly different from the returns formerly achieved. This is known as reinvestment risk. 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. Where the returns credited exceed the guaranteed minima, the insurer usually has the option to adjust the return from period to period. For other ﬁ nancial liabilities, returns are usually contractual and may only be adjusted on contract renewal or contract re-pricing. The Group is therefore exposed to the effects of ﬂ uctuations in the prevailing levels of market interest rates on its ﬁ nancial position and cash ﬂ ows. 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 ﬂ ows are not closely matched with respect to timing and amount. 139 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) The Group is exposed to risk under embedded derivatives contained in a host insurance contract. These risks include exposures to investment returns which may produce losses to the insurer arising from the following contract features: · · minimum annuity rates which are guaranteed to be applied at some future date; minimum guaranteed death beneﬁ ts which are applicable when the performance of an interest bearing or unit linked fund falls below expectations; · minimum guaranteed returns in respect of cash values and universal life investment accounts. The Group manages its interest rate risk by a number of measures, including where feasible the selection of assets which best match the maturity of liabilities, the offering of investment contracts which match the maturity proﬁ le of assets, the re-pricing of interest rates on loans receivable, policy contracts and ﬁ nancial 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 ﬁ xed rate debt securities to maturity and therefore mitigates the transient interest rate changes in these markets. Asset liability matching is a tool used by the Group to mitigate fair value risk by using ﬁ xed income securities to back insurance and ﬁ nancial liabilities. In addition, by holding ﬁ xed income securities to maturity, the Group is able to mitigate fair value risk relating to these assets. The Group’s ﬁ nancial assets and ﬁ nancial liabilities as disclosed in the balance sheet approximate their fair value, except as disclosed in notes 9, 15, 16 and 17. The table below summarises the exposures to interest rate risks of the Group’s insurance and ﬁ nancial liabilities (excluding actuarial liabilities which are disclosed in note 43). It includes liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. Insurance and investment contract liabilities are categorised by their expected maturities. As of December 31, 2007 Due within 1 year Due between 1 and 5 years Due after 5 years Non-interest bearing Total Other insurance liabilities 22,236 3,101 55,707 232,871 313,915 Investment contract liabilities 209,727 31,007 1,642 Notes and loans payable 1,515 5,836 145,368 Deposit and security liabilities: Other funding instruments 89,439 24,001 Deposits Securities 95,840 26,205 487,012 294 Bank overdrafts Accounts payable and accrued liabilities 2,899 227 - - 50,279 14,596 - - - - - - - - - 242,376 152,719 163,719 136,641 487,306 2,899 160,239 160,466 Total 908,895 90,444 267,592 393,110 1,660,041 140 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) As of December 31, 2006 Due within 1 year Due between 1 and 5 years Due after 5 years Non-interest bearing Total Other insurance liabilities 18,686 3,097 Investment contract liabilities 200,245 16,900 53,139 3,710 Notes and loans payable 9,689 5,808 144,991 Deposit and security liabilities: Other funding instruments 85,194 Deposits Securities Bank overdrafts Accounts payable and accrued liabilities 74,069 457,386 2,981 430 18,467 35,422 352 - - 57,895 13,666 3 - - 77,779 152,701 - - - - - - 220,855 160,488 161,556 123,157 457,741 2,981 128,236 128,666 Total 848,680 80,046 273,404 206,015 1,408,145 The table below summarises the exposures to interest rate risks of the Group’s ﬁ nancial assets. It includes assets at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. Reinsurance assets and policy loans are categorised by their expected maturities. As of December 31, 2007 Due within 1 year Due between 1 and 5 years Due after 5 years Non-interest bearing Total Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell Deposits Reinsurance assets (excluding share of actuarial liabilities) Deferred policy acquisition costs Premiums in the course of collection Other accounts receivable Cash resources Total 752,168 282,246 715,914 122 1,750,450 85,118 4,530 57,105 15,980 27,954 16,044 51,828 - 158,590 2,709 180,926 105,829 36,090 - 196 - - 741 - 203 293,998 126,403 145,764 15,980 161,698 2,532 - - 239 51,985 239 - 87 489 448 4,830 64,794 72,395 - - 40 - 25,917 25,917 78,212 78,299 54,602 39,707 55,370 92,140 1,128,247 382,044 1,043,825 264,298 2,818,414 141 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) As of December 31, 2006 Due within 1 year Due between 1 and 5 years Due after 5 years Non-interest bearing Total 510,328 448,079 692,335 118 1,650,860 Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell 80,610 4,207 48,075 22,320 17,299 15,920 46,812 - Deposits Reinsurance assets (excluding share of actuarial liabilities) 153,569 12,709 3,123 287 Deferred policy acquisition costs Premiums in the course of collection Other accounts receivable Cash resources Total - - 383 44,634 - - 524 - 149,984 105,764 27,498 - 1,584 5,103 - 52 38 175 - - 247,893 125,891 503 122,888 - - 22,320 167,862 36,705 45,218 3,747 3,747 27,874 50,564 42,873 27,926 51,509 87,682 867,249 541,630 982,533 162,384 2,553,796 The table below summarises the average interest yields on ﬁ nancial assets and liabilities held during the year. Financial assets Debt securities Mortgage loans Policy loans Finance loans and ﬁ nance leases Securities purchased under agreements to resell Deposits Financial liabilities Investment contract liabilities Notes and loans payable Deposit and security liabilities: Other funding instruments Deposits Securities 142 2007 2006 9.4% 7.8% 9.6% 12.1% 15.0% 5.7% 8.3% 8.1% 6.3% 7.6% 9.3% 9.4% 8.2% 8.3% 11.6% 11.4% 4.8% 7.8% 7.4% 6.1% 7.1% 9.3% Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) (a) Sensitivity Sensitivity to interest rate risk is considered by operating subsidiaries. The effects of changes in interest rates of assets backing actuarial liabilities are disclosed in note 43.2. The sensitivity of the Group’s principal operating subsidiaries engaged in property and casualty insurance and in banking, investment management and other ﬁ nancial services are considered below. (i) Sagicor Europe Limited and its subsidiaries The effect of an increase of 1% in interest rates of interest bearing ﬁ nancial assets and ﬁ nancial liabilities at balance sheet date to income from ordinary activities is as follows. As of December 31, 2007 Total interest bearing assets Revenue effect of a 1% increase in interest rates Total interest bearing liabilities Expense effect of a 1% increase in interest rates Effect on income from ordinary activities of an increase in interest rates of A 1% decrease in interest rates would have an equal and opposite effect to that disclosed above. (ii) Pan Caribbean Financial Services Limited and its subsidiaries (PCFS) 124,266 1,243 144 1 1,242 The following table indicates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, on net income and equity. The sensitivity of income is the effect of the assumed changes in interest rates on net income based on the ﬂ oating rate of ﬁ nancial assets and ﬁ nancial liabilities. The sensitivity of equity is calculated by revaluing ﬁ xed rate available- for-sale ﬁ nancial assets for the effects of the assumed changes in interest rates. The correlation of a number of variables will have an impact on market risk. It should be noted that movements in these variables are non-linear and are assessed individually. Change in interest rate: -2% +2% 2007 2006 Effect on net income Effect on equity Effect on net income Effect on equity 17 (20) 555 (501) 32 (27) 618 (542) 143 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk The Group is exposed to foreign exchange risk as a result of ﬂ uctuations in exchange rates since its ﬁ nancial 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 sufﬁ cient 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 other operating currencies. Management considers that these assets diversify the range of investments available in the Caribbean, and in the long-term are likely to either maintain capital value and/or provide satisfactory returns. Assets and liabilities at balance sheet date by currency are summarised in the following table. As of December 31, 2007 Balances denominated in Barbados $ Jamaica $ Trinidad $ UK £ US $ Other currencies ASSETS Financial investments 346,181 556,418 280,301 54,765 1,194,160 251,182 Reinsurance assets 14,638 820 11,373 962 267,962 24,400 Receivables and deferred policy acquisition costs Cash resources Other assets Total assets LIABILITIES 27,089 9,876 20,369 9,125 11,203 3,811 25,069 4,592 47,172 45,207 32,393 19,529 397,784 586,732 306,688 85,388 1,554,501 327,504 136,582 103,640 59,311 42,043 5,095 44,433 534,366 690,372 365,999 127,431 1,559,596 371,937 Actuarial liabilities 359,953 149,234 205,875 25 550,657 98,560 71,310 15,781 26,941 34,341 111,750 53,792 Other insurance liabilities Investment contract liabilities Deposit and security liabilities Accounts payable and accrued liabilities Notes and loans payable - - 51,748 277,399 54,398 63,693 74,563 - - 16,181 33,541 152,719 - 233 442,524 18,620 - 41 24,234 14,057 9,866 7,779 88,804 15,726 561,643 520,164 317,286 42,378 1,362,635 220,239 Other liabilities 11,970 11,191 7,300 - 293 7,895 Total liabilities 573,613 531,355 324,586 42,378 1,362,928 228,134 Net position (39,247) 159,017 41,413 85,053 196,668 143,803 144 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) As of December 31, 2006 Balances denominated in Barbados $ Jamaica $ Trinidad $ US $ Other currencies ASSETS Financial investments Reinsurance assets Receivables and deferred policy acquisition costs Cash resources Other assets Total assets LIABILITIES 339,901 6,237 23,697 14,552 384,387 122,971 507,358 547,028 1,058 17,275 11,727 577,088 115,112 692,200 239,850 1,203,865 7,065 6,459 9,102 262,476 52,009 314,485 285,214 31,837 23,933 1,544,849 8,755 194,178 22,115 6,928 28,368 251,589 44,041 1,553,604 295,630 Actuarial liabilities 343,419 136,516 184,646 600,561 108,442 Other insurance liabilities Investment contract liabilities Notes and loans payable Deposit and security liabilities Accounts payable and ac- crued liabilities 60,923 32,169 14,851 20,601 24,157 55,080 52,360 65,800 21,726 25,889 - - 49,716 266,213 - 44 160,488 - 414,630 14,832 14,444 22,624 7,579 65,431 18,588 523,582 509,882 272,920 1,283,437 191,908 Other liabilities 10,036 16,010 7,360 510 5,327 Total liabilities 533,618 525,892 280,280 1,283,947 197,235 Net position (26,260) 166,308 34,205 269,657 98,395 (a) Sensitivity The Group is exposed to currency risk in its operating currencies whose values have noticeably ﬂ uctuated against the United States dollar (USD). The exposure to currency risk may result in three types of risk, namely: · Currency risk relating to the future cash ﬂ ows of a ﬁ nancial instrument This occurs when a ﬁ nancial instrument is denominated in a currency other than the functional currency of the reporting unit to which it belongs. In this instance, a change in currency exchange rates results in the ﬁ nancial instrument being retranslated at balance sheet date and the exchange gain or loss is taken to income (note 25). 145 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) · Currency risk of reported results of foreign operations This occurs when a reporting unit’s functional currency depreciates or appreciates in value when retranslated to the USD, which is the Group’s presentational currency. In this instance, the conversion of the reporting unit’s results at a different rate of exchange results in either less or more income being consolidated in the Group’s income statement. · Currency risk of the Group’s investment in foreign operations This occurs when a reporting unit’s functional currency depreciates or appreciates in value when retranslated to the USD, which is the Group’s presentational currency. In this instance, the conversion of the reporting unit’s assets and liabilities at a different rate of exchange results in a currency loss or gain which is recorded in the currency translation reserve (note 22). If the reporting unit was disposed of, either wholly or in part, then the corresponding accumulated loss or gain in the currency translation reserve would be transferred to income. The operating currencies whose values noticeably ﬂ uctuate against the USD are the Jamaica dollar (JMD) and the Pounds Sterling (GBP). The theoretical impact of JMD and GBP currency risk on reported results and of the Group’s investment in foreign operations is considered below. The effects of a 5% depreciation in the JMD relative to the USD arising from JMD reporting units as of December 31, 2007 and for the year then ended are considered in the following tables. Balances denominated in JMD Balances denominated in USD Total balances Effect of a 5% depreciation Balance sheet: Assets Liabilities Net position Represented by: 693,552 531,179 162,373 406,511 326,034 80,477 1,100,063 857,213 242,850 Currency risk of the Group’s investment in foreign operations (33,027) (25,295) (7,732) (7,732) Amounts denominated in JMD Amounts denominated in USD Total amounts Effect of a 5% depreciation Income statement: Revenue Beneﬁ ts Expenses Income taxes Net income Represented by: 232,003 (115,514) (80,997) (12,970) 22,522 41,781 (18,730) (2,065) - 20,986 273,784 (134,244) (83,062) (12,970) 43,508 Currency risk relating to the future cash ﬂ ows of a ﬁ nancial instrument Currency risk of reported results of foreign operations (7,120) 5,501 3,857 618 2,856 3,928 (1,072) 2,856 A 5% appreciation in the JMD relative to the USD would have equal and opposite effects to those disclosed above. 146 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) The effects of a 5% depreciation in the GBP relative to the USD arising from GBP reporting units as of December 31, 2007 and for the year then ended are considered in the following tables. Balances denominated in GBP Balances denominated in USD Total balances Effect of a 5% depreciation Balance sheet: Assets Liabilities Net position Represented by: 126,206 42,285 83,921 99,660 97,775 1,885 225,866 140,060 85,806 Currency risk of the Group’s investment in foreign operations (6,005) (2,012) (3,993) (3,993) Amounts denominated in GBP Amounts denominated in USD Total amounts Effect of a 5% depreciation Income statement: Revenue Beneﬁ ts Expenses Income taxes Net income Represented by: 39,724 (7,059) (11,336) (451) 20,878 15,665 (5,697) (5,197) - 4,771 55,389 (12,756) (16,533) (451) 25,649 Currency risk relating to the future cash ﬂ ows of a ﬁ nancial instrument Currency risk of reported results of foreign operations (1,799) 336 539 21 (903) 90 (993) (903) A 5% appreciation in the GBP relative to the USD would have equal and opposite effects to that disclosed above. 147 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 41. FINANCIAL RISK (continued) 41.5 Other price risk The Group is exposed to other price risk arising from changes in equity prices. The group mitigates this risk by holding a diversiﬁ ed portfolio and by minimising the use of equity securities to back its insurance and ﬁ nancial liabilities. (a) Sensitivity The effects of an across the board 5% change in equity prices of the Group’s available for sale equity securities at balance sheet date are set out below. Carrying value Effect of a 5% change at Dec 31, 2007 Available for sale equity securities: Listed on Caribbean stock exchanges and markets Listed on US stock exchanges and markets Listed on other exchanges and markets 99,865 50,756 11,431 4,993 2,538 572 42. INSURANCE RISK The Group’s activities of issuing insurance contracts, of accepting funds from depositors, of investing insurance premium and deposit receipts in a variety of ﬁ nancial and other assets, and dealing in securities, exposes the Group to various insurance and ﬁ nancial risks. Risks arising from insurance contracts include credit, liquidity and market risks which have been disclosed in note 41. The effects of other risks arising from insurance contracts are disclosed in note 43 and in the sections below. 42.1 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 beneﬁ ts payable. This is the process of underwriting, which establishes appropriate pricing guidelines, and may include speciﬁ c 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 beneﬁ ts 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 beneﬁ ts is expected generally within one year. However, some beneﬁ ts are settled over a longer duration. The principal insurance risks arising from short-term contracts are premium risk, claims risk and reinsurance risk (see note 42.4). Premium risk is the risk that the premium rate has been set too low for the risk being assumed. Premium risk may arise from · the use of inadequate experience and statistical data in deriving premium rates; · market softening conditions. 148 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 42. INSURANCE RISK (continued) 42.1 Short term insurance contracts (continued) Claims risk is the risk that incurred claims may exceed expectations. Claim risk may arise from · the frequency of incurred claims; · the severity of incurred claims; · the development of incurred claims. For the Group’s property and casualty insurance contracts, signiﬁ cant risk exposures arise from low frequency high severity events such as hurricanes, windstorms and earthquakes. Single events, such as major ﬁ res and accidents may also generate signiﬁ cant claims. The development of incurred claims may also be a signiﬁ cant factor in the class of insurance (see note 44). For the Group’s life and health insurance contracts, signiﬁ cant risk exposures arise from mortality and morbidity experience. 42.2 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 beneﬁ ts which may be payable under the contract, the insurer has to assess the cash ﬂ ows which may be attributable to the contract. The process of underwriting may also be undertaken and may include speciﬁ c medical tests and other enquiries which affect the insurer’s assessment of the risk. The insurer assesses the likely beneﬁ ts and cash ﬂ ows 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 ﬂ ow characteristics that closely match the cash ﬂ ow characteristics of its policy liabilities. The primary purpose of this matching is to ensure that cash ﬂ ows from these assets are synchronised with the timing and the amounts of payments that must be paid to policyholders. Policy beneﬁ ts payable under long-term contracts may be triggered · by an insurable event, i.e. a death, disability or critical illness claim; · at a speciﬁ ed 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 beneﬁ ts 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 beneﬁ t cash outﬂ ows. Signiﬁ cant 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 liability may be inadequate to cover future policy maintenance expenses, thereby requiring the insurer to increase the associated policy reserve. The sensitivity of actuarial liabilities to insurance risk is disclosed in note 43.2. 149 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 42. INSURANCE RISK (continued) 42.3 Concentrations of insurance risk The Group carries signiﬁ cant 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. Signiﬁ cant concentration of life insurance, annuity, and health risks occurs in Antigua, Barbados, Cayman Islands, Jamaica, Netherlands Antilles, St Lucia and Trinidad and Tobago. Signiﬁ cant concentration of property and casualty risks occurs in Barbados, Cayman Islands and Trinidad and Tobago. Total insurance coverage on insurance policies quantiﬁ es 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, gross and net of reinsurance are summarised below. Gross amount insured Net amount insured 2007 2006 2007 2006 Contracts issued to individuals – life insurance 12,491,143 11,602,510 9,435,236 8,472,839 Contracts issued to groups – life insurance Property and casualty insurance – Caribbean operations 7,978,419 6,697,013 5,628,106 4,825,703 8,459,278 7,601,220 3,405,222 3,906,426 Concentration of insurance risk per policy is mitigated by obtaining reinsurance coverage. Levels of reinsurance cover are summarised in note 42.4. The Group’s property and casualty UK operations assess its exposures by modelling realistic disaster scenarios of potential catastrophic events. The most severe realistic disaster scenario which has been modelled is the occurrence of an earthquake in San Francisco triggering $69,000,000 in losses, resulting in an estimated gross loss to the Group’s property and casualty UK operations of $29,900 and a net loss of $10,600 after reinsurance recoveries. 42.4 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. For its property risks, insurers use quota share and excess of loss catastrophe reinsurance treaties to obtain reinsurance cover. Catastrophe reinsurance is obtained for multiple claims arising from one event or occurring within a speciﬁ ed time period. However, treaty limits may apply and may expose the insurer to further claim exposure. Under some treaties, when treaty limits are reached, the insurer may be required to pay an additional premium to reinstate the reinsurance coverage. For other insurance risks, insurers limit their exposure by event or per person by excess of loss or quota share treaties. Retention limits represent the level of risk retained by the insurer. Coverage in excess of these limits is ceded to reinsurers up to the treaty limit. 150 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 42. INSURANCE RISK (continued) 42.4 Reinsurance risk (continued) The principal features of retention programmes used by insurers are summarised in the tables below: Type of insurance contract Retention by insurers Property & casualty insurance – Caribbean operations Property risks Motor and liability risks Miscellaneous accident risks Engineering business risks Marine risks Property, motor, liability, and engineering risk · maximum retention of $10,000 for a single event; · maximum retention of $5,000 for a catastrophic event; · quota share retention to maximum of 40% in respect of the treaty limits; · quota share retention is further reduced to a maximum of $500 per event. · maximum retention of $500 for a single event; · treaty limits apply. · maximum retention of $108 for a single event; · treaty limits apply. · maximum retention of $150 · treaty limits apply for material damage and for liability claims. · maximum retention of $75 for a single event; · treaty limits apply. · 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. Property & casualty insurance – UK operations All property and accident risks – syndicate underwriting years 2005 and 2006 · 0% retention Property risks – syndicate underwriting year 2007 Miscellaneous accident risks – syndicate underwriting year 2007 · underwritten risks limited to a maximum of $1,250 per risk in non-catastrophe prone areas · underwritten risks limited to a maximum of $1,250 per risk in catastrophe prone areas · maximum retention of $7,500 per loss for catastrophe exposed risks · treaty limits apply to catastrophic excess of loss coverage · underwritten risks limited to a maximum of $1,250 per risk · maximum retention of $14,928 for a single event · maximum retention of $3,981 per individual life Health insurance contracts with individuals Retention per individual to a maximum of $400 Health insurance contracts with groups Retention per individual to a maximum of $200 Life insurance contracts with individuals Retention per individual life to a maximum of $350 Life insurance contracts with groups Retention per individual life to a maximum of $100 Life insurance and annuity blocks of contracts 0% to 37.5% retention on policy liabilities Certain insurers of the Group have ceded to a re-insurer further amounts representing 50% of the retentions above $5 for individual life contracts. 151 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 42. INSURANCE RISK (continued) 42.4 Reinsurance risk (continued) 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. The effects of reinsurance ceded are disclosed in the notes 13, 14, 24 and 27. Information on reinsurance balances are disclosed in notes 10, 20 and 41. 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES Actuarial liabilities comprise 81% of total insurance liabilities at balance sheet date (2006 – 90%). The determination of actuarial liabilities is sensitive to a number of assumptions, and changes in those assumptions could have a signiﬁ cant effect on the valuation results. These factors are discussed below. 43.1 Sensitivity arising from the valuation of life insurance and annuity contracts The valuation of actuarial liabilities of life insurance and annuity contracts is sensitive to: · the economic scenario used in CALM, · the investments allocated to back the liabilities, · the underlying assumptions used, and · the margins for adverse deviations. Under the CALM methodology, the AA is required to test the actuarial liability under 7 economic scenarios. These tests have been done and the results of the valuation provide adequately for liabilities derived from the worst of these different scenarios. The assumption for future investment yields has a signiﬁ cant impact on actuarial liabilities. The different scenarios tested under CALM reﬂ ect the impact of different yields. The other assumptions which are most sensitive in determining the actuarial liabilities of the Group, are: · Operating expenses and taxes · Lapse · Mortality and morbidity 43.2 Dynamic capital adequacy testing (DCAT) DCAT is a technique used by the Group to assess the adequacy of the insurer’s ﬁ nancial position and ﬁ nancial 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 ﬁ nancial position and ﬁ nancial condition under speciﬁ c scenarios. The ﬁ nancial position of an insurer is reﬂ ected by the amounts of assets, liabilities and equity in the balance sheet at a given date. The ﬁ nancial 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 beneﬁ ts and to its shareholders. The purpose of the DCAT is · to develop an understanding of the sensitivity of the total equity of the insurer and future ﬁ nancial condition to changes in various experience factors and management policies; · to alert management to material, plausible and imminent threats to the insurer’s solvency; and · to describe possible courses of action to address these threats. 152 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES (continued) 43.2 Dynamic capital adequacy testing (DCAT) (continued) Full DCAT or limited sensitivity tests have been conducted by insurers. The scenarios developed and tested by insurers operating in the Caribbean region are as follows. (i) Worsening rate of lapse. 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 decreased. (ii) High interest rate. Assumed increases in the investment portfolio yield rates of 1% per year for 5 years (or 0.5% for 10 years) were tested in this scenario. (iii) Low interest rate. Assumed decreases in investment portfolio yield rates of 0.25% per year for 5 years (or 0.5% per year for 10 years) were tested in this scenario. (iv) Worsening mortality and morbidity. To test this scenario, mortality and morbidity rates were increased for insurance and critical illness products were increased by 3% of the base rate per year for 5 years. For annuity products, the mortality and morbidity rates were decreased by 3% of the base rate for 5 years. (v) Higher expenses. To test this scenario, policy unit maintenance expense rates were increased by 5% for 5 years above those reﬂ ected in the base scenario. The DCAT conducted has not tested any correlation that may exist between assumptions. The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities at balance sheet date for insurers in the Caribbean region. Caribbean operations As of December 31, 2007 As of December 31, 2006 Base net actuarial liability Scenario (i) Worsening rate of lapse (ii) High interest rate (iii) Low interest rate (iv) Worsening mortality / morbidity (v) Higher expenses $000 847,647 % 100.0 $000 809,666 % 100.0 (Increase) / decrease (Increase) / decrease (31,892) 152,475 (74,486) (29,092) (21,109) (3.8) 18.0 (8.8) (3.4) (2.5) (29,189) 164,242 (79,586) (26,780) (37,547) (3.6) 20.3 (9.8) (3.3) (4.6) The use of differing sensitivity rates by insurers reﬂ ects differences in the insurers’ environment. The scenarios developed and tested by insurers operating in the USA are as follows: (vi) (vii) (viii) Adverse lapse. For business which produces higher valuation reserves with an increase in lapse rates, the lapse rate margins for adverse deviation (MfADs) were doubled. For business which produces higher valuation reserves with a decrease in lapse rates, the lapse rate MfADs were halved. Increasing interest rate. A 1% ﬂ at increase was applied to the statutory and pricing interest rate MfADs in this scenario. Inﬂ ation rates on inforce business are keyed to the risk free 10-year U.S. Treasury Bond rate in order to maintain a dynamic relationship between inﬂ ation rates and interest rates. Decreasing interest rate. A 1% ﬂ at decrease was applied to the statutory and pricing interest rate MfADS in this scenario. Inﬂ ation rates on inforce business are keyed to the risk free 10-year U.S. Treasury Bond rate in order to maintain a dynamic relationship between inﬂ ation rates and interest rates. (ix) Adverse mortality. To test this scenario, base mortality MfADs were doubled. (x) Higher expenses. To test this scenario, base expense MfADs were doubled. 153 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES (continued) 43.2 Dynamic capital adequacy testing (DCAT) (continued) Correlations that may exist between assumptions were not explicitly taken into account. For term products in the new business projections, the adverse lapse scenario has a ripple effect of worsening mortality due to selective lapsation at the end of the level term period. Also, dynamic lapse rates interact with changing market interest rates on interest sensitive life and annuity products in the DCAT model. The effect of these correlative activities is not explicitly broken out. The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities at balance sheet date for insurers in the USA. USA operations Base net actuarial liability Scenario (vi) Adverse lapse (vii) Increasing interest rate (viii) Decreasing interest rate (ix) Adverse mortality (x) Higher expenses As of December 31, 2007 $000 % 268,897 100.0 (Increase) / decrease (642) 20,001 (24,176) (3,766) (1,240) (0.2) 7.4 (9.0) (1.4) (0.5) 44. DEVELOPMENT OF PROPERTY AND CASUALTY CLAIMS The development of an insurer’s claims in the course of settlement provides a measure of its ability to estimate the ultimate value of claims incurred. In the table below, the estimate of total claims incurred for each year is provided at successive year ends. The most recent estimate is then reconciled to the liability recognised in the balance sheet. Gross 2005 2006 2007 Total Estimate of ultimate claims incurred: At the end of the reporting year One year later Two years later Most recent year Cumulative payments to date Liability recognised in the balance sheet Liability in respect of prior years Liability in respect of UK operations (1) Total liability 12,870 14,446 13,407 13,407 (11,806) 1,601 12,626 11,670 - 11,670 (7,967) 3,703 23,553 49,049 - - 23,553 (8,031) 15,522 - - 48,630 (27,804) 20,826 7,885 71,191 99,902 154 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 44. DEVELOPMENT OF PROPERTY AND CASUALTY CLAIMS (continued) The reinsurers’ share of the amounts in the foregoing table is set out below. Reinsurers’ share 2005 2006 2007 Total Estimate of ultimate claims incurred: At the end of the reporting year One year later Two years later Most recent year Cumulative payments to date Recoverable recognised in the balance sheet Recoverable in respect of prior years Recoverable in respect of UK operations(1) Total recoverable from reinsurers (1) Acquired during 2007 3,822 3,195 3,013 3,013 (2,902) 111 2,730 2,319 - 2,327 (1,297) 1,030 11,258 17,810 - - 11,258 (2,366) 8,892 - - 16,598 (6,565) 10,033 4,251 6,037 20,321 45. CAPITAL MANAGEMENT The Group manages its capital resources according to the following objectives: · To comply with capital requirements established by insurance, banking and other ﬁ nancial intermediary regulatory authorities; · To comply with internationally recognised capital requirements for insurance, where local regulations do not meet these international standards; · To safeguard its ability as a going concern to continue to provide beneﬁ ts and returns to policyholders, depositors, note-holders and shareholders; · To provide adequate returns to shareholders by pricing insurance, investment and other contracts commensurately with the level of risk; · To maintain a strong capital base to support the future development of Group operations. 45.1 Capital resources The principal capital resources of the Group at balance sheet date were as follows: Shareholders’ equity Minority interest Notes and loans payable Total balance sheet capital resources Letter of credit facility Total off balance sheet resources Total capital resources 2007 455,174 122,137 152,719 730,030 80,016 80,016 2006 413,850 118,553 160,488 692,891 - - 810,046 692,891 155 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 45. CAPITAL MANAGEMENT (continued) 45.1 Capital resources (continued) The Group deploys its capital resources through its operating activities. These operating activities are carried out by 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 operating subsidiaries is discussed in the following section. 45.2 Capital adequacy (a) Sagicor Life Inc Group (1) 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 seeks to maintain internal capital adequacy at levels higher than the regulatory or internationally recognised(2) requirements. To assist in evaluating the current business and strategy opportunities, a risk-based capital approach is a core measure of ﬁ nancial performance. The risk-based assessment measure which has been adopted is the Canadian Minimum Continuing Surplus and Capital Requirement (MCCSR) standard. The minimum standard recommended by the Canadian regulators for companies is an MCCSR of 150%. The estimated MCCSR for the Sagicor Life Inc Group as of December 31, 2007 (2006 – actual MCCSR) is set out below. Sagicor Life Inc Group 2007 MCCSR 300% 2006 MCCSR 263% (1) Comprises Sagicor Life Inc, Life of Jamaica Limited, Sagicor Capital Life Insurance Company Limited and Nationwide Insurance Company Limited. (2) It is to be noted that many of the jurisdictions in which the Sagicor Life Inc Group operates have no capital adequacy requirements, and in accordance with its objectives for managing capital, the Group has adopted the Canadian MCCSR standard. (b) 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) which 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, 2007 and 2006 are set out in the table below. 156 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 45. CAPITAL MANAGEMENT (continued) 45.2 Capital adequacy (continued) Sagicor Life Insurance Company (c) Sagicor at Lloyd’s: Syndicate 1206 2007 RBC 350% 2006 RBC 360% The Financial Services Authority (FSA) Lloyd’s sourcebook requires Lloyd’s syndicates to comply with an Individual Capital Adequacy Standards regime. A key objective of the regime is that syndicate management focuses on risk management in that there is a clearly deﬁ ned link between risk and capital setting. Sagicor at Lloyd’s Syndicate 1206 has adopted an approach whereby risks identiﬁ ed as having a material effect on the capital requirements are documented within a risk register and shown as prime risks. It is recognised that this register is dependent on both the identiﬁ cation and subsequent analysis of individual risks by management. The risk register is subject to regular review and is updated to reﬂ ect the changes in the syndicate’s risk proﬁ le. The risk classes comprise insurance, credit, market, liquidity, Group and operational risks. The Individual Capital Assessment (ICA) is calculated using “stress and scenario” methodology for prime risk categories except for reserving risk where a stochastic model is used. Prime risks have been correlated to minimise potential aggregation of risks. Each year, an ICA is prepared based on a one year event horizon and capital requirements are based on the 99.5% conﬁ dence level over the next year. The ICA provides for all losses modelled to ultimate. An overall ICA number is computed. To this is added a premium and the resulting total, known as the Funds at Lloyd’s requirement (FaL) is placed at the disposal of Lloyd’s of London. The FaL may consist of cash, securities or banker’s irrevocable standby letter of credit. The FaL is put into effect before the start of the underwriting year and remains in place until the underwriting year closes and its proﬁ ts are distributed or its losses are assumed by the participating member. An underwriting year is normally held open for a period of three years. The FaL for Syndicate 1206 is as follows: Syndicate 1206 2008 underwriting year FaL - £000 41,407 2007 underwriting year FaL - £000 33,125 The Group has satisﬁ ed the 2008 underwriting FaL by the provision of a banker’s letter of credit in the amount of £40,200,000 ($80,016) at balance sheet date, which was up-stamped to £41,407,000 in January 2008. (d) Pan Caribbean Financial Services Group Capital adequacy and the use of regulatory capital are monitored monthly by the PCFS Group management employing techniques based on the guidelines developed by the Financial Services Commission (FSC), the Bank of Jamaica (BOJ), Basel II and the Risk Management and Compliance Unit. The required information is ﬁ led with the respective Regulatory Authorities at stipulated intervals. The BOJ and the FSC require each regulated entity to: · Hold the minimum level of regulatory capital; · Maintain a minimum ratio of total regulatory capital to the risk-weighted assets. 157 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 45. CAPITAL MANAGEMENT (continued) 45.2 Capital adequacy (continued) The risk-weighted assets are measured by means of a hierarchy of ﬁ ve risk weights classiﬁ ed according to the nature of each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off- balance sheet exposure, with some adjustments to reﬂ ect the more contingent nature of the potential losses. The table below summarises the ratios of the regulated companies within the Group for the years ended December 31, 2007 and 2006. During those two years, the individual entities within the Group complied with all of the externally imposed capital requirements to which they are subject. The regulated companies within the PCFS Group are Pan Caribbean Financial Services Limited (PCFS), Pan Caribbean Merchant Bank Limited (PCMB) and Pan Caribbean Asset Management Limited (PCAM). Actual capital base to risk weighted assets Required capital base to risk weight- ed assets PCFS PCMB PCAM 2007 2006 2007 2006 2007 2006 77% 10% 79% 10% 20% 10% 23% 323% 204% 10% 10% 10% 46. 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. In general, these requirements do not restrict the ability of the insurer to trade investments. 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 $735,000 (2006 - $660,000) 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. 158 Year ended December 31, 2007 Amounts expressed in US $000 Sagicor Financial Corporation Notes To The Financial Statements 47. FIDUCIARY RISK 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 ﬁ duciary capacity and are not included in these ﬁ nancial statements. These services give rise to ﬁ duciary risk that may expose the Group to claims for mal- administration or under-performance of these funds. 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 2007 401,641 1,074,724 7,251 23,491 2006 362,123 940,773 10,052 21,932 1,507,107 1,334,880 159 “ DO NOT GO WHERE THE PATH MAY LEAD, BUT GO INSTEAD WHERE THERE IS NO PATH AND LEAVE A TRAIL.” 05 Executive Management 161 EXECUTIVE MANAGEMENT DODRIDGE D. MILLER, FCCA, MBA, LLM President and Chief Executive Ofﬁ cer Mr Dodridge Miller was appointed President and Chief Executive Ofﬁ cer of the Mutual Group of Companies, now Sagicor Group of Companies, on July 1, 2002, having previously held the positions of Treasurer and Vice President, Finance and Investments and Deputy Chief Executive Ofﬁ cer and Chief Operating Ofﬁ cer. Mr Miller joined the Group in 1989. He was elected Director of The Mutual Group in 2001. He is the Chairman of the Group’s main operating subsidiaries, Sagcior Life Inc, Life of Jamaica Limited and Sagicor Life Insurance Company. Mr Miller is a Fellow of the Association of Chartered Certiﬁ ed 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 ﬁ nancial services industries. RICHARD BYLES, BSc, MSc President and Chief Executive Ofﬁ cer, Life of Jamaica Mr Richard Byles was appointed President and CEO of Life of Jamaica Limited (LOJ), a member of the Sagicor Group, in March 2004. He is the Chairman of the Board of Pan Caribbean Financial Services, LOJ Property Management, Sagicor Reinsurance Limited (Cayman), Sagicor Insurance Managers (Cayman) and Desnoes and Geddes. He also serves on the boards of several subsidiary and associated companies as well as Air Jamaica and RBA Limited. He has earned valuable experience and expertise within the ﬁ nancial sector spanning the areas of Life, Health and General Insurance, Asset and Investment Management, Banking, Pension Administration, Property Development and Reinsurance Management. Mr Byles holds a BSc in Economics from the University of the West Indies and an MSc in National Development from the University of Bradford, England. J. EDWARD CLARKE FCCA, CIA Group Chief Internal Auditor Mr Edward Clarke was appointed to the position of Group Chief Internal Auditor on June 1, 2007. Mr Clarke is a Fellow of the Association of Chartered Certiﬁ ed Accountants and is a Certiﬁ ed Internal Auditor with more than 25 years’ experience in the ﬁ eld of auditing and ﬁ nance. Mr Clarke began his accounting career at Pannell FitzPatrick & Company Chartered Accountants (now Ernst & Young). He later joined Texaco and served as a senior member of its ﬁ nance team in Barbados, Nigeria and the USA. Prior to joining Sagicor, Mr Clarke was the Chief Finance Ofﬁ cer of Goddard Enterprises Limited. 162 M. PATRICIA DOWNES-GRANT, BA, MA, MBA, DBA President and Chief Executive Ofﬁ cer, Sagicor Life Inc Dr Patricia Downes-Grant was appointed President and Chief Executive Ofﬁ cer of Sagicor Life Inc on January 1, 2006, having served as Group Chief Operating Ofﬁ cer, 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 Ofﬁ cer. She holds an MBA in Finance, an MA in Economics, and a Doctorate in Business Administration (Finance). Prior to joining Sagicor, Dr Patricia Downes-Grant was a Senior Manager in the Management, Consulting and Insolvency Division of Coopers & Lybrand (now PricewaterhouseCoopers). Dr Downes-Grant has also had signiﬁ cant 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 the Sagicor Group and within the private sector of Barbados. GEORGE J. ESTOCK, BSc, MBA President, Sagicor International Management Services Inc Mr George Estock was appointed as President of the US-based subsidiary, Sagicor International Management Services in 1996. He also holds the position of President and CEO of Sagicor Allnation Insurance Company. He has over 20 years’ experience in the Life Insurance and Property & Casualty business. Prior to joining Sagicor, Mr Estock spent several years with CIGNA; the US-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 Helath Operations for the United Kingdom and, on his return to the US, he served as Regional Vice President - Americas, responsible 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. J. ANDREW GALLAGHER, FSA, FCIA Chief Risk Ofﬁ cer Mr Andrew Gallagher joined Sagicor in August 1997 as Resident Actuary. He holds a Bachelor of Mathematics degree from the University of Waterloo, and is both a Fellow of the Canadian Institute of Actuaries and a Fellow of the Society of Actuaries. Prior to joining Sagicor, Mr Gallagher worked with Eckler Partners in Toronto in their ﬁ nancial institutions practice. He has over 20 years of experience in the industry. 163 MAXINE MacLURE, BSc, MEd, MBA Executive Vice President, Corporate Services Ms Maxine MacLure was appointed Executive Vice President, Corporate Services for Sagicor Financial Corporation in February 2007. She is responsible for acquisitions in the US, Group-wide Compliance and Regulatory Liaison. Prior to this position she served as President and CEO, Sagicor USA where in September 2005, she successfully completed the Group’s acquisition of its ﬁ rst US life insurance subsidiary, Sagicor Life Insurance Company (formerly American Founders Life) and oversaw its integration into the Sagicor Group. Ms MacLure joined Sagicor in December 2001 as President and CEO of Life of Jamaica (LOJ). 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 ﬁ nancial sector crisis. She also spent seven years as a Senior Government Financial Sector Regulator in Canada. Ms MacLure has an MBA from the Richard Ivey School of Business at the University of Western Ontario, Canada, a Masters degree in Education from Western Washington University in the United States, and a BSc from the University of Manitoba, Canada, with a major in Mathematics. KEN A. MARSHALL President & CEO, Sagicor Life Insurance Company Mr Kendrick “Ken” Marshall was appointed President and Chief Executive Ofﬁ cer of Sagicor Life Insurance Company in February 2007. He is responsible for the growth and development of Sagicor Life’s operations, and leads the US strategy for the Group. Prior to his current position, Mr Marshall was General Manager of the Trinidad and Tobago Operations of Sagicor Life Inc. He joined the Group in 1968 as an insurance agent and held several positions, including Executive Vice President responsible for Barbados and the Eastern Caribbean, and Chief Executive Ofﬁ cer of Capital Life, another Group subsidiary. A former President of the Life Underwriters’ Association of Barbados, he successfully completed numerous Sales and Marketing Management programmes sponsored by LIMRA as well as an Executive Development Programme under the auspices of LOMA. PHILIP N. W. OSBORNE, BSc, ACA, FCA Chief Financial Ofﬁ cer Mr Philip Osborne was appointed Chief Financial Ofﬁ cer for the Group in 2003. He has held senior ﬁ nance positions in life insurance for over 18 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 is currently a director of a number of 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 ﬁ rms in London and Barbados over a ten-year period. He also holds a BSc in Mathematics with Computer Science from the University of London. 164 SANDRA OSBORNE, S.C.M., QC, BSc, LLB, FCIS Executive Vice President, General Counsel and Secretary Ms Sandra Osborne was appointed General Counsel and Secretary for the Sagicor Group in April 1989. An Attorney-at-Law and Chartered Secretary, Ms Osborne has 30 years’ experience in the legal ﬁ eld, having previously practiced as a Crown Counsel and at the private Bar in civil practice in Barbados. For the last 20 years, her focus has been in the corporate area, both as Corporate Counsel and Corporate Secretary. She has also contributed to legislative reform in Barbados in the area of securities. Ms Osborne holds a BSc (Hons) in Political Science and an LLB (Hons) both from the University of the West Indies, and a Certiﬁ cate 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 has completed an Executive Development Program at Kellogg Graduate School of Management, Northwestern University, United States. She was appointed a Queen’s Counsel of Barbados in 2007. RAVI RAMBARRAN, BSc, MSc, FIA Executive Vice President, International Division Mr Ravi Rambarran was appointed Executive Vice President, Strategy in 2006. His work experience includes Pensions Actuary of Life of Jamaica (LOJ), Appointed Actuary of Global Life Bahamas and Global Life Cayman, Chief Financial & Investment Ofﬁ cer 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 Rambaran has a BSc (Hons) in Actuarial Science from City University, London, and an MSc in Finance 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. MELBA SMITH, BA Vice President, Corporate Communications Mrs Melba Smith was appointed Vice President Corporate Communications for the Sagicor Group in January 2002. Prior to joining Sagicor, she was the General Manager of the Caribbean Broadcasting Corporation. During her 7-year tenure, she managed television, radio and cable services. She was also a Board member of the Caribbean Broadcasting Union and became that Institution’s ﬁ rst female President in 2000. She was elected Caribbean Representative on the Board of the Commonwealth Broadcasters Association. Mrs Smith, a graduate of the University of the West Indies, holds a BA (Hons), and a Post Graduate diploma in Mass Communications, and is a member of the International Association of Business Communicators. Over the last 25 years, Mrs Smith has worked in all areas of mass communication and in addition, has gained valuable experience and expertise in the areas of business communication, public relations and management. 165 “ THE BEST WAY TO PREDICT THE FUTURE IS TO CREATE IT.” 06 Advisors and Bankers 167 APPOINTED ACTUARY Sylvain Goulet, FCIA, FSA, MAAA, Afﬁ liate 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 Butterﬁ eld Bank (Barbados) Limited FirstCaribbean International Bank Limited RBTT Bank Limited The Bank of Nova Scotia 168 07 Sagicor Ofﬁ ces 169 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 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 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 Ofﬁ ce 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 170 SAGICOR PANAMÁ, SA Ave Samuel Lewis y Calle Santa Rita Ediﬁ cio Plaza Obarrio 3er Piso Oﬁ cina 201Panama City, Panama Tel: (507) 223-1511 Fax: (507) 264-1949 Email: capital1@sinfo.net SAGICOR CAPITAL LIFE INSURANCE COMPANY LIMITED Registered Ofﬁ ce MB&H Corporate Services Limited Mareva House 4 George Street PO Box N-3937 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 Curaçao Schottegatweg Oost #11 Tel: (599) 9 736-8558 Fax: (599) 9 736-8575 Email: capital.life@curinfo.an SAGICOR CAPITAL LIFE AGENCIES Curaçao Guillen Insurance Consultants PO Box 4929 Kaya E. Salas No 34 Tel: 011-5999-461-2081 Fax: 011-5999-461-1675 Email: chris-guillen@netlinks.an 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 SAGICOR CAPITAL LIFE SERVICE OFFICE CAPITAL LIFE BAHAMAS C/o Colina Insurance Company Limited 56 Collins Avenue, P O Box 4937 Nassau, Tel: (242) 393-9518 Fax: (242) 393-9523 SAGICOR LIFE ARUBA NV Fergusonstraat #106 AHMO Plaza Building, Suites 1 and 2 Oranjestad Tel: (297) 823967 Fax: (297) 826004 Email: calico@setarnet.aw 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 AT LLOYD’S 1 Great Tower Street London, UK EC3R 5AA Tel: 44 020 3003 6800 Fax: 44 020 3003 6999 BYRNE & STACEY UNDERWRITING LIMITED The Old Building Bishops College Churchgate Cheshunt Hertfordshire EN8 9XH Tel: 44 (0) 1992 630830 Fax: 44 (0) 1992 620090 171 GLOBE FINANCE INC 6 Rendezvous Court, Rendezvous Main Road Christ Church, Barbados Tel: (246) 426-4755 Fax: (246) 426-4772 Website: www.globeﬁ nanceinc.com SAGICOR FINANCE INC (FORMERLY 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 4010 West Boy Scout Boulevard Suite 800, Tampa Florida, 33607-5735 USA Tel: (813) 287-1602 Fax: (813) 287-7420 Website: www.globalsure.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 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 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 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: barbadosﬁ re@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 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 172 08 Shareholder Information 173 SHAREHOLDER INFORMATION SHARES No Shareholder owns more than 5% of the capital of the Company. The following Shareholders own more than 3% of the capital of the company: · Republic Bank Limited – 1162: 9,998,300 shares (3.6%) · T&T Unit Trust Corporation – FUS: 8,598,579 shares (3.1%) 424,610 grants of restricted stock at a value of US $2.01/Bds $4.01 each were granted over the four-year period commencing March 31, 2007 to Participants under the Long-term Incentive Plan (“LTI”) approved for Executives. Of the 424,610 grants, 127,384 were fully vested and were issued as common shares during the year. A further 97,148 grants at a value of US $1.98/Bds $3.95 each, being part of the grant made in 2006, became fully vested, and were also issued as common shares. As at December 31, 2007, 419,193 grants were unvested. During 2007, 2,049,598 stock options were granted at an exercise price of US$2.01/Bds $4.01 each. These options vest evenly over the four-year period commencing March 31, 2008 and expire on March 31, 2017. As at December 31, 2007, the total number of options granted was: · 932,387 granted at an exercise price of US $1.98/Bds $3.95 each, of which 233,097 were fully vested and of which 13,710 were exercised during the year · 2,049,598 at an exercise price of US$2.01/Bds $4.01 each, all of which were unvested. The total number of common shares issued under the LTI during 2007 was 238,242 – 97,148 in respect of the 2006 grant, 127,384 in respect of the 2007 grant and 13,710 being options exercised, bringing the total number of shares in issue as at December 31, 2007 to 267,223,578 (2006: 266,985,336). On February 8, 2008, following a successful take-over bid for Barbados Farms Limited, a further 10,319,819 common shares were issued to Shareholders of Barbados Farms Limited to satisfy part of the consideration under the bid. The total number of issued common shares as at May 8, 2008 was 277,543,397. DIVIDENDS A ﬁ nal dividend of Bds 8 cents (US 4 cents) per share, payable on May 16, 2008, was approved for the ﬁ nancial year ended December 31, 2007 to the holders of common shares and depositary interests whose names were registered on the books of the Company at the close of business on April 25, 2008. An interim dividend of Bds 6 cents (US 3 cents) per share, approved for the half year ended June 30, 2007, was paid on October 10, 2007 to the holders of common shares and depositary interests whose names were registered on the books of the Company at the close of business on September 10, 2007. The total dividend for the 2007 ﬁ nancial year amounted to Bds 14 cents (US 7 cents) per share. 174 ANALYSIS OF SHAREHOLDING Number of Shareholders by Size of Holding as at December 31 Size of Holding Number of Shareholders Percentage of Shareholders Total Shares Held Percentage Shares Held 2007 2006 2007 2006 2007 2006 2007 2006 1 - 1,000 6,073 6,015 15.91 15.43 3,875,580 3,917,331 1.45 1.47 1,001 - 2,500 16,188 16,618 42.40 42.64 26,904,075 27,634,402 10.07 10.35 2,501 - 5,000 7,619 7,817 19.96 20.06 26,394,625 27,081,522 9.88 5,001 - 10,000 4,330 4,460 11.34 11.44 30,919,270 31,920,923 11.57 10,001 - 25,000 3,114 3,212 25,001 - 100,000 100,001 - 1,000,000 1,000,001 & above 642 191 20 651 189 17 8.16 1.68 0.50 0.05 8.24 1.67 0.48 0.04 44,581,193 45,979,406 16.68 30,010,574 30,457,612 11.23 50,869,515 50,692,562 19.04 18.99 53,668,746 49,301,578 20.08 18.46 Total 38,177 38,979 100.00 100.00 267,223,578 266,985,336 100.00 100.00 Number of Shareholders by Country of Residence and by Type as at December 31, 2007 Country Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Directors, Management, Staff, Agents Companies Individuals Total Shareholders % Shareholders % Shareholders % 63.96 16,164 43.50 Shareholders 16,725 34 155 2 3 0 17.53 79.90 1.03 1.54 0.00 527 204 35 54 4 24.76 12,246 32.96 12,605 4.25 6.55 0.48 7,390 19.89 7,427 365 994 0.98 2.67 422 998 194 100.00 824 100.00 37,159 100.00 38,177 100.00 10.14 11.96 17.22 11.41 % 43.81 33.02 19.45 1.10 2.61 Number of Shareholders by Country of Residence and by Type as at December 31, 2006 Country Directors, Management, Staff, Agents Companies Individuals Total Shareholders % Shareholders % Shareholders % Shareholders % Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total 68 129 3 1 1 33.66 63.86 1.48 0.50 0.50 536 190 34 50 3 65.93 23.37 4.18 6.15 0.37 16,593 12,464 7,558 366 983 43.71 32.83 19.91 0.96 2.59 17,197 12,783 7,595 417 987 44.12 32.80 19.48 1.07 2.53 202 100.00 813 100.00 37,964 100.00 38,979 100.00 175 Number of Shares Held by Country of Residence and by Type as at December 31, 2007 Country Directors, Management, Staff, Agents Companies Individuals Total Shares % Shares % Shares % Shares % Trinidad and Tobago 186,454 6.79 49,374,790 67.74 101,781,559 53.13 151,342,803 56.64 Barbados 2,505,070 91.28 16,964,657 23.27 61,755,185 32.23 81,224,912 Eastern Caribbean Other Caribbean Other Total 2,884 50,115 0 0.10 1.83 0.00 947,628 3,740,209 1,867,513 1.30 5.13 2.56 21,258,654 11.10 22,209,166 2,607,447 4,181,413 1.36 2.18 6,397,771 6,048,926 2.26 2,744,523 100.00 72,894,797 100.00 191,584,258 100.00 267,223,578 100.00 30.4 8.31 2.39 Number of Shares Held by Country of Residence and by Type as at December 31, 2006 Country Directors, Management, Staff, Agents Companies Individuals Total Shares % Shares % Shares % Shares % Trinidad and Tobago 1,057,154 32.08 49,565,480 71.30 103,166,144 53.13 153,788,778 57.60 Barbados 2,224,473 67.51 15,686,559 22.56 62,509,406 32.19 80,420,438 30.12 Eastern Caribbean Other Caribbean Other Total 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 11.21 22,222,589 8.32 2,519,460 1.30 6,323,439 4,217,766 2.17 4,230,092 2.37 1.59 3,295,123 100.00 69,518,056 100.00 194,172,157 100.00 266,985,336 100.00 176 SAGICOR FINANCIAL CORPORATION NOTICE OF ANNUAL MEETING NOTICE is hereby given that the Fifth Annual Meeting of Shareholders of Sagicor Financial Corporation (“the Company”) will be held at Hilton Barbados, Needham’s Point, St Michael, Barbados, on Thursday June 26, 2008 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, 2007 and the Auditors’ Report thereon. 2. To elect Directors. 3. To re-appoint the incumbent Auditors for the ensuing year and to authorise Directors to ﬁ x their remuneration. 4. To transact such other business as may properly come before the Meeting. By Order of the Board of Directors. Sandra Osborne, QC Corporate Secretary May 30, 2008 PROXIES: Shareholders who are unable to attend the Meeting in person may complete and return the enclosed form of proxy at least 48 hours before the appointed time of the Meeting or adjourned Meeting to either: · 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. DOCUMENTS AVAILABLE FOR INSPECTION: There are no service contracts granted by the Company, or its subsidiaries, to any Director of the Company. 177 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 Fifth Annual Meeting of Shareholders of Sagicor Financial Corporation (“the Company”) to be held on June 26, 2008 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, 2008. 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 authorised in writing, or, if the Shareholder is a body corporate, partnership, estate, trust, or association, by any ofﬁ cer or attorney thereof duly authorised, at any time up to and including the last business day preceding the day of the Meeting or any adjournment thereof with: · the Corporate Secretary at the registered ofﬁ ce 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. The persons named in the enclosed form of proxy are Directors of the Company. If you wish to appoint some other person 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 ﬁ xed May 8, 2008 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 and the re-appointment of the incumbent Auditors and Directors’ authorisation to ﬁ x their remuneration. 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 8, 2008, there were 277,543,397 common shares of the Company outstanding. PRESENTATION OF FINANCIAL STATEMENTS AND AUDITORS’ REPORT The Financial Statements of the Company for the year ended December 31, 2007 and the Auditors’ Report thereon are included in the 2007 Annual Report. 178 ELECTION OF DIRECTORS The Board of Directors consists of twelve members. The number of Directors to be elected at the Meeting is four. Professor Sir Hilary Beckles and Messrs Andrew Aleong, David Walter Allan and Christopher Dennis deCaires will retire at the end of the Meeting. The retiring Directors, with the exception of David Walter Allan who has reached the age of compulsory retirement, will be seeking re-election. Following are the names of the qualiﬁ ed 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: ANDREW ALEONG SIR HILARY BECKLES, K.A. CHRISTOPHER DENNIS DECAIRES JOHN FRANCIS SHETTLE, JR. Andrew Aleong, MBA, aged 47, is a Citizen of Trinidad and Tobago and has been an independent Director since June 2005. He holds an MBA from the Richard Ivey School of Business, University of Western Ontario, Canada, and 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. He was elected a Director of Sagicor Life Inc in 2005. Sir Hilary Beckles, K.A., PhD, is 52 years of age and is a Citizen of Barbados. He has been an independent Director since June 2005. Sir Hilary 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 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. Sir Hilary 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 was elected a Director of Sagicor Life Inc in 2005 and is also a Director of Life of Jamaica Limited. Christopher Dennis deCaires, FCCA, MBA, aged 52, is a Chartered Accountant and holds an MBA from Henley Management College, United Kingdom. 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 ﬁ nance, international taxation, ﬁ nancial management, mergers and acquisitions, information systems, organisational design and business planning. Mr deCaires is Chairman of World Cup Barbados and is a former partner of PricewaterhouseCoopers, Barbados, where he was responsible for corporate ﬁ nance, business advisory, corporate secretarial and trust services. He has been an independent Director since June 2005 and was also elected a Director of Sagicor Life Inc in 2005. John Francis Shettle, Jr, is 53 years of age and is a citizen of the United States. He received his undergraduate degree from Washington & Lee University and holds an MBA from the Sellinger School of Business at Loyola College, Maryland. He is Senior Advisor, Lightyear Capital, a private equity investment ﬁ rm providing buyout and growth capital to companies in the ﬁ nancial services industry. He has over 20 years’ experience in senior management positions in the property/casualty, health and insurance-related services industry. Most recently, he served as President and Chief Executive Ofﬁ cer of the Victor O Schinnerer Company. Prior to that, he was the Chief Executive Ofﬁ cer of Tred Avon Capital Advisors, Inc, a ﬁ rm providing advisory services to companies and private equity ﬁ rms focused on the insurance sector. He previously held senior management positions at Securitas Capital, Swiss Reinsurance Company and Frederick, the Maryland-based AVEMCO Corporation (NYSE). Mr Shettle was appointed a Director of the Group’s US subsidiaries, Sagicor USA Inc, Laurel Life Insurance Company and Sagicor Life Insurance Company in 2006. Sir Hilary Beckles and Messrs Aleong and deCaires each brings a wealth of relevant 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. Mr Shettle, with over 20 years’ experience in the property/casualty, health and insurance-related services industry, will bring to the Board a US and international perspective on insurance. 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. 179 Having regard to the core competency requirements of the Board as a whole, the skills and experience of each nominee, their independence as deﬁ ned by the Board and their willingness and ability to devote the time necessary to fulﬁ l their role as Directors, the Board of Directors recommends that Shareholders vote FOR the election of the above-named nominees. RE-APPOINTMENT OF INCUMBENT AUDITORS PricewaterhouseCoopers, Chartered Accountants, of The Financial Centre, Bishop’s 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 ofﬁ ce until the next Annual Meeting of Shareholders. The Directors recommend that Shareholders vote FOR the re-appointment of PricewaterhouseCoopers and the authorisation of Directors to ﬁ x the Auditors’ remuneration. 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: · The election as Directors of Andrew Aleong, Sir Hilary Beckles, Christopher Dennis deCaires and John Francis Shettle, Jr. · The re-appointment of the incumbent Auditors, PricewaterhouseCoopers, and the authorisation of Directors to ﬁ x their remuneration. The enclosed form of proxy confers discretionary authority upon the persons named with respect to amendments to or variations in matters identiﬁ ed in the Notice of Meeting or other matters that may properly come before the Meeting. The Management of the Company knows of no matter to come before the Meeting other than the matters referred to in the Notice of Meeting. If any other matters which are not now known to Management should properly come before the Meeting, the persons named in the accompanying form of proxy will vote on such matters in accordance with their best judgement. Unless otherwise noted, a simple majority of the votes cast at the Meeting, whether by proxy or otherwise, will constitute approval of any matter submitted to a vote. The contents of this Management Proxy Circular and the sending thereof to the holders of the common shares of the Company have been approved by the Directors of the Company. No Directors’ statement is submitted pursuant to Section 71(2) of the Act. No Auditors’ statement is submitted pursuant to Section 163(1) of the Act. Dated May 30, 2008. Sandra Osborne, QC Corporate Secretary 180 Design and artwork: Gee Jeffery & Partners PrePress and Printing: COT Caribbean Graphics

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