Sagicor Financial Company Ltd. Annual Report 2010

Plain-text annual report

ANNUAL REPORT 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 Our Vision: to be a great company, committed to improving the lives of people in the communities in which we operate. CONTENTS 1840 – The Beginning The Establishment of Barbados Mutual Life Assurance Society 4 6 10 Overview Financial Highlights Chairman’s Statement 1849 – 1896 Caribbean Expansion Corporate Social Responsibility 16 22 Human Resources 1987 – 1999 Winds of Change – Demutualisation 28 Operating and Financial Review 2000 Rebirth Sagicor 42 48 49 58 Board of Directors Directors’ Interests Corporate Governance Report Executive Management 2005 – Present International Expansion Index to the Financial Statements and Notes Auditors’ Report Actuary’s Report Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity 64 66 67 68 69 70 71 180 Shareholder Information 185 Advisors and Bankers 186 Ofﬁces Sagicor Financial Corporation 1840 The Beginning – The Establishment of Barbados Mutual Life Assurance Society Sagicor’s legacy company, Barbados Mutual Life Assurance Society (The Mutual) launched in 1840, amidst ﬁnancial uncertainty. It was a time when the sugar plantation-based society of the West Indies was struggling with socio- economic changes following emancipation in 1834. From its inception, The Mutual made signiﬁcant contributions to capital formation and investment in Barbadian sugar plantations and cocoa estates in Trinidad and Grenada, keeping both industries aﬂoat amidst this period of crisis. In addition, all classes, including upper mercantile, planter elites, working, and middle classes used The Mutual’s policies as collateral. Some see things as they are and say, “Why?” Others dream of things that never were, and say, “Why not?” OVERVIEW 2010 marked 170 years of our Company’s existence, ﬁrst as The Barbados Mutual Life Assurance Society, and then as Sagicor, following our demutualisation in 2002. We are justiﬁably proud of our longevity as one of the oldest insurance companies in the Americas and the second oldest in the Commonwealth. Today, our company is synonymous with world-class ﬁnancial services, and is seen as a dynamic, indigenous Group which has been re-deﬁning ﬁnancial services in the Caribbean. It is not surprising therefore, that the proposed investment by the International Finance Corporation in our Company will be IFC’s largest investment to date in a single Caribbean entity as well as in the insurance industry. As we stand on the threshold of yet another extremely important and critical time in the economic life of our region and indeed, the rest of the world, Sagicor will continue to be at the vanguard of providing a wide range of ﬁnancial products and services, while at the same time renewing our commitment to our vision, “To be a great Company, improving the lives of the people of the communities in which we operate.” We are equally proud that the vision, tenacity, intrepid spirit and strong belief in, and commitment to the region which led to the start of our Company, has remained a guiding force more than a century and a half later. Over the years, our Company has played a critical role in the seminal periods of ﬁnancial development in our region. From inception, we made signiﬁcant contributions to capital formation and investment and for several decades we were a net importer of capital, at a time when capital for investment anywhere in the region was in short supply. We led the consolidation of the Caribbean life insurance industry between the late 1990s and early 2000s, emerging as the Region’s leading insurance company. Following a carefully crafted business strategy, we transformed our company from a local single-line life insurance company into a regional ﬁnancial services Group. Having built a strong regional base, we expanded into the international ﬁnancial services market. Sagicor now operates in 22 countries in the Caribbean, Latin America, the UK and the US. Our assets moved from US $150 million at the beginning of the 1990s to US $4.9 billion by end of year 2010. Our Revenue moved from US $40 million to US $1.3 billion and our proﬁts from US $2 million to US $42 million. Our policies in force have also grown substantially, moving from 60,000 to over 600,000. Sagicor Financial Corporation 4 If you can imagine it, you can create it. FINANCIAL HIGHLIGHTS SHAREHOLDER RETURNS AND SHAREHOLDER INFORMATION NET INCOME ATTRIBUTABLE TO SHAREHOLDERS EARNINGS PER SHARE US$16.6m 2010 2009 (US$m) 16.6 66.8 2010 2009 5.7cents (US cents) 5.7 24.0 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAREHOLDERS TOTAL COMPREHENSIVE INCOME - EARNINGS PER SHARE US$38.2m 2010 2009 (US$m) 38.2 83.1 (US$m) 565.6 538.1 (US$m) 399.2 516.3 13.2 cents DIVIDENDS 4.0 cents BOOK VALUE PER SHARE 195.7 cents SHARE PRICE 138.1 cents 2010 2009 2010 2009 2010 2009 2010 2009 (US cents) 13.2 29.8 (US cents) 4.0 4.0 (US cents) 195.7 185.7 (US cents) 138.1 178.2 NET INCOME – RETURN ON SHAREHOLDERS’ EQUITY TOTAL COMPREHENSIVE INCOME – RETURN ON SHAREHOLDERS’ EQUITY 3.0% (%) 3.0 14.5 7.2% 2010 2009 (%) 7.2 18.4 SHAREHOLDERS’ EQUITY US$565.6m MARKET CAPITALISATION US$399.2m 2010 2009 2010 2009 2010 2009 Sagicor Financial Corporation 6 FINANCIAL HIGHLIGHTS GROUP FINANCIAL POSITION ASSETS US$4,867.3m 2010 2009 2010 2009 DEBT US$181.9m GROUP PERFORMANCE NET INCOME US$41.6m 2010 2009 2010 2009 TOTAL COMPREHENSIVE INCOME US$80.6m EQUITY US$738.8m DEBT TO EQUITY 24.6% REVENUE US$1,256.1m BENEFITS US$769.7m (US$m) 4,867.3 4,460.0 (US$m) 181.9 200.8 (US$m) 41.6 87.6 (US$m) 80.6 100.8 2010 2009 2010 2009 2010 2009 2010 2009 (US$m) 738.8 681.4 (%) 24.6 29.5 (US$m) 1,256.1 1,205.3 (US$m) 769.7 708.2 Sagicor Financial Corporation 7 FINANCIAL HIGHLIGHTS SEGMENT PERFORMANCE SAGICOR LIFE INC – SEGMENT REVENUE SAGICOR LIFE INC – SEGMENT INCOME US$311.1m SAGICOR LIFE JAMAICA – SEGMENT REVENUE US$389.9m SAGICOR EUROPE – SEGMENT REVENUE US$355.1m SAGICOR USA – SEGMENT REVENUE US$162.7m (US$m) 311.1 300.4 (US$m) 389.9 431.5 (US$m) 355.1 255.6 (US$m) 162.7 189.7 2010 2009 2010 2009 2010 2009 2010 2009 US$29.0m SAGICOR LIFE JAMAICA – SEGMENT INCOME US$56.3m SAGICOR EUROPE – SEGMENT INCOME US$(13.1)m SAGICOR USA – SEGMENT INCOME US$3.1m (US$m) 29.0 36.1 (US$m) 56.3 55.6 (US$m) (13.1) 13.7 (US$m) 3.1 5.5 2010 2009 2010 2009 2010 2009 2010 2009 Sagicor Financial Corporation 8 The beginning is the most important part of the work. CHAIRMAN’S STATEMENT FINANCIAL CONDITION: The Group’s ﬁnancial condition remains strong with Total Assets increasing 9.1% from US $4.5 billion to US $4.9 billion. Shareholders’ Equity grew 5.1% from US $538.1 million to US$565.6 million, whilst Book Value per Share moved up 5.4% from US$1.86 to US$1.96. The Group’s Debt to Equity Ratio was 24.6% at the end of the year compared to 29.5% one year earlier. ANALYSIS: The primary source of the disappointing operating results was the very poor returns from our global P&C business, operated through our UK subsidiary Sagicor at Lloyds. Presented by principal operating segments and summary analysis, the Group net income attributable to shareholders for 2010 and 2009 was as follows: Income attributable to Shareholders (in US$000) Operating Segments Sagicor Life Inc Sagicor Life Jamaica 2010 2009 (restated) 30,236 40,437 31,960 34,155 Sagicor Europe (Sagicor at Lloyd’s) (13,124) 13,693 Sagicor USA Other Operating Companies Group ﬁnancing costs 3,144 2,130 5,461 4,257 (18,835) (15,105) 35,511 82,898 Head ofﬁce function and adjustments (18,951) (16,052) Total net income attributable to shareholders 16,560 66,846 Stephen McNamara Chairman OPERATING RESULTS: The ﬁnancial year 2010 was a disappointing one for the Sagicor Group. Strong ﬁnancial results from our core Caribbean operations were offset by losses in our global property and casualty (P&C) business written through our Lloyds Syndicate Sagicor at Lloyds, increased ﬁnancing costs, and lower future investment yields which had a negative impact on actuarial liabilities. Group Net income for the year amounted to US $41.6 million, down from a restated US $87.6 million for 2009. Consequently, Net Income attributable to shareholders was US $16.6 million, compared to a restated US $66.8 million for 2009. Group total comprehensive income amounted to US $80.6 million, of which US $38.2 million was attributable to shareholders. The comparable restated 2009 ﬁgures were US$100.8 million and US$83.1 million respectively. Earnings per Share amounted to 5.7 US cents, down from the restated 2009 earnings of 24.0 US cents. The average Return on Shareholders’ Equity in 2010 was 3.0%, compared to the 2009 restated percentage of 14.5%. Sagicor at Lloyds, like other Lloyds Syndicates, had an extremely difﬁcult year incurring a signiﬁcant increase in claims from both global catastrophes and UK motor liability. I have already made mention in previous quarters of the signiﬁcant impact of Sagicor Financial Corporation 10 the February 2010 Chilean and September 2010 New Zealand earthquakes. In addition it also became necessary to increase substantially the claims provision for the UK direct motor insurance class, due to the worsening claims experience in that market, as a result of unfavourable winter conditions. These adverse claims experiences combined to produce a net loss for the year at Sagicor at Lloyds of US $13.1 million, compared to a net proﬁt for 2009 of US $13.7 million. On the other hand, Sagicor Life Jamaica and its subsidiaries Sagicor Life Cayman and PanCaribbean Financial Services had a very good year despite a lower interest rate environment. After the Jamaica Government implemented the debt exchange programme in early 2010 (wherein higher yielding government debt securities were exchanged for lower yielding securities), interest rates and inﬂation have declined, and the Jamaica dollar has maintained its exchange rate with the US dollar. Net income (before allocation to shareholders) in 2010 was US $56.3 million compared to US $55.6 million in 2009. However, since the Group reduced its effective holding in PanCaribbean Financial Services in the segment, from 64% to 51% in late 2009, the resulting net income attributable to shareholders fell to US $32.0 million from US $34.2 million in 2009. The Sagicor Life Inc segment, which comprises the Barbados, Trinidad, Eastern Caribbean, Dutch Antilles and Belize life insurance operations, also had a good year earning net income of US $30.2 million, compared to US $40.4 million for 2009. The decline in net income from 2009 is mainly as a result of the impact of changes in actuarial assumptions, which had a less beneﬁcial impact on income in 2010. In particular, because of the general weak economic conditions, future investment yields were anticipated to decline in most territories comprising the segment and gave rise to an increase in the actuarial liabilities and a corresponding reduction in net income for 2010. The Sagicor USA operations continue to make progress in the US writing annuity, single premium life and periodic life business in that market. During ﬁnancial year 2010, the company wrote settled annualised premium totalling US $115.5 million, comprising 64% annuity products and 36% life products. Sagicor US contributed US $3.1 million, compared to a restated US $5.5 million for the previous year. Other operating companies comprise other subsidiaries not managed as part of the principal operating segments and in particular include Sagicor General Insurance Inc and Barbados Farms Limited. These entities contributed net income of US $2.1 million in 2010, compared to US $4.3 million in 2009. The reduced contribution reﬂects the lower earnings of Sagicor General as a result of reduced investment gains and increased claims resulting from hurricane Tomas. The Group ﬁnancing expense comprises the cost of the Sagicor 7.5% senior notes, and of banking and reinsurance ﬁnancing facilities. These principally ﬁnance our UK and USA operations. The increase for the year arises primarily from interest on a new bank loan taken out in late 2009 and from the cost of additional reinsurance ﬁnancing. In the statement of income, total revenue for the year was US $1,256.1 million (2009 - US $1,205.3 million) and was distributed 59% (2009 – 63%) across the Caribbean region, 28% (2009 – 21%) in the UK and 13% (2009 – 16%) in the USA. Property and casualty premium increased to US $350.2 million from US $249.5 million in 2009, while annuity premium fell to US $127.7 million from US $172.4 million in 2009. These amounts reﬂect the increased business in the UK and a reduction in annuity business written in the USA. Sagicor Financial Corporation 11 Net policy beneﬁts totalled US $691.7 million for the year, up from US $606.3 million in 2009. Property and casualty claims increased signiﬁcantly to US $243.3 million from US $135.8 million. However interest expense declined to US $78.0 million from US $101.9 million in 2009. This is largely a consequence of the reduction in interest rates in Jamaica. Total expenses recorded were US $429.4 million (2009 – US $390.2 million). Increased commission and administrative expenses arose directly as a consequence of the shift in premium to the UK operations in 2010. Other comprehensive income consists of net gains or losses resulting from movements in fair value of assets, and currency translation gains or losses from holding foreign currency subsidiaries. The Group recorded net gains of US $33.3 million resulting from movements in the fair value of assets and net gains of US $6.0 million in respect of currency translation. Other comprehensive income totalled US $39.0 million for the period, of which US $21.6 million was attributable to shareholders. capital to meet these anticipated obligations. Management have reviewed the current risk proﬁle of the Syndicate and are in the process of taking corrective actions to reduce the level of exposure to global catastrophes. We expect that these changes will take effect from the second half of the year. The global economy continues to show signs of improvement. Despite civil unrest in several areas and increasing oil prices we remain optimistic that 2011 will be a year of moderate growth for the global economy. Caribbean economies continued to experience difﬁculty during 2010 as the beneﬁts from the global up turn are yet to be felt in our region. Going forward, we expect that the region will gradually emerge from the global economic down turn and return to a period of modest growth. For the Sagicor Group, our traditional operations performed well during 2010 despite challenging economic circumstances. We are conﬁdent of a similar performance in 2011. Once the corrective action at Sagicor at Lloyds begins to impact our Group, we expect our results to return to the strong levels of previous years. OUTLOOK: 2010 was the seventh most expensive year for catastrophes for the P&C insurance industry since 1970, according to the latest sigma study by Swiss Re. Insurance losses were up 60% over 2009 which was a relatively benign year. The Sagicor at Lloyd’s business as a part of the Lloyds environment has exposures to global insurance catastrophes. 2011 is also shaping up to be an active year for catastrophes. Events have occurred in 2011 to date include the Queensland Australia ﬂoods and cyclone, and the earth quake in Christchurch New Zealand, and the earthquake and tsunami across parts of Japan. We anticipate that Sagicor will incur insurance claims arising out of these events. Though we have signiﬁcant reinsurance coverage in place, the magnitude and number of these events within a space of three months will have an adverse effect on our ﬁrst quarter 2011 results. Notwithstanding this, Sagicor at Lloyd’s has more than adequate resources and DIVIDEND: Despite the reduced operating results in 2010, and the challenging prospects arising from the property and casualty experience in the ﬁrst quarter of 2011, the Group remains in strong ﬁnancial condition. Accordingly, the Board has decided to declare a ﬁnal dividend of US 2 cents for 2010 which taken with the interim dividend paid in October 2010 maintains a total dividend of US 4 cents for the year. In 2005, Mr Christopher de Caires was elected as a Director of SFC, and subsequently served as a Director on a number of other subsidiaries within the Sagicor Group. He became Chairman of the Human Resources Committee of the SFC Board from June 2006. Mr de Caires will not be seeking re-election at this Annual Meeting. On behalf of the Directors, Management and Staff of the Sagicor Group, I wish to thank Mr de Caires for his yeoman service to the Sagicor Financial Corporation 12 Sagicor Group, and his many valuable contributions as Chairman of the HR Committee. On behalf of the Board, I would also like to sincerely thank our Staff and Advisors for their continuing support and hard work during the year. I would particularly like to extend congratulations to those Staff members and Advisors throughout the Group who excelled in their performance during 2010, and were recipients of our highest awards and accolades. Finally, on behalf of the Board, I sincerely thank our Policyholders, Clients, and Business Partners for their continued and valued support to Sagicor in 2010. Stephen McNamara Chairman Sagicor Financial Corporation 13 1849 – 1896 Caribbean Expansion Barbados was the major port for lively trade between the Caribbean islands, and it was a natural progression for The Mutual to branch out for new clients. Over the next 20 years, The Mutual expanded its operation, and branches were opened in St. Vincent (1849), Trinidad and Tobago (1858), Grenada (1858), St. Kitts (1861), Antigua (1863), Montserrat (1863), Guyana (1866), Dominica (1868), and Jamaica (1896). The Mutual was the only indigenous life insurance company to establish agencies throughout the British Caribbean, with the largest operations and investments during the entire nineteenth and early twentieth century. You cannot aspire if you look down; you must look up. CORPORATE SOCIAL RESPONSIBILITY Sagicor has always recognised the importance of social investment, and that is why, from the very beginning, we have been committed to enhancing the long-term quality of life in the communities we serve. For over several decades, we have provided ﬁnancial support and voluntary assistance to several organisations and institutions. Sagicor’s social responsibility initiatives stretch across multiple countries, and focus on a number of pillars within each community. We actively seek opportunities and charitable organisations that focus on the youth in our societies - speciﬁcally in the areas of education, health, sports and community development. In addition to providing wise ﬁnancial counsel, we wish to ensure that the legacy we pass on to future generations is an appreciation for education in a world ﬁlled with opportunity, health and wellbeing. On January 12, 2010, Sagicor, like the rest of the world, was profoundly moved by the earthquake in Haiti which wrought massive devastation. In addition to pledging US$250,000 to assist the Haitian people, Sagicor offered to match all donations made by staff members across the Group. The full amount contributed by Sagicor and its staff totaled US$309,456. Donations were made to several organisations working in Haiti. The largest of these – US$155,212 – was made to UNICEF. Immediately after the earthquake, UNICEF was one of the ﬁrst responders. They focused their attention on the children of Haiti, addressing their urgent nutritional and health needs, while simultaneously creating a programme for re-registering and ensuring that they returned to school as soon as possible. In addition to the donation to UNICEF, Holy Seed International, a non-proﬁt organisation that supports an orphanage in Marigot, Haiti received US$16,500 from Sagicor Life Inc. We thought that this orphanage, Arc en Ciel (French for ‘Rainbow’) was special, as it supports children who have been orphaned or abandoned and children who are already ﬁghting against the odds, having lost their parents either to tuberculosis and HIV/Aids, or the recent earthquake. The orphanage provides care for children between the ages of ﬁve and nine years old who are in need of basic food, clothes and other personal items. Sagicor Jamaica and PanCaribbean Financial Services donated US$50,744 to the Red Cross and the Salvation Army relief efforts in Haiti. Our United States operation, Sagicor Life Insurance Company, donated a total of US$ 87,000 to two organisations, Partners in Health and Project 81. Partners in Health has been working in Haiti for over 20 years. The organisation is based in Boston, and brings modern medical care to poor communities. Project 81 is the brainchild of Annie and Jared Brown, two volunteers at a Haitian orphanage, who are themselves former Sagicor producers. The organisation was named after Village 81, a poor community in which they installed a well to provide clean water, and also distributed food and parasite-ﬁghting medicine to young children. They still use the arts and other creative media to raise awareness about Haiti. Sports: As a result of the UNICEF programmes, the children of Haiti are given the opportunity to receive an education and much- needed health services. UNICEF places a great emphasis on education because they believe that, by educating children from early childhood, they will have a better start in life and greater opportunities. Sagicor has a vision which sees our people and our institutions, including our sporting teams, competing as equals in the global arena. On 6 March, the Sagicor West Indies Cricket High Performance Centre, the ﬁrst cricket academy of its kind in the Caribbean, based at the Cave Hill Campus of the University of the West Indies in Barbados, was ofﬁcially opened. Sagicor, Sagicor Financial Corporation 16 having ﬁrst strengthened its base in the Caribbean, now operates in 22 countries, including the United States and the United Kingdom. Our investment in the Sagicor West Indies Cricket High Performance Centre must therefore be viewed within the context of this vision. We believe that the return of West Indies cricket to its rightful place on the world stage is a necessary part of the restoration of the rapidly declining pride once associated with the region’s superior cricketing standards, and of our people. The High Performance Cricket Centre is an important part of this process. It will provide the much-needed strategic guidance and stimulating environment necessary to hone the competitive skills required in today’s cricketer, and we hope that this will be the catalyst which sparks the beginning of the re-emergence of high-quality West Indies cricket. Sagicor is proud to be a part of this initiative, and is working with the University of the West Indies and the West Indies Cricket Board to make this vision a reality. The Sagicor West Indies Cricket High Performance Centre provides a unique educational and training facility, designed to create well rounded, multi-skilled young cricketers. It offers support in physical, technical, psychological and lifestyle areas of the game, and players follow a programme speciﬁcally tailored to their individual needs. As a Group, Sagicor has continued nurturing proﬁciency in several sporting disciplines. In the USA, 2010 marked the third year of our Sagicor USA partnership with the University of South Florida (USF) Tampa as one of the sponsors of USF’s Athletics, with concentration on the “Bulls” Football Team. Sagicor USA is also a proud corporate partner with Major League Baseball’s Tampa Bay Rays and the National Football League’s Arizona Cardinals. Through these partnerships, Sagicor USA is active in a number of community outreach programs both in Tampa Bay, Florida, and metro Phoenix, Arizona. Sagicor USA’s association with the Tampa Bay Rays allows players to arrange a series of visits, throughout the baseball season, to the children undergoing medical treatment at the All Children’s Hospital in St. Petersburg, Florida. With the Arizona Cardinals, Sagicor USA was the corporate sponsor for the annual St. Mary’s Food Bank Alliance food drive. Just prior to the U.S. Thanksgiving holiday, Arizona Cardinal fans were asked to bring canned food donations which are then distributed to those in need throughout the Phoenix metropolitan area. In the United Kingdom, Sagicor at Lloyd’s (SaL) raised funds for several charities by sponsoring staff participation in several sporting activities including netball, cricket and golf. In addition, we supported three staff teams for the Insurance Endurance Go- Kart race which lasts for well over 6 hours. Sagicor Life Jamaica (SLJ) concentrated on training young athletes during the year. The highlight of their several initiatives was the Jamaica Teachers Association/Sagicor National Primary, All Age & Junior High Meet, an annual sporting event for all age schools with participation of over 5,000 students in the lead up to the event. At the championships, over 1,200 students compete to be crowned national champions. Still in the area of sports, PanCaribbean Financial services (PCFS) focused on the Junior Tennis Championships and Development Tournament. However their single largest project, the PanCaribbean’s Sigma Corporate Run, attracted over 11,000 participants and, as a result, PCFS were able to donate money to the Sir John Golding Rehabilitation Centre, the Jamaica Association for the Deaf and the Jamaica Society for the Blind. Sagicor Life Inc (SLI) supported several sporting disciplines, including golf, game ﬁshing, Special Olympics, an annual summer camp and the uniquely Barbadian sport, Road Tennis. SLI continued its support to the Primary Schools Chess Championships. The tournament is the nucleus for developing Sagicor Financial Corporation 17 junior chess players, some of whom go on to represent Barbados regionally and internationally. Participation allows the children to meet new people and make new friends, while encouraging sportsmanship; striving for excellence and surpassing their personal best. Chess also prepares them for certain aspects of their life, since it exposes them to a healthy level of competition. SLI in Trinidad and Tobago continued its long association with the Sagicor Junior Tennis Tournament for 8 to 18 year olds, and the St Andrew invitational Golf Tournament. Trinidad also sponsored the new Bago Sports Beach Football Invitational Tournament. This new tournament, which was held at Turtle Beach in Tobago, was an overwhelming success and attracted several teams from Tobago, Antigua, Barbados and Trinidad. In the Eastern Caribbean, SLI entered its nineteenth year of support for the OECS Swimming Championships, one of the region’s premier sporting events. The centerpiece of Sagicor General’s commitment to sport continued to be the Sagicor General Super-Cup, Shield and Twenty/20 competitions. In 2010, they also supported the Junior National Squash Championships, the National Junior Track and Field Championships in Trinidad, and the Somerset Cricket Team in Dominica. Health: During 2010, Sagicor continued to provide signiﬁcant support in the area of Health. Emphasis was placed on the prevention of non-communicable diseases, the promotion of healthy living and facilitating access to health-care. Throughout the Sagicor Group, funds were raised for organisations which are advocates for speciﬁc health issues. Sagicor Life supported the Trinidad and Tobago Cancer Society programme, which builds awareness about the disease in primary and secondary schools, and teaches about the lifestyle changes that can assist in preventing various forms of cancer. Sagicor Life Jamaica supported the Consie Walters Cancer Care Hospice, the Jamaica Cancer Society and MacMillan Cancer Support in the United Kingdom, an organisation that provides practical, emotional and ﬁnancial support to people who live with cancer. Another area supported was health care facilities catering speciﬁcally to children. These included the Bustamante Hospital for Children in Jamaica, for whom funds were raised through the Shakti Love Fest. This annual one-day health and ﬁtness event was the brainchild of the Shaggy Make a Difference Foundation. Sagicor Life (USA) participated once again in the annual telethons for Tampa Bay’s All Children’s Hospital and the Phoenix Children’s Hospital annual “Give for Kids” telethon. In addition to a corporate donation to each cause, staff members volunteered their time to make the telethons a success. The funds raised from both telethons go to ongoing support of the hospitals, purchase of advance medical technology and specialised medical treatments. SaL supported the Great Ormond Street Hospital, so that it may remain at the forefront of international paediatric medicine, and continue to offer specialist, world-class care to thousands of patients every year. The Stroke Association also beneﬁtted from SaL. It is the only UK-wide charity solely concerned with combating stroke in people of all ages. Recognising that strokes have a greater disability impact than any other medical condition, the Stroke Association funds research into prevention, treatment and better methods of rehabilitation. It also helps stroke patients and their families cope with the effects of the disease through its Life After Stroke Services. These include Information, Advice and Support, Communication Support and Life After Stroke grants. In addition, the Association also crafts campaigns to educate, inform and increase knowledge and awareness of the disease at all levels of society. Sagicor Financial Corporation 18 continued sponsorship of Sagicor Exodus, one of the island’s premier steel orchestras, entered its 6th year in 2010 and remains a rewarding community engagement. Other activities included support for Special Olympics, the B.T. Washington Elementary School in Tampa, Florida, Arthritis Foundation, Habitat for Humanity, and Lowery Park Zoo in the USA; British Heart Foundation, Royal British Legion, Lloyd’s Patriotic Fund and First Central Charity Auction in the United Kingdom; Scout Association of Jamaica, West regional Foundation for Disabled Children, Dare-to-Care children homes, the Jamaica Defence and Jamaica Constabulary Forces and Camp Yellow Bird, Wolmer Boys and William Knibb High Schools in Jamaica; The Optimists, Crime stoppers, Small Business Association. 2010 was the ﬁrst year of a commitment made by SLI Trinidad and Tobago towards the upkeep of the Vitas House facility, which provides a sanctuary for those afﬂicted with cancer. Education The “Read with Big Red” program is sponsored by Sagicor USA. An Arizona Cardinals player and the Cardinals’ mascot, “Big Red”, visit elementary schools in the Phoenix area, where they read story books to the children. This program provides a fun and exciting way for young students to experience the joy of reading. Sagicor USA also continues to collaborate with USF’s College of Business in a special project with the Marketing Faculty. Sagicor Life Inc and PanCaribbean provided scholarships for University students. In the case of Sagicor Life Inc, Barbados, the awarding of these scholarships started approximately 20 years ago. In Trinidad and Tobago, Sagicor’s sponsorship of the Fulbright Scholarship stands as testimony to the fact that Education remains high on the company’s agenda. Supplementary to this effort was the establishment of a scholarship for studies in insurance at the University of the West Indies under the auspices of the Trinidad and Tobago Association of Insurance and Financial Advisors. Sagicor Life Jamaica awarded scholarships to outstanding children of public sector workers for the duration of their high school career. They also continued their Adopt-A-School projects, in which company branches execute building projects and repair and beautiﬁcation work for 12 basic schools across the Island. In-house health checks for vision, hearing and general health were conducted at each of the schools. Several other organisations, schools, speciﬁc interest groups, community projects and sporting associations were supported by the Sagicor Group during the year. Trinidad and Tobago’s Sagicor Financial Corporation 19 1 2 3 5 1. Sagicor branding at the Raymond James Stadium, home of the USF Bulls. 2. Participants warming up before the 2010 Sigma Corporate Run in Jamaica. 3. Presentation of cheque to the Trinidad & Tobago Cancer Society. 4. Presentation of cheque to UNICEF Regional Representative towards their Haiti Relief Fund. 5. Participants after a fundraising event for the Arthritis Foundation in Florida. 4 1 2 3 4 1. Young players and their coaching staff at the Sagicor West Indies Cricket High Performance Centre, 3W’s Oval in Barbados. 2. The winning team of the Bago Sports Beach Football Invitational Tournament in Trinidad. 3. Presentation of cheque to the Jamaica Red Cross towards their Haiti relief efforts. 4. A member of the Sagicor-sponsored Major League Baseball’s Tampa Bay Rays at a community outreach event. HUMAN RESOURCES Modern organisations can survive in the dynamic, competitive environment of today only if they capitalize on the full potential of each employee. In this regard, the Sagicor Group continues its focus on employee development through education, training and various programmes geared towards employee engagement, many of which are available online for convenience and ease of use. Many of our staff have successfully pursued, and have been awarded key industry designations during 2010. These include Fellow, Life Management Institute (FLMI), Associate, Insurance Agency Administration (AIAA) and Professional, Customer Service (PCS). In addition, Sagicor employees across the Group have gained Masters of Business Administration degrees and other degrees, at Masters level, across a spectrum of disciplines. In addition to the above training programmes, Sagicor initiated a Memorandum of Understanding with the University of the West Indies in Trinidad and Tobago, for a Bachelor’s Degree in Risk Management and Insurance. The degree programme is expected to become part of the curriculum for the academic year, September 2011. We will leverage opportunities for similar programmes for Management and Staff development in other regions. In 2010, training facilitators embraced available technologies for remote training, using video conferencing facilities and “GoToMeeting”, for delivering Corporate Induction, Performance Management and Time Management programmes. Ongoing workshops on Anti-Money Laundering and our Code of Ethics and Business Conduct will be moving to online facilitation, thereby making delivery more convenient. These programmes are key to ensuring that our Management, Advisors and Staff are able to deliver a high quality of service to Customers, whilst maintaining the highest standards of integrity and full compliance with all legal and regulatory requirements. During 2010, the Global Human Resources Task Force successfully introduced a new Group-wide talent management system internally branded ‘Sagicor Success’. The system includes modules in performance, talent and recruitment management, succession planning, and learning and development. It is anticipated that implementation will improve performance and productivity, enhance training, career development and succession planning, and provide Management with analytical reports for critical decision-making of our human capital. As part of this exercise, the Sagicor Group also moved to a new nine (9) grade salary structure. This initiative provides the following beneﬁts: (cid:116)(cid:1) Equity - all positions that require similar skills and experience are classiﬁed in the same grade. (cid:116)(cid:1) Standardisation of competency requirements for each grade to facilitate consistent job evaluations, (cid:116)(cid:1) A foundation for the standardisation of jobs, employee training and development programmes, and the harmonisation of beneﬁts and rewards. Sagicor Life Jamaica launched a three-year Customer Service Training programme to strengthen its customer service culture. Under the theme, “Service First”, it included workshops and themed programmes for all staff. Similar initiatives will be launched in other Group Companies in 2011. Sagicor Life Inc launched the pilot for a Coaching Program facilitated by the Cave Hill School of Business. Initially rolled out in Barbados and Trinidad, this initiative will be expanded across Group companies in 2011. Managers will participate in practical, hands-on workshops which will focus on group-work and role-play. Coaching and mentoring enhance morale, motivation, productivity, and will support our efforts to improve employee engagement. Employee engagement continued to be at the forefront of initiatives across the Group for 2010. Using the independent services of LOMA, Group companies conducted employee opinion surveys. These reports provided employee feedback on key issues, Sagicor Financial Corporation 22 and helped to guide Management’s decisions for employee participation and satisfaction. Sagicor USA focused their efforts on beneﬁts education for Staff and introduced “Benetrac”, a system allowing for Online Beneﬁts Enrolment and Maintenance. Sagicor Life Jamaica hosted a motivational seminar, which included internationally renowned speakers, Les Brown and Susan Taylor. During the year, multiple events were hosted across the Group to recognise and reward team members for their dedication and high performance, and to foster social interaction. Our Family Fun Days, our Wellness Programmes and Healthy Lifestyle activities have become important social events on our calendar. won by Kareem Prescod from Trinidad, is awarded for outstanding contribution in the areas of new business, service above and beyond the call of duty and/or commitment to excellent service. The Employee of the Year Award recognises outstanding contribution for customer service, creativity and innovation and demonstrating all the qualities that best exemplify the Sagicor Spirit including sound knowledge of our business, wise judgment that has led to business development and good corporate citizenry. For 2010, the winners were Maritza Pottinger, USA; Earlene Davis, Trinidad; Victoria Dalrymple, Barbados and Wayne Thorpe of Jamaica. Our reward and recognition programmes culminated in recognising the best employees across geographical boundaries. These Group- level awards are judged by an external panel of three regionally eminently qualiﬁed persons. The Contributor of the Year, The Sagicorian is recognised as the most outstanding Employee of the Year in the Sagicor Group. Wayne Thorpe of Sagicor Life Jamaica won this coveted title in 2010. Maritza Pottinger Earlene Davis Victoria Dalrymple Wayne Thorpe Sagicor Financial Corporation 23 Amongst our Advisors, the leading producers in individual life sales, in their speciﬁc territory were Patricia Gilding, Barbados; Rudolf Coelho, Capital Life; Cheryl Rolle, Eastern Caribbean; Rosa Rengifo, Panama, and Winston Williams, Trinidad & Tobago. USA. In the area of Group Life & Health, the leading producers for 2010 were Gay Grifﬁth, Barbados; Abel Simpson, Capital Life; Dane Vigo, Eastern Caribbean and Patti Hudson, Trinidad & Tobago. Sagicor continues to focus heavily on rewards and recognition as we believe that these programmes and initiatives foster a performance based culture and encourage our Managers, Advisors and Staff to give of their best, especially in these challenging times. Patricia Gilding Sagicor Financial Corporation 24 Rudolf Coelho Cheryl Rolle Rosa Rengifo Winston Williams Your aspirations are your possibilities. 1987 – 1999 Winds of Change – Demutualisation The mid-1980’s was the springboard for the development of the modern company and The Mutual saw unprecedented growth. In 1987 it established Mutual Finance and acquired Travelers Overseas, renamed Capital Life. This acquisition expanded its portfolio by 30%, added 10,000 new policyholders, and extended its operations from eight to ﬁfteen territories, by adding Aruba, Curacao, St Maarten, Belize, Haiti, Cayman Islands, and the Bahamas. In 1999, two more acquisitions were made in the Caribbean - Island Life in Jamaica and Nationwide Insurance Company in Trinidad and Tobago During this period, The Mutual also increased its commitment to community affairs and built its reputation role as a good corporate citizen. Let go of the past and go conﬁdently in the direction of your dreams. OPERATING AND FINANCIAL REVIEW (amounts expressed in US currency unless otherwise stated) INCOME - $ millions Overview 2010 was a year in which the economic environment remained difﬁcult for many of the major economies. Growth remained slow and unemployment levels remained high. In the Caribbean, the international effects were felt as many economies which are dependent on tourism saw a signiﬁcant decline in earnings from this sector. Net premium revenue Net investment income Fees and other revenues Total revenue Net beneﬁts Expenses Income taxes In this environment, the Sagicor Group made steady progress. Our Caribbean operations continue to enjoy a strong position in the marketplace and generated good results. The Sagicor at Lloyd’s operations suffered from international property claims arising from natural disasters and from a very poor experience in motor insurance. Group net income Fair value reserve gains (net) Retranslation of foreign currency operations Total comprehensive income Revenue 2010 2009 restated 901 293 62 843 294 68 1,256 1,205 (770) (429) (15) 42 33 6 81 (708) (390) (19) 88 26 (13) 101 Group net income for the year was $42 million, contributing to total comprehensive income of $81 million. The restated 2009 results were Group net income of $88 million and total comprehensive income of $101 million. The tables below summarise the components of income and comprehensive income for 2010 and 2009. Sagicor recorded total revenue of $1,256 million for 2010, an increase of $51 million or 4% over 2009’s total. Net premium revenue in 2010 totalled $901 million, up from $843 million recorded in 2009. The components of this revenue are as follows: NET PREMIUM REVENUE – $ millions Life insurance Annuity Health insurance Property and casualty insurance Net premium revenue 2010 2009 294 128 129 350 901 280 173 141 249 843 Sagicor Financial Corporation 28 Life insurance premium grew by 5% to $294 million. Annuity premium, which has a substantial proportion of single premiums, declined by 36% to $128 million. Health insurance premium declined by 9% to $129 million; the decline is a consequence of the Group’s exit at the end of 2009 from this market in the Cayman Islands. Property and casualty insurance premium grew substantially by 41% to total $350 million in 2010. This growth came principally from Sagicor at Lloyd’s. represent (i) the amounts due to policyholders which arise during the year and (ii) the amounts expensed during the year for future amounts payable to policyholders. After deducting reinsurance recoveries, the net amounts are disclosed in the next table. Interest expense represents the interest returns to contract-holders and ﬁnancial institutions which place or advance funds to the Group to earn interest and, in some instances, capital returns. The table below summarises the net insurance beneﬁts and interest expense for 2010 and 2009. Net investment income for 2010 amounted to $293 million, a decrease of $1 million from 2009’s total. Interest income is the main component of investment income. Investment yields were lower especially in the Jamaica market where the Government introduced a debt exchange program and issued lower yielding securities. The interest yields of the principal assets classes are summarised in the table below. NET BENEFITS – $ millions Life insurance Annuity INTEREST YIELDS Debt securities Mortgage loans Policy loans 2010 2009 Amounts expensed for future beneﬁts 8.1% 8.3% 8.6% 9.8% 8.6% 8.6% Health insurance Property and casualty insurance Net insurance beneﬁts Finance loans and ﬁnance leases 11.4% 12.9% Interest expense Securities purchased under agreements to resell 5.6% 15.5% Net beneﬁts Deposits 2.5% 2.9% 2010 2009 restated 132 78 145 94 243 692 78 770 118 73 164 115 136 606 102 708 Fees and other revenue totalled $62 million in 2010 as compared to $68 million in 2009. With the strengthening of the Jamaica dollar in 2010, there was a reversal of the foreign exchange gains traditionally recorded by Sagicor’s Jamaica operations. Beneﬁts, expenses and taxes The Group recorded net insurance beneﬁts of $692 million in 2010, an increase of $86 million over 2009’s total. Insurance beneﬁts In the foregoing table, life insurance and annuity beneﬁts comprise amounts which become due to policyholders and beneﬁciaries during the year. Life insurance beneﬁts grew by 11% when compared to the previous year. Annuity beneﬁts grew by $5 million to $78 million in 2010. The amounts expensed for future beneﬁts are principally in respect of life insurance and annuity policies. These represent the amounts the Group should prudently set aside in order to fund future beneﬁts of inforce policies. The amount expensed in 2010 amounted to $145 million, a decrease of $19 million from 2009. The amount expensed is inﬂuenced by the Sagicor Financial Corporation 29 quantum of single premiums written which were signiﬁcantly lower in 2010. in these expenses is consistent with the growth experienced in premium revenue. Health insurance beneﬁts declined by $21 million in 2010 in comparison to 2009’s total. $15 million of the decline is attributable to the Group’s exit at the end of 2009 from this market in the Cayman Islands. In addition, the Group experienced improved claims ratios on its continuing health business. Property and casualty (P&C) insurance beneﬁts comprise amounts due and paid on policy contracts during the year and the estimates of claims incurred during the year, but not reported to the Group. P&C beneﬁts grew substantially to $243 million in 2010. Included in this growth is a worsening net claims ratio, which increased to 69% in 2010 from 55% in 2009. There was a reduction in interest expense in 2010 when compared to 2009. This reﬂects the trend of reduced investment yields, particularly in Jamaica, where the Group has a signiﬁcant banking operation. The interest yields of the principal liability classes are summarised in the following table. INTEREST YIELDS Investment contracts Other funding instruments Customer deposits 2010 2009 8.3% 2.0% 5.3% 8.1% 2.4% 6.7% Securities sold under agreements to repurchase 7.4% 11.8% In 2010, the Group recorded total expenses of $429 million. These included administrative expenses of $212 million and commissions and related expenses to agents and brokers of $174 million. Administrative expenses increased 7% over 2009’s total and commissions increased 16% over 2009’s total. The growth Income taxes are levied on the investment income of certain life insurance subsidiaries of the Group, and on net income before tax on most of the remaining Group companies. Total investment income and net income subject to taxation declined to $128 million compared to $133 million in 2009. The resulting tax charge in 2010 was $15 million, a reduction of $4 million from the previous year. Group net income and total comprehensive income During the year, the Group changed its accounting policy for recording changes in actuarial liabilities which result directly from the fair value movements of assets which are booked in other comprehensive income. The new policy is to record those movements in actuarial liabilities in other comprehensive income. The policy achieves a better matching of asset fair value movements and the consequential changes in actuarial liabilities. The 2009 results have been restated to conform to the revised accounting policy, resulting in a decrease in net beneﬁts of $24 million and an increase in income tax of $7 million. These amounts which net to $17 million have been reclassiﬁed to other comprehensive income under the revised accounting policy. Group net income for 2010 totalled $42 million as compared to a restated $88 million for 2009. In other comprehensive income, the Group recorded in 2010 an increase of $33 million in the fair value reserves (including the consequential movements in actuarial liabilities). The comparable result for 2009 was $26 million. The Group also recorded gains on the retranslation of foreign currency operations in 2010 of $6 million (2009 – losses of $13million). The turnaround is a result of the strengthening of the Jamaica dollar. Sagicor Financial Corporation 30 In summary, the Group’s total comprehensive income for 2010 was $81 million, a reduction of $20 million from the prior year’s result. Allocation of income to shareholders The Group’s net income and comprehensive income are allocated ultimately to the equity owners of the respective Group companies in accordance with their results. As some Group companies have minority shareholders, particularly in Jamaica, the Group’s net income is allocated accordingly between Sagicor shareholders and the minority interest shareholders. There is also an allocation to Sagicor Life Inc policyholders who hold participating policies. This latter arrangement was established on the demutualisation of Sagicor Life Inc. Accordingly, the income attributable to shareholders was $17 million (2009 - $67 million), representing earnings per share of 6 cents and a modest return on shareholders’ equity of 3%. Other comprehensive income attributable to shareholders totalled $21 million (2009 - $16 million). Operating Segments The table below presents the management structure of the Group. Sagicor Financial Corporation (Head Ofﬁce) Sagicor Europe (Sagicor at Lloyd’s) Sagicor Life Inc Sagicor Life Jamaica Sagicor USA Other Operating Companies Sagicor Financial Corporation is a holding company and does not engage directly in trading activities. Most trading activities are carried out by Group companies within the principal operating segments, namely Sagicor Life Inc, Sagicor Life Jamaica, Sagicor Europe and Sagicor USA. The contribution of each of these to income and comprehensive income is considered and discussed in the following sections. Sagicor Life Inc Segment The Sagicor Life Inc segment consists of the life insurance subsidiaries which conduct business in Barbados, Trinidad and Tobago, the Eastern and Dutch Caribbean islands, Belize and Panama. The main activities of the segment are the provision of life and health insurance, retirement accumulation savings, annuities, mortgages, pension investment and pension administration services. This segment generated $311 million in total revenue for 2010, a marginal increase over the prior year. Net premium revenue advanced to $216 million, with growth being recorded in the Trinidad and Tobago and Dutch Caribbean markets. Net beneﬁts incurred totalled $185 million in 2010, as compared to $173 million in the previous year. Compared to 2009, declining investment yields was a feature in most territories. This impacted the actuarial assumptions used for valuation of life insurance and annuity liabilities, generating a higher liability as a result. Sagicor Financial Corporation 31 Administrative and commission expenses recorded increases of $5 million. In summary, the Sagicor Life Inc segment recorded total comprehensive income attributable to shareholders of $30 million in 2010, a reduction from the 2009 result of $44 million. SAGICOR LIFE INC SEGMENT INCOME - $ millions Net premium revenue Net investment income Fees and other revenues Segment revenue Net beneﬁts Expenses Income taxes Segment income Income attributable to shareholders Comprehensive income attributable to shareholders 2010 2009 restated 216 80 15 311 209 77 14 300 (185) (173) (92) (5) 29 30 30 (86) (5) 36 40 44 The overall Segment net income totalled $29 million as compared to a restated $36 million for 2009. After adjusting for the net income or loss attributable to the participating policyholders of Sagicor Life Inc, the net income attributable to shareholders totalled $30 million and $40 million for 2010 and 2009 respectively. Notwithstanding the decline from 2009, the 2010 performance is in line with management’s expectations since the favourable investment yield assumption for 2009 was not projected to continue. Unrealised investment gains had a more beneﬁcial impact on other comprehensive income in 2009 than in 2010. Sagicor Life Jamaica segment This segment comprises Group subsidiaries in Jamaica and Cayman Islands conducting insurance under the Sagicor brand, and banking and other ﬁnancial services under the PanCaribbean Financial Services (PCFS) brand. The principal products of the segment are the provision of life, critical illness and health insurance, annuities, pension administration, investment management, securities dealing and commercial banking. During 2010, the Government of Jamaica (GOJ) implemented the Jamaica Debt Exchange program (JDX). The JDX was a program to exchange the majority of existing GOJ domestic debt instruments for new debt instruments having longer maturities and lower coupon rates. The exchange date for the new debt instruments was February 24, 2010. Sagicor’s Jamaica operations participated in the JDX. As a large holder of long-term GOJ bonds, the JDX program had a negative impact on current and expected future bond yields. This reduction in bond yields affected the segment’s 2010 investment income. The future bond yields impact the assumptions used in computing the actuarial liabilities. This was reﬂected in the 2009 computation of actuarial liabilities and remained effective for the 2010 computation. In addition, the interest rates payable on non- insurance liabilities also declined in 2010. With the implementation of the JDX and other ﬁscal and economic measures by the GOJ under an International Monetary Fund Standby Agreement, Jamaica in 2010 continued to experience lower inﬂation than in the relatively recent past. In 2010 the Jamaica dollar currency (JMD) experienced an overall strengthening when Sagicor Financial Corporation 32 translated to the US dollar (USD), moving from an exchange rate of JMD89:USD1 to JMD86:USD1 over the course of the year. SAGICOR LIFE JAMAICA SEGMENT Net premium revenue totalled $213 million a reduction of $19 million from 2009’s total. The reduction is a consequence of the disposal effective January 1, 2010 of Sagicor General Insurance (Cayman) Limited (SGC), which generated $22 million in premium revenue in 2009. Net investment income recorded was $157 million in 2010, a decrease of $10 million over 2009’s total. Fees and other revenue totalled $20 million in 2010, a decline of some $13 million when compared to 2009. A reversal of foreign exchange gains and the disposal of SGC are contributing factors for this variance. As a result of the foregoing, total revenue in the segment declined by $42 million in comparison to 2009. Net beneﬁts incurred in 2010 were $213 million, a decline of $39 million when compared to 2009. $17 million of this reduction is attributable to the disposal of SGC. Interest expense declined by $21 million as explained in a foregoing paragraph. Expenses recorded a slight decline of $3 million and income taxes remained constant at $9 million. INCOME - $ millions Net premium revenue Net investment income Fees and other revenues Segment revenue Net beneﬁts Expenses Income taxes Segment income Income attributable to shareholders Comprehensive income attributable to shareholders 2010 2009 213 157 20 390 (213) (112) (9) 56 32 54 232 167 33 432 (252) (115) (9) 56 34 31 The segment achieved net income of $56 million in 2010, which remained unchanged in comparison to 2009. After adjusting for minority interests, the income attributable to shareholders for the two years totalled $32 million and $34 million respectively. It should be noted that the Sagicor Group reduced its effective interest in the PCFS Group of companies from 64% to 51% in November 2009. This resulted in the reduction in income attributable to shareholders. Other comprehensive income included $28 million (2009 - $21 million) in unrealised investment gains. Due to the strengthening of the JMD in 2010, the segment recorded a currency translation gain of $10 million as compared to a currency translation loss of $22 million in 2009. These movements contributed to the overall $22 million other comprehensive income attributable to shareholders. Sagicor Financial Corporation 33 In summary, the segment contributed $54 million total comprehensive income attributable to shareholders in 2010, in contrast to the corresponding ﬁgure of $31 million for 2009. Sagicor Europe Segment This segment comprises the Sagicor at Lloyd’s business which consists primarily of property and casualty (P&C) insurance business written through Lloyd’s of London Syndicate 1206. The principal insurance lines underwritten by this syndicate are in respect of personal accident, property, liability and motor risks. The Lloyd’s of London franchise enables the syndicate to write international business outside of the United Kingdom. A substantial proportion of the syndicate’s property business is international. 2010 was a very disappointing year for this segment. Earthquakes were recorded in Chile in February and in New Zealand in September. While there were no major hurricanes affecting North America and the Caribbean, the claims generated from the aforementioned earthquakes adversely affected the 2010 results. In addition, the direct motor insurance class, underwriting motor risks in the UK, experienced exceptionally high levels of incurred claims. A trend of escalating claims became critical late in the year. Notwithstanding the implementation of premium rate increases as the year progressed, the claims experience continued to worsen. Other syndicates in the Lloyd’s UK insurance market also experienced very poor results. Net premium revenue for the year totalled $345 million, an increase of $94 million over 2009’s ﬁgure. Increases were recorded across motor, property and liability insurance lines. Foreign exchange gains contributed to the increase in other revenue of $4 million. Net beneﬁts grew to $236 million from $127 million in 2009. The overall net claims ratio incurred in 2010 for the P&C insurance lines was 70%, an increase of 17% from the 53% net claims ratio incurred in 2009. Total expenses increased in 2010 over 2009’s total by $33 million. Additional commissions costs and administrative expenses were incurred in support of the increase in premium revenue recorded. International Financial Reporting Standards (IFRS) require that non-monetary deferred premiums and commissions are brought into the income statement at the rates of exchange prevailing on the dates of inception of the premiums. Because this applies to premium and commissions, and not to the corresponding claims and administrative expenses, it means that IFRS requires different rates of exchange for different types of transactions in the income statement. The items in the table below, up to and including segment income before FX (foreign exchange) unwinding, have all been converted at consistent rates of exchange. The amount of FX unwinding disclosed in the table below is the net adjustment required to comply with IFRS. The amount of FX unwinding was minimal in 2010 as exchange rate movements of the Pounds Sterling to the other operating currencies did not have a signiﬁcant impact. In 2009, the impact was quite signiﬁcant, generating an expense of $9 million. Sagicor Financial Corporation 34 SAGICOR EUROPE SEGMENT INCOME - $ millions Net premium revenue Net investment income Fees and other revenues Segment revenue Net beneﬁts Expenses Income taxes 2010 345 3 7 355 (236) (136) 3 Segment (loss) / income before FX unwinding (14) FX unwinding Segment (loss) / income (Loss) / income attributable to shareholders Comprehensive (loss) / income attributable to shareholders 1 (13) (13) (15) 2009 251 2 3 256 (127) (103) (3) 23 (9) 14 14 18 opposed to periodic premium polices which prevail in Sagicor’s Caribbean markets. Sagicor has continued to maintain the success in this market which was established in 2009. Total settled annualised premium in 2010 was $116 million, of which $74 million comprised annuities and $42 million comprised life insurance products. Settled premium for 2009 totalled $143 million, comprising annuities $94 million and life insurance $49 million. Consequently, net premium revenue in 2010 totalling $120 million declined from 2009’s total of $153 million. Net investment income grew by $6 million to $41 million in 2010, the increase arising from the larger quantum of assets invested throughout 2010. Consistent with the reduction in premium revenue, total net beneﬁts declined by $23 million to $122 million. In 2010, expenses and income taxes were broadly consistent with the prior year amounts. Other comprehensive income includes a charge of $2 million for the retranslation of the Group’s investment in the segment. The retranslation is done from Pounds Sterling, which is the functional currency of the segment, to USD. In 2009, a retranslation gain of $4 million was recorded. Accordingly, in 2010 the total comprehensive loss for this segment totalled $15 million (2009 – income of $18 million). Sagicor USA segment This segment comprises the USA operations of Sagicor. Life insurance and annuity products are offered in this segment. The USA market has a strong appetite for single premium policies, as Sagicor Financial Corporation 35 SAGICOR USA SEGMENT INCOME - $ millions Net premium revenue Net investment income Fees and other revenue Segment revenue Net beneﬁts Expenses Income taxes Segment income Income attributable to shareholders Comprehensive income attributable to shareholders 2010 2009 restated 120 41 2 163 153 35 2 190 (122) (145) (36) (2) 3 3 7 (37) (3) 5 5 10 The segment generated net income of $3 million for 2010, compared to a ﬁgure of $5 million in 2009. In other comprehensive income unrealised investment gains were the principal feature. In summary, the total comprehensive income attributable to this segment for 2010 was $7 million. Statement of Financial Position In the Group’s consolidated statement of ﬁnancial position, assets totalled $4,867 million, an increase of $407 million during 2010. Liabilities grew by $350 million during the year to reach $4,128 million. This growth in assets and liabilities has been generated internally from operations. As of December 31, 2010, total equity amounted to $739 million, of which shareholders’ equity amounted to $566 million. With 289 million common shares outstanding, the book value per share was $1.96, up from $1.86 at the beginning of the year. Consolidated assets, liabilities and capital are discussed in the following three sections. Assets The Group’s primary assets are its investments comprising debt securities, loans, deposits, equity securities and investment property. These investments back the insurance and ﬁnancial liabilities assumed by the Group. The distribution of investments and cash is summarised in the following table. INVESTMENTS & CASH 2010 2009 $ millions % $ millions % Government debt securities 1,497 Corporate and other debt securities 1,111 Total debt securities 2,608 Loans and ﬁnance leases Deposits and repo securities Cash Equity securities Investment property Associated companies and other items 565 340 219 112 119 45 37 28 65 14 9 5 3 3 1 1,350 874 2,224 572 357 196 117 117 37 38 24 62 16 10 5 3 3 1 4,008 100 3,620 100 Debt securities remain the principal class of investment held by the Group, comprising 65% of the total. Of this percentage, 37% comprises government securities, while corporate and other securities comprise 28%. Sagicor Financial Corporation 36 The remaining assets totalled $859 million (2009 - $840 million). The more signiﬁcant balances comprising this total are reinsurance assets of $282 million, property plant and equipment of $131 million, premium receivables of $145 million, and intangible assets of $123 million. no signiﬁcant insurance risk, and supplement our life insurance and annuity suite of products. Securities sold under agreements to repurchase, customer deposits and a signiﬁcant proportion of other funding instruments represent the liabilities arising from our banking, investment management and securities dealing operations. Liabilities The Group’s principal activities consist of accepting insurance risks from policyholders and of accepting funds from depositors and lending institutions. The liabilities which arise from these activities are summarised in the following table. The remaining liabilities totalled $432 million (2009 - $452 million). Included in this total are notes and loans payable of $182 million, amounts due to reinsurers and policyholders of $80 million and general payables and accruals of $108 million. OPERATING LIABILITIES 2010 2009 Capital Life and annuity insurance contracts Health insurance contracts Property and casualty insurance contracts Investment contracts Securities sold under agreements to repurchase Customer deposits Other funding instruments and other items $ millions % $ millions % 1,840 50 1,689 41 537 294 576 174 234 1 14 8 16 5 6 41 385 304 501 168 238 51 1 12 9 15 5 7 3,696 100 3,326 100 The provision of life insurance and annuity contracts remains a core product line of Sagicor. Liabilities from these contracts represent some 50% of the Group’s operating liabilities. Property and casualty insurance contracts are a signiﬁcant product line forming 14% of operating liabilities. Investment contracts carry The capital resources of the Group consist of equity, debt and off balance sheet contingent debt. Capital resources are summarised in the following table. CAPITAL RESOURCES - $ millions Sagicor shareholders’ equity Minority shareholders’ equity Total equity Total debt Off balance sheet contingent debt Total capital resources 2010 2009 566 169 735 182 34 951 538 138 676 201 35 912 There have been no new external sources of capital during the year. There were however debt repayments of $14 million during the year as a Group company partially repaid its preference shares and as certain other debt obligations were repaid. The result is a debt to equity ratio of approximately 25% at the end of 2010 compared to a ratio of 29% a year before. Sagicor Financial Corporation 37 performance of Sagicor at Lloyd’s was a major disappointment. The combination of earthquakes in two countries with a history of infrequent exposure to such disasters and an adverse claims experience in underwriting UK motor risks meant that this segment of our business incurred a signiﬁcant loss. The economic and ﬁnancial landscape continues to exhibit challenges which will inﬂuence the Group’s performance in the foreseeable future. Particular attention has to be drawn to the natural disasters which have occurred early in 2011 in Queensland Australia, Christchurch New Zealand and in Japan. Unfortunately, these events will adversely affect the results of Sagicor at Lloyd’s in 2011. In recent years, Sagicor’s operations have become more diverse, entering the USA and Lloyd’s insurance markets. Management believes that diversiﬁcation strengthens the Group’s ability to deliver consistently favourable results to shareholders over time. In 2011, the Group will continue to reﬁne its strategies to take advantage of the opportunities available and to make adjustments when it is ﬁtting to do so. Shareholders’ equity increased by $28 million during the year. The increase largely arose from total comprehensive income of $38 million which was offset by dividends declared of $12 million. Minority interests increased during the year to $169 million from $138 million. The increased is explained by total comprehensive income generated of $44 million offset by dividends paid of $9 million and a disposal of $4 million. The Group maintained its off balance sheet letter of credit facility which supports the Sagicor at Lloyd’s operations. The change in the balance is attributable to exchange rate movements. The Group is subject to a number of capital adequacy standards for its insurance, banking, investment management and securities dealing 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 meets the prevailing capital adequacy standards and the standards it has voluntarily adopted. The principal standard followed by the Group is the Canadian Minimum Continuing Capital and Surplus Ratio (MCCSR), which was a consolidated 224% for the Group as of December 31, 2010, well in excess of the minimum recommended requirement of 150%. The MCCSR is a standard for life insurance operations. The Group’s major property and casualty operation is Sagicor at Lloyd’s, which is subject to and complies with the capital standards established by Lloyd’s of London and by the Financial Services Authority of the United Kingdom. Conclusion Sagicor Financial Corporation For Sagicor 2010 was a year of mixed results. Our Caribbean businesses performed well in a weak economic environment. Our US business continues to demonstrate promise. The 38 Believe you can and you’re half way there. 2000 Rebirth Sagicor In 2001, Sagicor acquired Life of Jamaica. Operations of Island Life and Life of Jamaica were amalgamated and the company was subsequently rebranded to Sagicor Life Jamaica Limited in 2008. In November 2002, after 162 years as a mutual company, policyholders overwhelmingly agreed to demutualise. To mark the rebirth the Company was rebranded Sagicor, a combination of two words: “Sage” meaning wise and “Cor” for heart or judgment. Sagicor Financial Corporation was established in 2002 with 45,000 of its policyholders as shareholders. The company’s Initial Public Offering was oversubscribed by 162%. Sagicor was ﬁrst listed in 2003 on the Barbados Stock Exchange and a year later on the Trinidad and Tobago Stock Exchange. To accomplish great things, we must not only act, but also dream; not only plan, but also believe. BOARD OF DIRECTORS STEPHEN McNAMARA, 60, was appointed Non- Executive Chairman on January 1, 2010, having formerly served as Vice- Chairman since June 2007. He has been an independent Director since December 2002, and is a citizen of St Lucia and Ireland. He is a British-trained Attorney-at-law, and is the Senior Partner of McNamara & Company, Attorneys-at-Law of St Lucia. Mr McNamara was elected to the Board of Sagicor Life Inc in 1997. He is Chairman of the Group’s main operating subsidiary, Sagicor Life Inc, and also of Sagicor Capital Life Insurance Company Limited, Sagicor USA, and Sagicor Finance Inc. He is also a Director of a number of other subsidiaries within the Group. ANDREW ALEONG, 50, has been an independent Director since June 2005, and is a citizen of Trinidad and Tobago. He holds an MBA from the Richard Ivey School of Business, University of Western Ontario, Canada. Mr Aleong is Group Managing Director of the Albrosco Group of Companies, Trinidad and Tobago, and has served the Trinidad and Tobago manufacturing industry for over 20 years. He is a former President of the Trinidad and Tobago Manufacturers’ Association. Mr Aleong also serves as a Director of a number of private companies. He was elected a Director of Sagicor Life Inc in 2005, and is also a Director of Sagicor Capital Life and a number of other subsidiaries within the Group. Sagicor Financial Corporation 42 PROFESSOR SIR HILARY BECKLES, K.A., 55, has been an independent Director since June 2005, and is a citizen of Barbados. 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 Sagicor Life Jamaica and a number of other subsidiaries within the Group. PETER CLARKE, 56, has been an independent Director since June 2010, and is a citizen of Trinidad and Tobago. He obtained a Bachelor of Arts degree from Yale University and a Law degree from Downing College, Cambridge University. He was called to the Bar as a member of Grays Inn, London, in 1979, and to the Bar of Trinidad and Tobago in 1980. He is a Financial Consultant with a 22-year career in stockbroking. From 1984 to 2000 he was the Managing Director of Money Managers Limited, one of the leading stockbrokers in Trinidad and Tobago. On the acquisition of Money Managers by West Indies Stockbrokers Limited (WISE), he became Managing Director of WISE in 2000 and was appointed its Chief Executive in 2001 until his retirement in 2005. Between 1980 and 1984 he practised as a Barrister-at- Law in private practice in Trinidad and Tobago. Mr Clarke is a Director of a number of companies in Trinidad and Tobago, and a former Chairman and Director of the Trinidad and Tobago Stock Exchange. He is also a member of the University of the West Indies Development and Endowment Fund and the Finance Council of the Roman Catholic Archdiocese of Port of Spain. From 2002 to 2005 he was a Director of the Trinidad and Tobago Chamber of Industry and Commerce, and from 1992 to 1995 was a member of the Betting Levy Board and Deputy Chairman of the Trinidad and Tobago Free Zones Company. Mr Clarke was elected a Director of Sagicor Life Inc in August 2010, and is also a Director of a number of other subsidiaries within the Group. Sagicor Financial Corporation 43 DR JEANNINE COMMA, 60, has been an independent Director since June 2007, and is a citizen of Trinidad and Tobago. She holds a PhD from George Washington University, Washington, DC, USA, and is also a graduate CHRISTOPHER DE CAIRES, 55, has been an independent Director since June 2005, and is a Citizen of Barbados, Guyana and the United Kingdom. He is a Chartered Accountant and holds an MBA from Henley Management of the University of the Virgin Islands. 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. She has made signiﬁcant contributions to the sustainable development of human capital within the regional business community. Dr Comma has extensive experience in 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. She is a member of The American Society for Training and Development and the Commonwealth Association of Public Administration and Management (CAPAM). Dr Comma was elected a Director of Sagicor Life Inc in 2006, and is also a Director of Sagicor Capital Life and a number of other subsidiaries within the Group. College, United Kingdom. He is the Managing Director of the Fednav Group, a private international shipping company, and has signiﬁcant experience in management and ﬁnancial services. Mr de Caires is a former Partner of PricewaterhouseCoopers where he was responsible for corporate ﬁnance, business advisory, international business and trust services in the Caribbean. He has also served as President of the Institute of Chartered Accountants of Barbados, and as Chairman of a number of Government and national institutions. He was elected a Director of Sagicor Life Inc in 2005, and is also a Director of PanCaribbean Financial Services, Sagicor USA, and a number of other subsidiaries within the Group. Sagicor Financial Corporation 44 JOYCE DEAR, 67, has been an independent Director since August 2006, and is a citizen of Barbados. She is a Fellow of the Association of Chartered Certiﬁed Accountants of the United Kingdom, and holds an MBA from the MARJORIE FYFFE-CAMPBELL (formerly Marjorie Chevannes-Campbell), 59, has been an independent Director since June 2005, and is a citizen of Jamaica. She holds an MSc in Accounting 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 in Barbados. Mrs Dear has over 31 years’ experience in rendering audit and ﬁnancial services to a wide variety of industries, including public companies, tourism and hospitality entities, manufacturing companies, statutory corporations and international funding agencies/ government-ﬁnanced programs and projects. Mrs Dear was the PricewaterhouseCoopers Industry Lead Partner for the public service assignments, and is a past President of the Institute of Chartered Accountants of Barbados. She is a former Director of a general insurance company in Barbados, and is also the Vice-Chair of the subsidiary, Globe Finance Inc. 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 Ofﬁcer of the Urban Development Corporation, Jamaica, a large property-owning company that manages several entities such as hotels, attractions, a maintenance company, a water supply company, a shopping centre, a conference centre and a golf course. Mrs Fyffe-Campbell is a part-time Lecturer in Financial and Management Accounting at the Mona School of Business of the University of the West Indies, where she is also pursuing a Doctorate in Business Administration with emphasis on corporate governance. She was elected a Director of Sagicor Life Jamaica in 2002, and is also a Director of other subsidiaries within the Group. Sagicor Financial Corporation 45 RICHARD KELLMAN, 59, was elected as a Director in June 2009, and was appointed Group Chief Operating Ofﬁcer on November 1, 2009. He is a citizen of Guyana and of the United Kingdom. He holds a BSc in Statistics from University College, London University, and is a Fellow of the Institute of Actuaries and an Associate of the Society of Actuaries. He has also attended training programs at Harvard Business School and has completed other ﬁnancial, investment and management training courses. Mr Kellman is a ﬁnancial services professional with wide knowledge regionally in the areas of ﬁnance, pensions, insurance and investments. He has business experience at board level, and is a former CEO of a quoted diversiﬁed Group with interests in insurance, banking and real estate. He has also held senior actuarial positions and served on several boards. WILLIAM LUCIE-SMITH, 59, has been an independent Director since June 2005, and is a citizen of Trinidad and Tobago. He 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 Advisor 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 Sagicor USA, Sagicor at Lloyd’s, Sagicor Life Jamaica, and a number of other subsidiaries within the Group. Sagicor Financial Corporation 46 DODRIDGE MILLER, 53, was appointed Group President and Chief Executive Ofﬁcer in July 2002, and has been a Director since December 2002. A citizen of Barbados, Mr Miller is a Fellow of the Association of Chartered Certiﬁed Accountants (ACCA), and obtained his MBA from the University of Wales and Manchester Business School. He holds an LLM in Corporate and Commercial Law from the University of the West Indies and, in October 2008, he was conferred with an Honorary Doctor of Laws degree by the University of the West Indies. He has more than 25 years’ experience in the banking, insurance and ﬁnancial services industries. Prior to his appointment as Group President and Chief Executive Ofﬁcer, he held the positions of Treasurer and Vice President – Finance and Investments, Deputy Chief Executive Ofﬁcer and Chief Operating Ofﬁcer. Mr Miller joined the Group in 1989. He is the Chairman of Sagicor at Lloyd’s, and is also a Director of Sagicor Life Inc, Sagicor USA, Sagicor Life Jamaica, PanCaribbean Financial Services and a number of other subsidiaries within the Group. JOHN SHETTLE, Jr, 56, has been an independent Director since June 2008, and is a citizen of the United States of America. He received his undergraduate degree from Washington & Lee University, and holds an MBA from the Sellinger School of Business at Loyola College, Maryland. Mr Shettle is an Operating Partner of Stone Point Capital, a private equity ﬁrm in the global ﬁnancial services industry. He has over 20 years’ experience in senior management positions in the property/ casualty, health and insurance-related services industry. More recently, he served as Senior Advisor, Lightyear Capital, a private equity ﬁrm, and President and Chief Executive Ofﬁcer of the Victor O Schinnerer Company. Prior to that, he was the Chief Executive Ofﬁcer of Tred Avon Capital Advisors, Inc, a ﬁrm providing advisory services to companies and private equity ﬁrms focused on the insurance sector. He has held senior management positions at Securitas Capital, Swiss Reinsurance Company and Frederick, the Maryland-based AVEMCO Corporation (NYSE). Mr Shettle is also a Director of Sagicor USA and a number of subsidiaries within the Group. Sagicor Financial Corporation 47 DIRECTORS’ INTERESTS Directors’ interests as at December 31, 2010 and as at the record date, April 15, 2011, are as follows: Shares as at 31-Dec-10 Shares as at 15-Apr-11 Beneﬁcial Non-beneﬁcial Beneﬁcial Non-beneﬁcial Non-Executive Directors: Stephen McNamara Andrew Aleong Professor Sir Hilary Beckles Peter Clarke Jeannine Comma Christopher de Caires Joyce Dear Marjorie Fyffe-Campbell William Lucie-Smith John Shettle, Jr Group Chief Operating Ofﬁcer: Richard Kellman President and Chief Executive Ofﬁcer: 9,834 505,002 9,579 10,000 11,523 22,378 25,000 7,484 40,000 1,000 1,000 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 16,218 505,002 9,579 10,000 11,523 22,378 25,000 7,484 45,000 1,000 1,000 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Dodridge Miller As at 31-Dec-10 Shares As at 15-Apr-11 Shares Beneﬁcial 912,050* Non-beneﬁcial Nil Beneﬁcial 912,050* Non-beneﬁcial Nil Restricted Stock Grants Restricted Stock Grants Vested 924,349 Unvested 167,208 Vested 924,349 Unvested 167,208 Stock Options Stock Options Vested 519,012 Exercised Unvested Nil 624,655 Vested 519,012 Exercised Unvested Nil 624,655 * Includes vested Restricted Stock. Sagicor Financial Corporation 48 CORPORATE GOVERNANCE REPORT Board Composition and Structure The maximum number of Directors permitted by the Articles of Incorporation of the Company is 12 and the minimum is 7. The Board of Directors presently consists of 12 Members, 10 of whom are independent Non-Executive Directors. The remaining 2 are the President and Chief Executive Ofﬁcer and the Group Chief Operating Ofﬁcer. Biographical information on the Directors and details of their interests in the Company as at December 31, 2010 and as at the record date, April 15, 2011, are set out earlier in this Report. Non-Executive Directors do not participate in performance- related incentive plans, and their remuneration consists solely of cash. The Board Chairman and Directors are paid fees, and Committee Chairmen and Members are paid an additional fee for each Committee on which they serve. Executives who are Directors are not paid fees. Board and individual Director core competencies, knowledge, experience and skills are as illustrated on the following Board Core Competency matrix: Sagicor Financial Corporation 49 a r a m a N c M n e h p e t S g n o e l A w e r d n A s e l k c e B y r a l i H r i S f o r P a m m o C e n n n a e J i r D s e r i a C e d r e h p o t s i r h C e k r a l C r e t e P r a e D e c y o J l l e b p m a C - e f f y F e i r o j r a M h t i m S - e i c u L m a i l l i W n a m l l e K d r a h c i R r e l l i M e g d i r d o D . r J , e l t t e h S n h o J Directors’ Skills and Experience General Management International Business Finance/Accounting Corporate Finance, Mergers & Acquisitions Strategic Marketing Corporate Law Banking Asset Management Insurance Human Resource Management Property Management and Development Regulatory Information Technology Other: Education Sagicor Financial Corporation 50 Rotation and Re-election of Directors The Company’s Bylaws provide that at least one-third, or the number nearest thereto, of the Directors must retire every year, but a Director shall not be required to retire unless he has been in ofﬁce for three years. Professor Sir Hilary Beckles, and Messrs Andrew Aleong, Christopher de Caires and John Shettle, Jr will retire at the Eighth Annual Meeting and, with the exception of Mr de Caires, have offered themselves for re-election. The Corporate Governance and Ethics Committee considered the candidates who are standing for election or re-election at the Eighth Annual Meeting of Shareholders, and recommends to Shareholders that all the nominees be re-elected. Proﬁles of the nominees are contained in the Management Proxy Circular accompanying the Notice of the Meeting. 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 deﬁned by our Corporate Governance Policy and their willingness and ability to devote the time necessary to fulﬁl their role as Directors. Board Responsibilities The Board of Directors is collectively responsible for providing 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’s six main responsibilities, which it executes through decision-making and oversight, are strategic planning, enterprise risk management, executive succession planning and performance evaluation, Shareholder communications and public disclosures, internal controls, and Corporate Governance. The four Committees of the Board - Audit, Corporate Governance and Ethics, Human Resource, and Investment and Risk - 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 speciﬁcally for the Board. The mandates of all the Committees comply with best practice. The respective roles of the Chairman of the Board, the Board, Committee Chairmen, Committees and Management are clearly deﬁned. The Group CEO and the Executive Committee (Excom) are responsible for the day-to-day management of the Group. Their role is to formulate and implement strategy, operational plans, policies, procedures and budgets, monitor operating and ﬁnancial performance, assess and control risk, prioritise and allocate resources and monitor competitive and environmental forces in each area of operation. The roles of functional Group Executives, who form part of Excom, are also speciﬁcally deﬁned. Board Evaluation The Board undertook its annual performance evaluation to assess the effectiveness of the Board’s performance in 2010 as a whole, as well as that of the Chairman, Directors, Board Committee Chairmen, Board Committees, the President, Management and the Corporate Secretary. The 2010 evaluation took the form of a self- assessment and peer review questionnaire, and the ﬁndings have revealed ongoing opportunities for the continued enhancement of our Corporate Governance practices. The Corporate Governance and Ethics Committee also completed a detailed and rigorous self-assessment of Directors’ independence as deﬁned under the Corporate Governance architecture. Areas addressed included the relationship between Sagicor and Directors in terms of legal and regulatory issues faced by Directors, their share ownership and share dealings, cross directorships and Sagicor Financial Corporation 51 potential conﬂicts of interest. The Committee concluded that Directors all meet the independence requirements under our Corporate Governance Policy. On-going Director Education A comprehensive Director Education Program was held during the year, which also served as an induction exercise to assist Mr Peter Clarke, who was elected a Director in 2010, in understanding the operations of the Group and the markets in which it operates. These sessions expedited his effectiveness as a new Director. Subjects covered included the allocation of capital and expected returns on allocated capital, capital standards and requirements, actuarial reserving, asset liability management, reinsurance, risk management, ﬁnancial reporting, and key ﬁnancial monitoring ratios. Board Operations During 2010, Management engaged the Board of Directors (BOD) 14 times, either in formal meetings or by requests for round-robin decisions in between meetings. The Audit Committee (AC) met 6 times; the Corporate Governance and Ethics Committee (CGC) met 7 times; the Human Resource Committee (HRC) met 5 times, and the Investment and Risk Committee (IRC) met 3 times. Directors’ record of attendance was as follows: Stephen McNamara Andrew Aleong Prof Sir Hilary Beckles Peter Clarke* Dr Jeannine Comma Christopher de Caires Joyce Dear Marjorie Fyffe- Campbell Richard Kellman William Lucie-Smith Dodridge Miller John Shettle, Jr BOD 14 of 14 12 of 14 8 of 14 6 of 7 11 of 14 11 of 14 14 of 14 12 of 14 13 of 14 13 of 14 14 of 14 7 of 14 AC 6 of 6 6 of 6 4 of 6 6 of 6 6 of 6 6 of 6 6 of 6 * Mr Peter Clarke was elected a Director on June 11, 2010. CGC 7 of 7 HRC 4 of 4 5 of 7 4 of 5 5 of 5 5 of 5 5 of 5 6 of 7 5 of 7 3 of 3 IRC 3 of 3 3 of 3 1 of 1 3 of 3 1 of 3 3 of 3 Total 34 of 34 21 of 23 17 of 26 7 of 8 20 of 25 16 of 19 20 of 20 24 of 27 13 of 14 22 of 23 31 of 35 13 of 20 % 100 91 65 88 80 84 100 89 93 96 89 65 Sagicor Financial Corporation 52 The Board manages an annual schedule of critical agenda items designed to ensure that it fulﬁls its recurring obligations, and that Board-reserved items are routinely considered. The principal business at Board meetings in 2010 was to: (cid:116)(cid:1) consider and approve the Group strategic plan, capital plan and projections for the period 2010 to 2012; (cid:116)(cid:1) review periodically the Group capital and liquidity plan, strategic and business development initiatives forming part of the Strategic Plan, and other key initiatives; (cid:116)(cid:1) consider and approve strategic acquisitions and divestments in furtherance of Group strategy; (cid:116)(cid:1) receive and consider periodic reports and presentations from Management on the performance of various subsidiaries within the Group and the Group on a consolidated basis; (cid:116)(cid:1) review and approve unaudited interim and audited annual consolidated ﬁnancial statements; (cid:116)(cid:1) approve interim and ﬁnal dividends; and (cid:116)(cid:1) receive reports on work being carried out by Board Committees, and consider and approve their recommendations as required. Committee Reports Corporate Governance and Ethics Committee Report The role of the Corporate Governance and Ethics Committee is principally to develop and recommend to the Board policies and procedures to establish and maintain best practice standards of Corporate Governance and Corporate Ethics. It also manages the process for Director succession, Director performance, the operation of the President, the composition of Board and Committees, Shareholder communications, and corporate image. The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current Members are Stephen McNamara (appointed a Member on March 9, 2004 and Chairman on February 17, 2010), Professor Sir Hilary Beckles (appointed a Member on March 18, 2009), Marjorie Fyffe-Campbell (appointed a Member on March 18, 2009) and John Shettle Jr (appointed August 18, 2010). The Committee’s business during 2010 included: (cid:116)(cid:1) reviewing Board and Director core competencies and identifying gaps to inform the nomination process; (cid:116)(cid:1) overseeing Director nominations, Board Committee, subsidiary and outside Board appointments; (cid:116)(cid:1) overseeing the management of independence requirements and conﬂicts of interest; (cid:116)(cid:1) reviewing the adequacy of Director and Ofﬁcer liability insurance cover; (cid:116)(cid:1) monitoring Director attendance; (cid:116)(cid:1) reviewing investor relations plans and programs; (cid:116)(cid:1) generally monitoring the operation of Corporate Governance practices; and (cid:116)(cid:1) assessing the adequacy of the Committee’s mandate and evaluating its effectiveness in fulﬁlling the same. Audit Committee Report The mandate of the Audit Committee is to oversee the external audit process, and manage all aspects of the relationship with the External Auditors. The Committee is also required to review the annual audit plan, interim and audited ﬁnancial statements, and international ﬁnancial reporting standards having a signiﬁcant impact on the ﬁnancial statements. It also reviews actuarial reports and recommendations. Sagicor Financial Corporation 53 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. The Committee meets the independence and skill requirements of the Group’s Corporate Governance Policy. The majority of the Members are ﬁnancially literate, and three Members, William Lucie-Smith, Joyce Dear and Marjorie Fyffe-Campbell, all Chartered Accountants, have recent and relevant accounting expertise. The current Members are William Lucie-Smith (appointed a Member on August 24, 2005 and Chairman on June 28, 2006), Andrew Aleong (appointed a Member on June 28, 2006), Joyce Dear (appointed a Member on August 11, 2006), Marjorie Fyffe- Campbell (appointed a Member on September 11, 2008) and Dr Jeannine Comma (appointed a Member on September 11, 2008). The 2010 activities of the Committee included: (cid:116)(cid:1) reviewing and approving the external audit plan and timetable; (cid:116)(cid:1) evaluating the performance of the External Auditors for Group entities and approving their audit fees; (cid:116)(cid:1) reviewing the External Auditors’ 2009 management letter and report on the 2009 audit; (cid:116)(cid:1) approving the 2010 audit engagement letter; (cid:116)(cid:1) approving interim and annual audited ﬁnancial statements, dividend recommendations, valuation of intangible and other assets, goodwill impairment tests, actuarial reports and reports from the External Auditors on key audit issues; (cid:116)(cid:1) reviewing the ﬁnancial performance of the Group and key subsidiaries; (cid:116)(cid:1) approving the 2010 Internal Audit Plan, reviewing Internal Audit reports and monitoring Management action on open Internal Audit items; (cid:116)(cid:1) reviewing compliance with various ﬁnancial covenants; (cid:116)(cid:1) reviewing reports on pending material claims and litigation; (cid:116)(cid:1) reviewing regulatory compliance reports; (cid:116)(cid:1) assessing the adequacy of the Committee’s mandate and evaluating its effectiveness in fulﬁlling the same. Human Resource Committee Report The role of the Human Resource Committee is to advise the Board with respect to compensation policies, programs and plans, human resources policies and practices to attain the Company’s strategic goals, executive management recruitment, succession plans, performance evaluation and compensation. The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current Members are Christopher de Caires (appointed Chairman on June 28, 2006 and a Member on October 26, 2005), Professor Sir Hilary Beckles (appointed a Member on June 28, 2006), Dr Jeannine Comma (appointed a Member on September 18, 2007) and Stephen McNamara (appointed a Member on August 18, 2010). During the year the Committee: (cid:116)(cid:1) reviewed progress in the implementation of the Group Global Human Resources Development and Compensation Strategy, designed to standardise human resource practices, and to facilitate knowledge transfer of human resource policies and practices within the Group; (cid:116)(cid:1) examining the implications of changes to International (cid:116)(cid:1) reviewed executive performance, compensation and terms of Financial Reporting Standards; engagement; (cid:116)(cid:1) monitored succession planning and leadership and development plans at the executive level; Sagicor Financial Corporation 54 (cid:116)(cid:1) granted awards to qualiﬁed participants under the annual cash incentive, long-term incentive plan (LTI) and employee share ownership plan (ESOP); (cid:116)(cid:1) reviewed aspects of the rules of the Company’s annual long- term incentive plans; (cid:116)(cid:1) made incentive awards based on performance against established benchmarks, and (cid:116)(cid:1) assessed the adequacy of the Committee’s mandate and evaluated its effectiveness in fulﬁlling the same. Investment and Risk Committee Report The Investment and Risk Committee is charged with ensuring generally that the Group manages risk within its deﬁned philosophy and appetite, and in compliance with policy risk parameters. Its speciﬁc mandate is to ensure that an appropriate enterprise risk management framework is implemented throughout the Group, approve risk policies and risk undertakings and exposures reserved for Board decision. It continually monitors exposures relating to insurance, ﬁnancial and operational risks. Committee Members are required to understand the enterprise’s signiﬁcant inherent risks and the policies and controls used by Management to assess, manage and report these risks. The Committee regularly reviews the Group risk proﬁle, and assesses Management’s plans for ensuring ﬁnancial stability and capital soundness. The Committee meets the independence requirements of the Group’s Corporate Governance Policy. The current Members are Stephen McNamara (appointed a Member on November 26, 2003 and Chairman on February 17, 2010), Andrew Aleong (appointed a Member on March 18, 2009), William Lucie-Smith (appointed a Member on October 26, 2005), John Shettle, Jr, (appointed a Member on March 18, 2009) and Peter Clarke (appointed a Member on August 18, 2010). In 2010, the Committee saw the results of Management’s work to strengthen aspects of the Group’s enterprise risk management architecture, which focused on infrastructural development, risk identiﬁcation, assessment and prioritisation, and the development of quantitative risk models for assessing risks to which the Group is exposed, including the key risks relating to interest rate, credit and liquidity. The Committee’s work included: (cid:116)(cid:1) review of interest rate, credit and liquidity risk dashboards and ratings for the Company as a whole, and for its major subsidiaries; (cid:116)(cid:1) monitoring of risk exposures and review of mitigation strategies designed to manage risk; and (cid:116)(cid:1) assessment of the adequacy of the Committee’s mandate and an evaluation of its effectiveness in fulﬁlling the same. Enterprise Risk Management The Group continued its work to strengthen its integrated and centralised risk management function. The enterprise risk management framework comprises articulation of risk philosophy and appetite, risk structures and processes, risk policies and a regime of monitoring risk exposures both at the enterprise and subsidiary levels. The Group’s activities of issuing insurance contracts, accepting funds from depositors, and investing insurance premium and deposit receipts in a variety of ﬁnancial and other assets expose the Group to various insurance, ﬁnancial and operational risks. Insurance risks include pricing, claims and lapse risks. Financial risks include credit, liquidity, interest rate and market risks. Operational risks include fraud, damage to physical assets, improper business practices, improper employment practices, business interruption and system failures, and execution and process errors. Exposure to and sensitivity to ﬁnancial and Sagicor Financial Corporation 55 insurance risks are disclosed in Notes 41 and 42 respectively to the 2010 audited ﬁnancial statements contained in this Annual Report. Internal Audit The mission of Group Internal Audit is to provide independent, objective assurance and consulting services designed to add value and improve the organisation’s operations by utilising an appropriate risk-based audit methodology across the Group. It helps the organisation accomplish its objectives by bringing a systematic, disciplined approach to the evaluation and improvement of risk management, control, and governance processes. The scope of work of Internal Audit is to determine whether the organisation’s network of risk management, control, and governance processes, as designed and represented by Management, is adequate and functioning in a manner to ensure that: (cid:116)(cid:1) risks are appropriately identiﬁed and managed; (cid:116)(cid:1) interaction with the various governance groups occurs as needed; (cid:116)(cid:1) signiﬁcant ﬁnancial, managerial, and operating information is accurate, reliable, and timely; (cid:116)(cid:1) employees’ actions are in compliance with policies, standards, procedures, applicable laws and regulations; (cid:116)(cid:1) resources are acquired economically, used efﬁciently, and adequately protected; (cid:116)(cid:1) programs, plans, and objectives are achieved; (cid:116)(cid:1) quality and continuous improvement are fostered in the During 2010, Group Internal Audit continued work on its risk- based, centralised approach to a range of activities and assurance reviews across the Group in furtherance of its annual plan. Operating through a modiﬁed shared services model, the Internal Audit function was able to allocate resources in the most efﬁcient and effective way. Compliance Sagicor’s response to the increasing complexity of regulatory risks has been to develop a centralised compliance function to oversee the management of regulatory risks across the Group, and to formalise reporting to the Audit Committee on all aspects of regulatory compliance. During 2010, regular compliance monitoring and reporting continued to be executed. Code of Business Conduct and Ethics Sagicor’s Code of Business Conduct and Ethics (which codiﬁes our corporate value system embracing legal, moral and ethical conduct, accountability, corporate social responsibility and leadership) requires Directors, Management, Staff and Advisors to acknowledge, on an annual basis, that they have read the Code, and whether or not they are in compliance. Mechanisms through which code violations can be reported and channelled to the appropriate parties operated reasonably satisfactorily, including widely available anonymous whistle-blowing facilities. These enabled Management to take timely corrective action. Further training of Staff on the whistle-blowing facilities available to them is planned for 2011. organisation’s control process; and Investor Relations and Communications (cid:116)(cid:1) signiﬁcant legislative or regulatory issues impacting the organisation are recognised and addressed appropriately. During 2010, we considerably improved our investor relations communications program with the introduction of quarterly Sagicor Financial Corporation 56 brieﬁngs to communicate our performance and major initiatives to the market, through the Media, Analysts and Brokers. We developed a new corporate website, designed speciﬁcally for Shareholders and Investors, which publishes ﬁnancial, governance and other material information. We also regularly utilise the print media and our website to communicate information on a timely basis. We continue to ensure that price-sensitive information is released to the market at the same time, and to manage our Insider Trading Policy as an integral part of our Code of Business Conduct and Ethics. Shareholders who comprise the largest single geographical group of 44%. We also regard our annual Shareholders’ meetings as an important opportunity to interact further, particularly with smaller investors who have an opportunity to ask questions of Directors, both during the formal meeting and informally after the meeting. By Order of the Board of Directors. Cognisant of the fact that our Shareholders resident in Trinidad and Tobago often do not have an opportunity to attend our Annual Meetings of Shareholders held in Barbados, we extended the scope of our annual investor brieﬁngs in Trinidad and Tobago in 2010 to allow Directors to interact with larger numbers of these Sandra Osborne, QC Corporate Secretary May 10, 2011 Sagicor Financial Corporation 57 EXECUTIVE MANAGEMENT DODRIDGE D. MILLER, FCCA, MBA, LLM, LLD (Hons.) Group President and Chief Executive Ofﬁcer RICHARD BYLES, BSC, MSC President and Chief Executive Ofﬁcer, Sagicor Life Jamaica Limited J. EDWARD CLARKE, FCCA, CIA Chief Operating Ofﬁcer, Sagicor Life Inc Edward Clarke was appointed to the position of Chief Operating Ofﬁcer for Sagicor Life Inc in September, 2010. Prior to this, he held the position of Group Internal Auditor. Mr. Clarke is a Fellow of the Association of Chartered Certiﬁed Accountants and is a Certiﬁed Internal Auditor with more than 25 years’ experience in the ﬁeld of auditing and ﬁnance. 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 ﬁnance team in Barbados, Nigeria and the USA. Prior to joining Sagicor, Mr. Clarke was the Chief Finance Ofﬁcer of Goddard Enterprises Limited. Dodridge Miller is Group President and Chief Executive Ofﬁcer of the Sagicor Group of Companies. He is a Fellow of the Association of Chartered Certiﬁed Accountants (FCCA), and obtained his MBA from the University of Wales and Manchester Business School. He holds an LLM in Corporate and Commercial Law from the University of the West Indies, and in October 2008, he was conferred with an Honorary Doctor of Laws degree by the University of the West Indies. He has more than 20 years experience in the insurance and ﬁnancial services industries. Prior to his appointment as Group President and Chief Executive Ofﬁcer, he previously held the positions of Treasurer and Vice-President – Finance and Investments, Deputy Chief Executive Ofﬁcer and Chief Operating Ofﬁcer. Mr. Miller is the Chairman of Sagicor at Lloyd’s, and is a director of a number of other companies within the Sagicor Group and the Caribbean Private Sector. Richard Byles is President and CEO of Sagicor Life Jamaica Limited, a member of the Sagicor Group. He is Chairman of the Board of PanCaribbean Financial Services Ltd., Sagicor Property Services Limited, Sagicor Life of the Cayman Islands Ltd., Sagicor Insurance Managers (Cayman) and Desnoes and Geddes. He also serves on the boards of several subsidiary and associated companies as well as Pan Jamaican Investment Trust Limited. He has earned valuable experience and within the ﬁnancial sector spanning the areas of Life, Health and General Insurance, Asset and Investment Management, Banking, Pension Administration, Property Development and Reinusrance Management. Mr. Byles holds a BSc in Economics from the University of the West Indies and an Ms.c in National Development from the University of Bradford, England. Sagicor Financial Corporation 58 DR. M. PATRICIA DOWNES-GRANT, BA, MA MBA, DBA President and Chief Executive Ofﬁcer, Sagicor Life Inc Dr. Patricia Downes-Grant was appointed President and Chief Executive Ofﬁcer of Sagicor Life Inc on January 1, 2006, having served as Group Chief Operating Ofﬁcer, since July 1, 2002. She joined Sagicor in 1991 and held several senior positions, including those of Vice President, (Investments), and Treasurer and Executive Vice President (Finance and Investments) before being appointed Chief Executive Ofﬁcer. She holds an MBA in Finance, an MA in Economics, and a Doctorate in Business Administration (Finance). 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. J. ANDREW GALLAGHER, FSA, FCIA Chief Risk Ofﬁcer RICHARD M. KELLMAN, BSC, FIA, ASA Group Chief Operating Ofﬁcer Andrew Gallagher was appointed to the position of Chief Risk Ofﬁcer for the Group in 2007. He joined Sagicor in August 1997, and previously held the position of Resident Actuary. He holds a Bachelor of Mathematics degree from the University of Waterloo, and is both a Fellow of the Canadian Institute of Actuaries and a Fellow of the Society of Actuaries. Prior to joining Sagicor, Mr Gallagher worked with Eckler Partners in Toronto in their ﬁnancial institutions practice. He has over 20 years of experience in the industry. Richard Kellman was appointed to the post of Group Chief Operating Ofﬁcer of Sagicor Financial Corporation in November, 2009. He holds a BSc in Statistics from University College, London University, and is a Fellow of the Institute of Actuaries and an Associate of the Society of Actuaries. He has also attended training programmes at Harvard Business School and has completed other ﬁnancial, investment and management training courses. Mr. Kellman is a ﬁnancial services professional with wide knowledge regionally in the areas of ﬁnance, pensions, insurance and investments. He has held senior actuarial positions in the insurance industry, is a former CEO of the Guardian Holdings Group, has business experience at board level, and prior to joining Sagicor, was the Executive Ofﬁcer of the Caribbean Court of Justice Trust Fund. He is a Director of Sagicor Financial Corporation, a position he has held since June 2009. Sagicor Financial Corporation 59 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. PHILIP N.W. OSBORNE, BSC, ACA, FCA Chief Financial Ofﬁcer Philip Osborne was appointed Chief Financial Ofﬁcer for the Group in 2003. He has held senior ﬁnance positions in life insurance for over 20 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, of Almond Resorts Inc, a publicly listed company in Barbados and of TD Reinsurance (Barbados) Inc, a reinsurance company. Mr. Osborne is a UK-trained chartered accountant and has worked in professional accounting ﬁrms in London and Barbados over a ten-year period. He also holds a BSc in mathematics with Computer Science from the University of London. MAXINE MACLURE, BSC, MED, MBA Executive Vice President, Corporate Services and Chief Compliance Ofﬁcer 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 ﬁrst 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 ﬁnancial sector crisis. She also spent seven years as a Senior Government Financial Sagicor Financial Corporation 60 SANDRA OSBORNE, SCM, QC, BSC, LLB, FCIS Executive Vice President, General Counsel and Secretary 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 ﬁeld, having previously practiced as a Crown Counsel and at the private Bar in civil practice 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 Certiﬁcate in Legal Education, Hugh Wooding Law School, Council of Legal Education, Trinidad. She is also a Fellow of the Institute of Chartered Secretaries and Administrators in Canada and 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 President and Chief Executive Ofﬁcer, Sagicor International MELBA SMITH, BA Vice President, Corporate Communications Ravi Rambarran is President and Chief Executive Ofﬁcer of Sagicor International. His work experience includes Pensions Actuary of Life of Jamaica (LOJ), Appointed Actuary of Global Life Bahamas and Global Life Cayman, Chief Financial Investment Ofﬁcer of LOJ, Managing Director of NCB Capital Markets and West Indian Trust Company, part-time Lecturer in Actuarial Science at the University of the West Indies and running his own actuarial practice. Prior to joining LOJ, Mr. Rambarran was a Consulting Actuary with Aon Group and the HSBC Group in the United Kingdom. Mr. Rambarran has a BSc(Hons) in Actuarial Science from City University, London, and an MS.c 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 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 ﬁrst 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 Communications. 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 communication, public relations and management. Sagicor Financial Corporation 61 2005 – Present International Expansion Sagicor’s international strategy allowed the Group to diversify and expand its presence in the US and European Financial Markets. In 2005 this expansion began with the acquisition of American Founders Life, a US-based insurance entity. Rebranded Sagicor Life Insurance Company Limited, it is licensed to operate in 44 states and the District of Columbia. In 2007, SFC listed on the London Stock Exchange, the ﬁrst Caribbean company to be admitted to the LSE’s main market. That same year, Sagicor acquired Gerling at Lloyd’s Group in the UK, which was rebranded Sagicor at Lloyd’s. The second acquisition in Europe was Byrne and Stacey Underwriting. In late 2008 Sagicor at Lloyd’s expanded its operations by acquiring a Life Syndicate. Opportunities multiply as they are seized. INDEX TO THE FINANCIAL STATEMENTS AND NOTES Page Consolidated Statement of Financial Position. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 12. Miscellaneous Assets and Receivables Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 13. Actuarial Liabilities Consolidated Statement of Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . . . . . . 70 14. Other Insurance Liabilities Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 15. Investment Contract Liabilities Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 16. Notes and Loans Payable 1. Incorporation and Principal Activities 73 17. Deposit and Security Liabilities 2. Accounting Policies 73 18. Provisions 3. Critical Accounting Estimates and Judgements 92 19. Income Tax Liabilities 4. Segments 5. Investment Property 6. Property, Plant and Equipment 94 20. Accounts Payable and Accrued Liabilities 106 21. Share Capital 107 22. Reserves 7. Investment In Associated Companies 108 23. Participating Accounts 8. Intangible Assets 9. Financial Investments 10. Reinsurance Assets 11. Income Tax Assets 64 Sagicor Financial Corporation 109 24. Premium Revenue 111 25. Net Investment Income 113 26. Fees And Other Revenue 113 27. Policy Benefits and Change in Actuarial Liabilities Page 113 114 117 118 119 119 120 120 120 120 121 122 122 123 124 124 Page 171 174 177 178 178 Page 28. Interest Expense 29. Employee Costs 124 44. Analysis of Property and Casualty Claim Liabilities 125 45. Capital Management 30. Employee Share Based Compensation 125 46. Statutory Restrictions on Assets 31. Employee Retirement Benefits 129 47. Fiduciary Risk 32. Income Taxes 33. Deferred Income Taxes 34. Earnings and Dividends per Common Share 35. Other Comprehensive Income 36. Cash Flows 37. Divestiture, Acquisitions and Ownership Changes 38. Restatements 39. Commitments and Contingent Liabilities 40. Related Party Transactions 41. Financial Risk 42. Insurance Risk 43. Sensitivity Analysis of Actuarial Liabilities 131 48. Events after December 31, 2010 132 133 134 135 136 137 138 139 140 163 169 Sagicor Financial Corporation 65 AUDITORS’ REPORT 66 ACTUARY’S REPORT 67 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 (cid:1) (cid:1) Note 2010 2009 (restated) 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 5 6 7 8 9 10 11 12 119,169 131,407 116,845 128,883 32,929 32,674 123,379 129,428 3,636,832 3,274,442 281,848 294,879 27,764 31,790 295,288 218,635 255,011 196,020 4,867,251 4,459,972 (cid:1) (cid:1) These financial statements have been approved for issue by the Board of Directors on March 31, 2011(cid:1) (cid:1) Director (cid:1) (cid:1) (cid:1) Director 68 Sagicor Financial Corporation (cid:1) (cid:1) LIABILITIES Actuarial liabilities Note 2010 2009 (restated) 13 1,753,712 1,612,531 Other insurance liabilities 14 664,881 501,769 Investment contract liabilities 15 294,338 304,397 Total policy liabilities 2,712,931 2,418,697 Notes and loans payable 16 181,885 200,844 Deposit and security liabilities 17 983,551 907,487 Provisions 18 38,834 39,359 Income tax liabilities 19 23,800 16,490 Accounts payable and accrued liabilities 20 187,409 195,667 Total liabilities 4,128,410 3,778,544 EQUITY Share capital Reserves 21 277,172 278,252 22 (14,406) (42,609) Retained earnings 302,786 302,431 Total shareholders’ equity 565,552 538,074 Participating accounts 23 4,347 5,851 Minority interest in subsidiaries 168,942 137,503 Total equity 738,841 681,428 Total equity and liabilities 4,867,251 4,459,972 CONSOLIDATED STATEMENT OF INCOME Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 24 24 25 26 27 27 28 (cid:1) REVENUE Premium revenue Reinsurance premium expense Net premium revenue Net investment income Fees and other revenue Total revenue BENEFITS Policy benefits and change in actuarial liabilities Policy benefits and change in actuarial liabilities reinsured Net policy benefits and change in actuarial liabilities Interest expense Total benefits EXPENSES Administrative expenses Commissions and related compensation Premium taxes Finance costs Depreciation and amortisation Total expenses INCOME BEFORE TAXES Income taxes NET INCOME FOR THE YEAR Note 2010 2009 (restated) Note 2010 NET INCOME ATTRIBUTABLE TO: 1,047,021 1,007,526 Shareholders (146,071) (164,584) Participating policyholders 900,950 842,942 Minority interest 293,280 294,216 61,867 68,176 1,256,097 1,205,334 Net income attributable to shareholders - EPS 16,560 (1,265) 26,340 41,635 2009 (restated) 66,846 (4,351) 25,062 87,557 Basic earnings per common share Fully diluted earnings per common share 34.1 34.1 5.7 cents(cid:1) 5.7 cents(cid:1) 24.0 cents 23.9 cents (cid:1) (cid:1) 745,079 (53,370) 691,709 77,997 769,706 657,731 (51,389) 606,342 101,899 708,241 212,092 198,362 174,116 149,685 8,600 8,123 16,369 18,269 15,375 18,659 429,446 390,204 32 56,945 (15,310) 41,635 106,889 (19,332) 87,557 Sagicor Financial Corporation 69 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 Note 2010 2009 (restated) NET INCOME FOR THE YEAR 41,635 87,557 OTHER COMPREHENSIVE INCOME 35 Changes in fair value reserves: Owner occupied property Available for sale financial assets Actuarial liabilities Cash flow hedges Retranslation of foreign currency operations Other items Other comprehensive income for the year, net of tax 770 1,331 43,097 43,890 (10,576) - (17,106) (1,701) 33,291 26,414 6,007 (309) 38,989 (12,996) (129) 13,289 TOTAL COMPREHENSIVE INCOME, NET OF TAX 80,624 100,846 TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Shareholders Participating policyholders Minority interest 38,208 83,053 (1,247) (4,533) 43,663 80,624 22,326 100,846 Total comprehensive income attributable to shareholders: Total comprehensive income per common share Total comprehensive income per common share on a fully diluted basis 34.1 34.1 13.2 cents 13.1 cents 29.8 cents 29.7 cents 70 Sagicor Financial Corporation CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Year ended December 31, 2010 Balance, beginning of year, as restated (note 38) Total comprehensive income Issue of shares Dividends declared (note 34.2) Disposal of interest in subsidiary Other movements Balance, end of year Year ended December 31, 2009 (restated) Share Capital (note 21) Reserves (note 22) Retained Earnings Total (cid:54)hareholders (cid:40)quity Participating Accounts (note 23) Minority Interest Total (cid:40)quity 278,252 - (42,609) 21,648 302,431 16,560 659 - - 538,074 38,208 659 - - (1,739) 277,172 - (11,591) (11,591) 64 - 6,491 (4,614) 64 138 (14,406) 302,786 565,552 5,851 (1,247) - - - (257) 4,347 137,503 43,663 264 (8,988) (3,722) 222 168,942 681,428 80,624 923 (20,579) (3,658) 103 738,841 Balance, beginning of year (note 38) 258,153 (72,577) 264,030 449,606 10,644 121,397 581,647 Total comprehensive income - 16,336 66,717 83,053 (4,533) 22,326 100,846 Issue of shares 20,981 - - 20,981 - 630 21,611 Dividends declared (note 34.2) - - Changes in the ownership interest of subsidiaries (note 37.2) Other movements Balance, end of year - 6,756 (882) 6,876 (11,117) (11,363) (5,836) (11,117) - (11,333) (22,450) (4,607) - 4,332 (275) 158 (260) 151 49 278,252 (42,609) 302,431 538,074 5,851 137,503 681,428 Sagicor Financial Corporation 71 CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 Note 2010 2009 (restated) - 19,562 (1,739) (11,441) (882) (10,606) 114 762 (8,988) (11,248) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Note 2010 56,945 36.1 (13,736) 2009 (restated) 106,889 38,576 244,164 246,714 (95,283) (17,506) (113,345) (16,436) FINANCING ACTIVITIES Common shares issued Net purchase of treasury shares Dividends paid to shareholders Shares issued to minority interest Dividends paid to minority interest OPERATING ACTIVITIES Income before taxes Adjustments for non-cash items, interest and dividends Interest and dividends received Interest paid Income taxes paid Changes in operating assets Changes in operating liabilities Net cash flows (used in) / from operating activities 36.1 36.1 (355,140) (347,772) Notes and loans payable, net 36.3 (14,452) 36,833 168,348 164,081 (12,208) 78,707 Net cash flows (used in) / from financing activities (36,506) 34,421 Effects of exchange rate changes 582 2,735 INVESTING ACTIVITIES Property, plant and equipment, net 36.2 Investment in associated companies, net Intangible assets, net Divestiture and acquisition of subsidiaries and insurance businesses, net of cash and cash equivalents (10,252) 1,357 (5,066) 11,543 (9,634) (337) (2,684) (442) Net cash flows used in investing activities (2,418) (13,097) NET CHANGE IN CASH AND CASH EQUIVALENTS (50,550) 102,766 Cash and cash equivalents, beginning of year 329,618 226,852 CASH AND CASH EQUIVALENTS, END OF YEAR 36.4 279,068 329,618 72 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 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. Sagicor and its subsidiaries ‘the Group’ operate across the Caribbean, in the United States of America (USA) and in the United Kingdom (UK). Details of the Sagicor’s holdings and operations are set out in note 4. The principal activities of the Sagicor Group are as follows: (cid:1) (cid:1) (cid:1) (cid:1) Life and health insurance Annuities and pension administration services Property and casualty insurance Banking, investment management and other financial services For ease of reference, when the term “insurer” is used in the following notes, it refers to either one or more Group subsidiaries that engages in insurance business. 2. ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. (cid:1) 2.1 Basis of preparation These consolidated financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS). Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) The Group has adopted accounting policies for the computation of actuarial liabilities on life insurance and annuity contracts which comply with the Canadian Asset Liability Method (CALM). As no specific guidance is provided by IFRS for computing actuarial liabilities, management has judged that CALM should continue to be applied. The adoption of IFRS 4 – Insurance Contracts, permits the Group to continue with this accounting policy, with the modification required by IFRS 4 that rights under reinsurance contracts are measured separately. The consolidated financial statements are prepared under the historical cost convention except as modified by the revaluation of investment property, owner-occupied property, available for sale investment securities, financial assets and liabilities held at fair value through income, actuarial liabilities and associated reinsurance assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas when assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3. All amounts in these financial statements are shown in thousands of United States dollars, unless otherwise stated. (cid:1) (a) Amendments to IFRS There are no new or amended standards which are effective for the 2010 financial year which have a significant impact on the presentation, measurement or disclosure in the Group’s financial statements. Amended standards which are effective for the 2010 financial year that have no significant impact on the Group’s financial statements are listed in the following table. Sagicor Financial Corporation 73 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) 2.1 Basis of preparation (continued) IFRS Subject of amendment IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations IFRS 8 – Operating Segments Disclosure of information about segment assets IAS 1 – Presentation of Financial Statements IAS 7 – Statement of Cash Flows Current/non-current classification of convertible instruments Classification of expenditures on unrecognised assets (cid:1) IFRIC IFRIC 17 IFRIC 18 IFRIC 9 IFRIC 16 Subject / subject of amendment Distribution of non-cash Assets to Owners Transfers of Assets from Customers Reassessment of Embedded Derivatives Hedges of a Net Investment in a Foreign Operation (c) New and amended standards and interpretations which are not yet effective Certain new standards and amendments have been issued which were not effective at the date of the financial statements. The Group has adopted the amendments to IAS 12 Income Taxes – Deferred Tax: Recovery of Underlying Assets. The amendments provide a practical approach for measuring deferred tax liabilities and deferred tax assets in respect of investment property. The adoption of this amended standard clarifies the treatment of deferred tax on the fair value appreciation of investment property and has had no impact on the financial statements. The Group has not adopted any other amended standard or interpretation. The only change in standards and future presentation, measurement or disclosure of the Group’s financial statements is IFRS 9 – Financial Instruments. This standard has an effective date of January 1, 2013. Comments on the standard are as follows: interpretations which may have a significant effect on IAS 17 - Leases Classification of leases of land and buildings IAS 18 - Revenue Determining whether an entity is acting as a principal or as an agent IAS 36 – Impairment of Assets Unit of accounting for goodwill impairment test IAS 39 – Financial Instruments – Recognition and Measurement Treating loan repayment penalties as closely related embedded derivatives Scope exemption for business combination contracts Cash flow and hedge accounting (b) Amendments to International Financial Reporting Interpretations The International Financial Reporting Interpretations Committee (IFRIC) has issued new or amended interpretations which are effective from 2010. These interpretations, which do not impact significantly the presentation, measurement or in disclosure in these financial statements, are as follows: (cid:1) 74 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.1 Basis of preparation (continued) IFRS 9 - Comments 2.2 Basis of consolidation (a) Subsidiaries This standard deals with the classification and measurement of financial instruments, and replaces sections of IAS 39 – Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value. The determination is based on how an entity manages its financial instruments and the contractual cash flow characteristics of the financial assets. IFRS 9 has amended the treatment, applicable to financial liabilities designated at fair value, of changes in own credit risk. Such changes are to be recorded in other comprehensive income unless part of a hedging relationship. This standard does not address changes contemplated by the International Accounting Standards Board with respect to the following related items: (cid:1) (cid:1) impairment methodology for financial assets hedge accounting (cid:1) (cid:1) (d) Changes in accounting policies The Group has changed its accounting policies for insurance contracts as follows: (cid:1) (cid:1) Changes in actuarial liabilities arising from fair value movements in available for sale debt securities. This change is further described and disclosed in notes 2.13(a), 13.2, 22, 23, 32, 33, 34, 35 and 38. Change in the computation of property and casualty claim liabilities to include discounting by reserving class. This change is further described and disclosed in notes 2.12(b) (i) and 14.2(a). Subsidiaries are entities over which the Group has the power to govern the financial and operating policies generally accompanying a majority voting interest. Subsidiaries are consolidated from the date on which control is transferred to the Group, and are de-consolidated from the date on which control ceases. All material intra-group balances, transactions and gains are eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. Minority interest balances represent the interest of minority shareholders in subsidiaries not wholly owned by the Group. (cid:1) The Group uses the acquisition method of accounting when control over entities and insurance businesses is obtained by the Group. The cost of an acquisition is measured as the fair value of the identifiable assets given, the equity instruments issued and the liabilities incurred or assumed at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any minority interest. On an acquisition by acquisition basis, the Group recognises any minority interest in the acquiree either at fair value or at the minority’s proportionate(cid:1) share of the acquiree’s net identifiable assets. The excess of the cost of the acquisition, the minority interest recognised and the fair value of any previously held equity interest in the acquiree, over the fair value of the of the net identifiable assets acquired is recorded as goodwill. If there is no excess and there is a shortfall, the Group reassesses the net identifiable assets acquired. If after reassessment, a shortfall remains, the acquisition is deemed to be a bargain purchase and the shortfall is recognised in income as a gain on acquisition. Subsequent ownership changes in a subsidiary, without loss of control, are accounted for as transactions between owners in the statement of changes in equity. Sagicor Financial Corporation 75 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.2 Basis of consolidation (continued) 2.2 Basis of consolidation (continued) (b) Investment in associated companies (e) Pension and investment funds The investments in associated companies, which are not majority-owned or controlled but where significant influence exists, are included in these consolidated financial statements under the equity method of accounting. Investments in associated companies are originally recorded at cost and include intangible assets identified on acquisition. Accounting policies of associates have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. The Group recognises in income its share of associated companies’ post acquisition income and its share of the amortisation and impairment of intangible assets which were identified on acquisition. Unrealised gains or losses on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. The Group recognises in other comprehensive income, its share of associated companies’ post acquisition other comprehensive income. (c) Joint Ventures Interests in the assets, liabilities and earnings of jointly controlled ventures are included in these consolidated financial statements using the proportionate consolidation method, eliminating all material related party balances. Insurers have issued deposit administration and unit linked contracts in which the full return of the assets supporting these contracts accrue directly to the contract-holders. As these contracts are not operated under separate legal trusts, they have been consolidated in these financial statements. The Group manages a number of segregated pension funds, mutual funds and unit trusts. These funds are segregated and investment returns on these funds accrue directly to unit-holders. Consequently the assets, liabilities and activity of these funds are not included in these consolidated financial statements unless the Group has a significant holding in the fund. Where a significant holding exists, the Group consolidates the assets, liabilities and activity of the fund and accounts for any non-controlling interest as a financial liability. (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(cid:1)Trust shall be applied towards the purchase of additional Company shares. (cid:1) 2.3 Foreign currency translation (d) Divestitures (a) Functional and presentational currency On the disposal of or loss of control of a subsidiary, the Group de-recognises the related assets, liabilities, minority interest and associated goodwill of the subsidiary. The Group reclassifies its share of balances of the subsidiary previously recognised in other comprehensive income either to income or to retained earnings as appropriate. The gain (or loss) on divestiture recorded in income is the excess (or shortfall) of the fair value of the consideration received over the de-recognised and reclassified balances. Items included in the financial 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 financial statements are presented in thousands of United States dollars, which is the Group’s presentational currency. 76 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.3 Foreign currency translation (continued) 2.3 Foreign currency translation (continued) (b) Reporting units The results and financial position of reporting units that have a functional currency other than the Group’s presentational currency are translated as follows: (i) Income, other comprehensive income, movements in equity and cash flows are translated at average exchange rates for the year. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are recorded in other comprehensive income. On the disposal or loss of control of a foreign entity, such exchange differences are transferred to income. Goodwill and other intangible assets recognised 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. (ii) (iii) Assets and liabilities are translated at the exchange rates ruling on December 31. Resulting exchange differences are recognised in other comprehensive income. (c) Transactions and balances Currencies which are pegged to the United States dollar are converted at the pegged rates. Currencies which float 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 2010 closing rate 2010 average rate December 2009 closing rate 2009 average rate Barbados dollar 2.0000 2.0000 2.0000 2.0000 Jamaica dollar 85.6606 87.4076 89.3088 87.8012 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, which result from the settlement of foreign currency transactions and from the re-translation of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement. Non-monetary assets and liabilities, primarily deferred acquisition costs and unearned premiums, are maintained at the transaction rates of exchange. The foregoing exchange gains and losses which are recognised in the income statement are included in other revenue. (cid:1) Exchange differences on the re-translation of the fair value of non-monetary items such as equities held at fair value through income are reported as part of the fair value gain or loss. Exchange differences on the re-translation of the fair value of non-monetary items such as equities held as available for sale are reported as part of the fair value gain or loss in other comprehensive income. Trinidad & Tobago dollar 6.3766 6.3424 6.3574 6.2996 2.4 Segments Pound sterling 0.6388 0.64716 0.6193 0.6457 The Group adopted IFRS 8 Operating segments for the 2009 financial statements. Reportable operating segments have been accordingly defined on the basis of performance and resource allocation decisions of the Group’s Chief Executive Officer. Sagicor Financial Corporation 77 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.5 Investment property Investment property consists of freehold lands and freehold properties which are held for rental income and/or capital appreciation. Investment property is recorded initially at cost. In subsequent financial years, 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 which are accounted for under the proportionate consolidation basis. 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 the other portion is occupied by the Group. In such circumstances, the property is accounted for as an investment property if the Group’s occupancy level is not significant in relation to the total available occupancy. Otherwise, it is accounted for as an owner-occupied. Rental income is recognised on an accruals basis. 2.6 Property, plant and equipment 2.6 Property, plant and equipment (continued) (cid:1) On disposal of owner-occupied property, the amount included in the fair value reserve is transferred to retained earnings. Owner-occupied property includes property held under partnership and joint venture arrangements with third parties which are accounted for under the proportionate consolidation basis. 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 or fair value of property, plant and equipment to residual value over the estimated useful life. Estimated useful lives are reviewed annually and are as follows. Asset Buildings Estimated useful life 40 to 50 years Furnishings and leasehold improvements 10 years or lease term Computer and office equipment Vehicles Leased equipment and vehicles 3 to 10 years 4 to 5 years 5 to 6 years Property, plant and equipment are recorded initially at cost. Subsequent expenditure is capitalised when it will result in future economic benefits to the Group. Lands are not depreciated. Owner-occupied property is re-valued at least every three years to its fair value as determined by independent valuers. Revaluation of a property may be conducted more frequently if circumstances indicate that a significant change in fair value has occurred. Movements in fair value are reported in other comprehensive income, unless there is a cumulative depreciation in respect of an individual property, which is then recorded in income. Accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset. 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. Gains or losses recognised in income on the disposal of property, plant and equipment are determined by comparing the net sale proceeds to the carrying value. 78 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 2. ACCOUNTING POLICIES (continued) 2.7 Intangible assets (a) Goodwill Goodwill (defined in note 2.2(a)) arising from an acquisition of a subsidiary or insurance business is allocated to appropriate cash generating units which are defined by the Group’s operating segments. Goodwill arising in a reportable operating segment is allocated to that segment. Goodwill arising in a Group entity, which is not within a reportable operating segment, is allocated to that entity’s own operations, or, if that entity is managed in conjunction with another Group entity, to their combined operations. Goodwill arising from an investment in an associate is included in the carrying value of the investment. Goodwill is tested annually for impairment and is carried at cost less accumulated impairment. On disposal of a subsidiary or insurance business, the associated goodwill is de-recognised and is included in the gain or loss on disposal. On the disposal of a subsidiary or insurance business forming part of a reportable operating segment, the proportion of goodwill disposed is the proportion of the fair value of the asset disposed to the total fair value of the operating segment. (b) Other intangible assets Other intangible assets identified on acquisition are recognised only if future economic benefits attributable to the asset will flow to the Group and if the fair value of the asset can be measured reliably. In addition, for the purposes of recognition, the intangible asset must be separable from the business being acquired or must arise from contractual or legal rights. Intangible assets acquired in a business combination are initially recognised at their fair value. Other intangible assets, which have been acquired directly, are recorded initially at cost. On acquisition, the useful life of the asset is estimated. If the estimated useful life is definite, then the cost of the asset is amortised over its life, and is tested for impairment when there is evidence of same. If the estimated useful life is indefinite, the asset is tested annually for impairment. Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.7 Intangible assets (continued) The estimated useful lives of recognised intangible assets are as follows: Class of intangible asset Asset Estimated useful life Customer related Customer relationships 4 - 20 years Broker relationships 10 years 4 – 10 years Indefinite 15 years 2 – 10 years Marketing related Trade names Contract based Technology based Syndicate capacity Licences Software 2.8 Financial assets a) Classification The Group classifies its financial assets into four categories: (cid:1) (cid:1) (cid:1) (cid:1) held to maturity financial assets; available for sale financial assets; financial assets at fair value through income; loans and receivables. Management determines the appropriate classification of these assets on initial recognition. (cid:1) Held to maturity financial assets are non-derivative financial instruments with fixed or determinable payments and fixed maturities that management has both the intent and ability to hold to maturity. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Sagicor Financial Corporation 79 Notes to the Financial Statements Year ended December 31, 2010 2. ACCOUNTING POLICIES (continued) 2.8 Financial Assets (continued) Financial assets in the category at fair value through income comprise designated assets or held for trading assets. These are set out below. Assets designated by management on acquisition form part of managed portfolios (cid:1) whose performance is evaluated on a fair value basis in accordance with documented investment strategies. They 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 are acquired principally for the purpose of selling in the (cid:1) short-term or if they form part of a portfolio of financial assets in which there is evidence of short-term profit taking. Derivatives are also classified as held for trading unless designated as hedges. Available for sale financial assets are non-derivative financial instruments intended to be held for an indefinite period of time and which may be sold in response to liquidity needs or changes in interest rates, exchange rates and equity prices. (b) Recognition and measurement Purchases and sales of financial investments are recognised on the trade date. 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. (cid:1) Financial assets in the category at fair value through income are measured initially at fair value 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. 80 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.8 Financial Assets (continued) (cid:1) Financial assets in the available for sale category are measured initially at fair value 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 reported in other comprehensive income. 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 be agreed upon between knowledgeable, willing parties who are under no compulsion to act and is best evidenced by a quoted market value, if one exists. The estimated fair values of financial assets are based on quoted bid prices of securities as at December 31 where available. In estimating the fair value of non-traded financial assets, the Group uses a variety of methods such as obtaining dealer quotes and using discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows 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 financial assets A financial asset is considered impaired if its carrying amount exceeds its estimated recoverable amount. An impairment loss for assets carried at amortised cost is calculated as the difference between the carrying amount and the present value of expected future cash flows discounted at the original effective interest rate. The carrying value of impaired financial assets is reduced by impairment losses. The recoverable amount for an available for sale security is its fair value. Notes to the Financial Statements Year ended December 31, 2010 2. ACCOUNTING POLICIES (continued) 2.8 Financial Assets (continued) Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.8 Financial Assets (continued) For an available for sale equity security, an impairment loss is recognised in income if there has been a significant or prolonged decline in its fair value below its cost. Determination of what is significant or prolonged requires judgement which includes consideration of the volatility of the fair value, and the financial condition and financial viability of the investee. In this context, management considers a 40% decline in fair value below cost to be significant. Any subsequent increase in fair value occurring after the recognition of an impairment loss is reported in other comprehensive income. Derivative financial instruments are initially recognised at fair value on the date a derivative contract is entered into, and subsequently are re-measured at their fair value at each financial statement date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates its interest rate swaps as cash flow hedges. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. For an available for sale security other than an equity security, if the Group assesses that there is objective evidence that the security is impaired, an impairment loss is recognised for the amount by which the instrument’s amortised cost exceeds its fair value. If in a subsequent period 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. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedging transactions. The Group also documents its assessments, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. (cid:1) (e) Securities purchased under agreements to resell Securities purchased under agreements to resell are recognised initially at fair value and are subsequently stated at amortised cost. Securities purchased under agreements to resell are treated as collateralised financing transactions. The difference between the purchase and resale price is treated as interest and is accrued over the life of the agreements using the effective yield method. (f) Finance leases The Group, as lessor, enters into finance leases with third parties to lease assets. Finance leases are leases in which the Group has transferred substantially the risks of ownership to the lessee. The finance lease, net of unearned finance income, is recorded as a receivable and the finance income is recognised over the term of the lease using the effective yield method. (cid:1) (g) Derivative financial instruments and hedging activities Derivatives are financial instruments that derive their value from the price of underlying items such as equities, bonds, interest rates, foreign exchange, credit spreads, commodities or other indices. Derivatives enable users to increase, reduce or alter exposure to credit or market risk. The Group transacts derivatives for three primary purposes: to create risk management solutions for customers, for proprietary trading purposes, and to manage its own exposure to credit and market risk. For cash flow hedges, gains and losses relating to the effective portion of changes in the fair value of derivatives are initially recognised in other comprehensive income, and are transferred to the statement of income when the forecast cash flows affect income. The gain or loss relating to the ineffective portion is recognised immediately in the statement of income. Gains and losses from changes in the fair value of derivatives that do not qualify for hedge accounting are included in income. (h) Embedded derivatives The Group holds certain bonds and preferred equity securities that contain options to convert into common shares of the issuer. These options are considered embedded derivatives. If the measurement of an embedded derivative can be separated from its host contract, the embedded derivative is carried at current market value and is presented with its related host contract. Unrealised gains and losses are recorded as investment income. If the measurement of an embedded derivative cannot be separated from its host contract, the full contract is accounted for as a financial asset at fair value through income. Sagicor Financial Corporation 81 Notes to the Financial Statements Year ended December 31, 2010 2. ACCOUNTING POLICIES (continued) 2.8 Financial Assets (continued) Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.11 Cash and cash equivalents (i) Financial assets held in trust under modified coinsurance arrangements For the purposes of the cash flow statement, cash and cash equivalents comprise: These assets are held in trust for a reinsurer and are in respect of policy liabilities ceded to the reinsurer. The assets are recognised in the financial statements 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. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) cash balances, call deposits, other liquid balances with maturities of three months or less from the acquisition date, less bank overdrafts which are repayable on demand, less other borrowings from financial institutions made for the purpose of meeting cash 2.9 Real estate developed or held for resale commitments and which have maturities of three months or less from origination. Lands being made ready for resale along with the cost of infrastructural works are classified as real estate held for resale and are stated at the lower of carrying value and fair value less costs to sell. Cash equivalents are subject to an insignificant risk of change in value. Real estate acquired through foreclosure is classified as real estate held for resale and is stated at the lower of carrying value and fair value less costs to sell. 2.12 Policy contracts (a) Classification Gains and losses realised on the sale of real estate are included in revenue at the time of sale. 2.10 Impairment of non-financial assets The Group’s policy for the potential impairment of property, plant, equipment, intangible assets and investments in associated companies is set out below. Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. The Group issues policy contracts that transfer insurance risk and / or financial risk from the policyholder. The Group defines insurance risk as an insured event that could cause an insurer to pay significant additional benefits in a scenario that has a discernable effect on the economics of the transaction. Insurance contracts transfer insurance risk and may also transfer financial risk. Once a contract has been classified as an insurance contract, it remains an insurance contract for its duration, even if the insurance risk reduces significantly over time. Investment contracts transfer financial risk and no significant insurance risk. Financial risk includes credit risk, liquidity risk and market risk. A reinsurance contract is an insurance contract in which an insurance entity cedes assumed risks to another insurance entity. (cid:1) 82 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 2.12 Policy contracts (continued) A number of insurance contracts contain a discretionary participation feature. A discretionary participation feature entitles the holder to receive, supplementary to the main benefit, additional benefits or bonuses:(cid:1) Casualty insurance contracts provide coverage for the risk of causing physical harm or financial loss to third parties. Personal accident, employers’ liability, public liability, product liability and professional indemnity are common types of casualty insurance. (cid:1) (cid:1) (cid:1) that are likely to be a significant portion of the total contractual benefits; whose amount or timing is contractually at the discretion of management; and that are contractually based on o o o the performance of a specified pool of contracts; investment returns on a specified pool of assets held by the insurer; or the profit or loss of a fund or insurer issuing the contract. Policy bonuses and policy dividends constitute discretionary participation features which the Group classifies as liabilities. Residual gains in the participating accounts constitute discretionary participation features which the Group classifies as equity (see also note 2.20). (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, liability and marine. (cid:1) Property insurance contracts provide coverage for the risk of property damage or of loss of property. Commercial property, homeowners’ property, motor and certain marine property are common types of risks covered. For(cid:1) commercial policyholders insurance may include coverage for loss of earnings arising from the(cid:1)inability to use property which has been damaged or lost. (cid:1) Premium revenue is recognised as earned on a pro-rated basis over the term of the respective policy coverage. If alternative insurance risk exposure patterns have been established over the term of the policy coverage, then premium revenue is recognised in accordance with the risk exposure. The provision for unearned premiums represents the portion of premiums written relating to the unexpired terms of coverage. (cid:1) 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 the date of the financial statements. Reserving involves uncertainty and the use of statistical techniques of estimation. These techniques generally involve projecting from past experience, 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 discounted for separate reserving classes of insurance where the expected average interval between the dates of incurral and settlement is at least 4 years (defined as long-tail claims). The claim reserve is not discounted for other classes of insurance. The accounting policy for discounting claims has been refined during 2010 to define the criteria for discounting by reserving class. A reserving class constitutes a class or sub-class of insurance for which claims data is aggregated separately, to which is applied a particular statistical technique and common estimation factors. For example, direct motor is divided into sub-classes, injury and property damage. Appropriate statistical techniques are applied to each sub-class; injury claims are discounted because they satisfy the criteria of being long-tail claims, while property damage claims are not discounted because these are relatively short-tail. The change has been adopted in order to present a more consistent approach to reserving for long-tail claims. There was no material effect on the prior year claim liabilities in adopting this change. Sagicor Financial Corporation 83 Notes to the Financial Statements Year ended December 31, 2010 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) An insurer may obtain reinsurance coverage for its property and casualty insurance risks. The reinsurance ceded premium is expensed on a pro-rata basis over the term of the respective policy coverage or of the reinsurance contract as appropriate. Reinsurance claim recoveries are established at the time of the recording of the claim liability and are computed on a basis which is consistent with the computation of the claim liability. Profit sharing commission due to the Group is accrued as commission income when there is reasonable certainty of earned profit. (cid:1) Commissions and premium taxes payable are recognised on the same basis as premiums earned. At the date of the financial statements, commissions and premium taxes arising on unearned premiums are recorded as deferred policy acquisition costs. Profit 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-rata 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 the date of the financial statements, commissions and premium taxes arising on unearned premiums are recorded as deferred policy acquisition costs. 84 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) (iii) Long-term traditional insurance contracts Long-term traditional insurance contracts are generally issued for fixed terms of five years or more, or for the remaining life of the insured. Benefits are typically a death, disability or critical illness benefit, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneficiaries with a proviso for a minimum number of payments. Some of these contracts have a discretionary participation feature in the form of regular bonuses or dividends. Other benefits such as disability and waiver of premium on disability may also be included in these contracts. Some contracts may allow for the advance of policy loans to the policyholder and may also allow for dividend withdrawals by the policyholder during the life of the contract. Premium revenue is recognised when due. Typically, premiums are fixed and are required to be paid within the due period for payment. If premiums are unpaid, either the contract may terminate, an(cid:1) automatic premium loan may settle the premium, or the contract may continue at a reduced value. Policy benefits are recognised on the notification of death, disability or critical illness, on the termination or maturity date of the contract, 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 financial statements and are secured by the cash values of the respective policies. Policy bonuses may be “non-cash” and utilised to purchase additional amounts of insurance coverage. Accumulated cash bonuses and dividends are recorded as interest bearing policy balances. Reserves for future policy liabilities are recorded as described in note 2.13. An insurer may obtain reinsurance coverage for death benefit insurance risks. Typically, coverage is obtained for individual coverage exceeding prescribed limits. The reinsurance premium is expensed when due, which generally coincides with when the policy premium is due. Reinsurance claim recoveries are established at the time of claim notification. Commissions and premium taxes payable are recognised on the same basis as earned premiums. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) 2.12 Policy contracts (continued) (iv) Long-term universal life and unit linked insurance contracts Universal life and unit linked insurance contracts are generally issued for fixed terms or for the remaining life of the insured. Benefits are typically a death, disability or critical illness benefit, a cash value on termination and/or a monthly annuity. Annuities are generally payable until the death of the beneficiaries with a proviso for a minimum number of payments. Benefits may include amounts for disability or waiver of premium on disability. Universal life and unit linked contracts have either an interest bearing investment account or unit linked investment accounts. Either gross premiums or gross premiums net of allowances are deposited to the investment accounts. Investment returns are credited to the investment accounts and expenses, not included in the aforementioned allowances, are debited to the investment accounts. Interest bearing investment accounts may include provisions for minimum guaranteed returns or returns based on specified investment indices. Allowances and expense charges are in respect of applicable commissions, cost of insurance, administrative expenses and premium taxes. Fund withdrawals may be permitted. Premium revenue is recognised when received and consists of all monies received from the policyholders. Typically, premiums are fixed at the inception of the contract or periodically thereafter but additional non-recurring premiums may be paid. Policy benefits are recognised on the notification of death, disability or critical illness, on the receipt of a withdrawal request, on the termination of maturity of the contract or on the annuity payment date. Reserves for future policy liabilities are recorded as described in note 2.13. An insurer may obtain reinsurance coverage for death benefit insurance risks. Typically, coverage is obtained for individual coverage exceeding prescribed limits. The reinsurance premium is expensed when due, which generally coincides with when the policy premium is due. Reinsurance claims recoveries are established at the time of claim notification. Commissions and premium taxes payable are generally recognised only on settlement of premiums. (cid:1) (cid:1)(cid:1)(v)(cid:1)(cid:1)(cid:1)(cid:1)(cid:1)(cid:1)(cid:1)(cid:1)(cid:1)Reinsurance contracts assumed (cid:1) Reinsurance contracts assumed by an insurer are accounted for in a similar manner as if the insurer has assumed the risk direct from a policyholder. 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. Reinsurance contracts held by an insurer are recognised and measured in a similar manner to the originating insurance contracts and in accordance with the contract terms. Reinsurance premium ceded and reinsurance recoveries on claims are offset against premium revenue and policy benefits in the income statement. The benefits to which an insurer is entitled under its reinsurance contracts held are recognised as reinsurance assets or receivables. Reinsurance assets and receivables are assessed for impairment. If there is evidence that the asset or receivable is impaired, the impairment is recorded in the statement of income. The obligations of an insurer(cid:1) under reinsurance contracts held are included under accounts payable and accrued liabilities or actuarial liabilities. Policy liabilities include blocks of life and annuity policies ceded to reinsurers on coinsurance or modified coinsurance bases. The Group records as a receivable the reinsurer’s share of the insurer’s liabilities on these policies. Reinsurance balances are measured consistently with the insurance liabilities to which they relate. Sagicor Financial Corporation 85 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.12 Policy contracts (continued) (vii) Deposit administration and other investment contracts (cid:1) 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: (cid:1) amortised cost where the insurer is obligated to provide investment returns to the pension scheme in the form of interest; 2.12 Policy contracts (continued) (cid:1) (d) Liability adequacy tests At the date of the financial statements, liability adequacy tests are performed by each insurer to ensure the adequacy of insurance contract liabilities, using current estimates of the related expected future cash flows. If a test indicates that the carrying value of insurance contract liabilities is inadequate, then the liabilities are adjusted to correct the deficiency. The deficiency is included in the income statement under benefits. (cid:1) fair value through income where the insurer is obligated to provide investment returns to the 2.13 Actuarial liabilities pension scheme in direct proportion to the investment returns on specified blocks of assets. (a) Life insurance and annuity contracts Deposit administration contributions are recorded directly as liabilities. Withdrawals are deducted directly from the liability. The interest or investment return provided is recorded as an interest expense. In addition, the Group may provide pension administration services to the pension schemes. The Group earns fee income for both pension administration and investment services. Other investment contracts are recognised initially at fair value and are subsequently stated at amortised cost and are accounted for in the same manner as deposit administration contracts which are similarly classified. (c) Embedded derivatives Certain insurance contracts contain embedded derivatives which are options whose value may vary in response to changes in interest rates or other market variables. The Group does not separately measure embedded derivatives that are closely related to the host insurance contract or that meet the definition of an insurance contract. Options to surrender an insurance contract for a fixed amount are also not measured separately. In(cid:1) these cases, the entire contract liability is measured as set out in note 2.13. 86 Sagicor Financial Corporation The Canadian Asset Liability Method (CALM) is used for the determination of actuarial liabilities of long-term insurance contracts. These liabilities consist of amounts that, together with future premiums and investment income, are required to provide for future policy benefits, expenses and taxes on insurance and annuity contracts. The process of calculating life insurance and annuity actuarial liabilities for future policy benefits necessarily involves the use of estimates concerning such factors as mortality and morbidity rates, future investment yields, future expense levels and persistency, including reasonable margins for adverse deviations. As experience unfolds, these provisions for adverse deviations will be included in future income to the extent they are no longer required to cover adverse experience. Assumptions used to project benefits, expenses and taxes are based on Group and industry experience and are updated annually. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.13 Actuarial liabilities (continued) (cid:1) CALM is based on an explicit projection of cash flows using best estimate assumptions for each material cash flow item and contingency. Investment returns are based on projected investment income using the current asset portfolios and projected re-investment strategies. Each assumption is adjusted by a margin for adverse deviation. Under CALM, assets of each insurer are selected to back the actuarial liabilities of each insurer. Changes in the carrying value of these assets may generate corresponding changes in the carrying amount of the associated actuarial liabilities. These assets include available for sale securities, whose changes in carrying value are recorded in other comprehensive income. The Group has changed its accounting policy for recording the changes in actuarial liabilities which result directly from the changes in the carrying value of backing assets which are recorded in other comprehensive income. The adopted policy is to reflect also in other comprehensive income the resulting changes in the carrying amount of the actuarial liabilities. In prior years, the Group recorded these changes to the actuarial liabilities in income. With the adoption of this change, the income and other comprehensive income results provide more consistent measures of performance. The change in accounting policy has been applied retroactively to January 1, 2009, and consequently the income and other comprehensive income for 2009 have been restated. In addition, a fair value reserve for actuarial liabilities has been established in the statement of equity for the accumulation of the amounts recorded in other comprehensive income. The impact of the change in accounting policy is summarised in note 38. Certain life insurance policies issued by the insurer contain equity linked policy side funds. The investment returns on these unitised funds accrue directly to the policies with the insurer assuming no credit risk. Investments held in these side funds are accounted for as financial assets at fair value through income and unit values of each fund are determined by dividing the value of the assets in the fund at the date of the financial statements by the number of units in the fund. The resulting liability is included in actuarial liabilities. (cid:1) (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 or settled. (cid:1) 2.14 Financial liabilities During the ordinary course of business, the Group issues investment contracts or otherwise assumes financial liabilities that expose the Group to financial risk. The recognition and measurement of the Group’s principal types of financial liabilities are disclosed in note 2.12(b) (vii) and in the following paragraphs. (a) Securities sold under agreements to repurchase Securities sold under agreements to repurchase are recognised initially at fair value and are subsequently stated at amortised cost. Securities sold under agreements to repurchase are treated as collateralised financing transactions. The difference between the sale and repurchase price is treated as interest and is accrued over the life of the agreements using the effective yield method. (b) Deposit liabilities Deposits are recognised initially at fair value and are subsequently stated at amortised cost using the effective yield method. (c) Loan obligations Loan obligations are recognised initially at fair value, being their issue proceeds, net of transaction costs incurred. Subsequently, loan obligations 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 loan obligations using the effective yield method. Loan obligations undertaken for the purposes of financing operations and capital support are classified as notes or loans payable and the associated cost is classified as finance costs. Loan obligations undertaken for the purposes of providing funds for on-lending,(cid:1) leasing or portfolio investments are classified as deposit and security liabilities and the associated cost is included in interest expense. (cid:1) Sagicor Financial Corporation 87 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.14 Financial liabilities (continued) 2.17 Fees and other revenue (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 financial liabilities are based on market values of quoted securities as at December 31 where available. In assessing the fair value of non-traded financial liabilities, the Group uses a variety of methods including obtaining dealer quotes for specific or similar instruments and the use of internally developed pricing models, such as the use of discounted cash flows. If the non- traded liability is backed by a pool of assets, then its value is equivalent to the value of the underlying assets. 2.15 Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, if it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. 2.16 Interest income and expenses Interest income and expenses are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the initial transaction price. Interest includes coupon interest and accrued discount and premium on financial instruments.(cid:1)(cid:1) (cid:1) Fees and non-insurance commission income are recognised on an accrual basis when the service has been provided. Fees and commissions arising from negotiating or participating in the negotiation of a transaction for a third party are recognised on completion of the underlying transaction. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-apportionate basis. Asset management fees related to investment funds are recognised rateably over the period in which the service is provided. Performance linked fees or fee components are recognised when the performance criteria are fulfilled. Other revenue is recognised on an accrual basis when the related service has been provided. 2.18 Employee benefits (cid:1) (a) Pension benefits Group companies have various pension schemes in place for their employees. Some schemes are defined benefit plans and others are defined contribution plans. The liability in respect of defined benefit plans is the present value of the defined benefit obligation at December 31 minus the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is computed using the projected unit credit method. The present value of the defined benefit obligation is determined by the estimated future cash outflows using appropriate interest rates for the maturity dates and location of the related liability. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions, and amendments to pension plans are charged or credited to the income statement over the average service lives of the related employees. Past service costs are charged to the income statement on a straight line basis over the average period until the benefits become vested. Past service costs are recognised immediately if the benefits vest immediately. (cid:1) 88 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (continued) 2.18 Employee benefits (continued) For defined contribution plans, the Group pays contributions to the pension schemes on a mandatory or contractual basis. Once paid, the Group has no further payment obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in expenses in the income statement. 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. (cid:1) (b) Other retirement benefits Certain Group subsidiaries provide supplementary health, dental and life insurance benefits to qualifying employees upon retirement. The entitlement to these benefits is usually based on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using an accounting methodology similar to that for defined benefit pension plans. (c) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on various profit and other objectives of the Group as a whole or of individual subsidiaries. An accrual is recognised where there are contractual obligations or where past practice has created a constructive obligation. (cid:1) (d) Equity compensation benefits The Group has a number of share-based compensation plans in place for administrative, sales and managerial staff. (cid:1) (i) Equity-settled share-based transactions with staff (cid:1) 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. (cid:1) Where the equity instruments do not vest until the individual has completed a further period of service, the services received are expensed in the income statement during the vesting period, with a corresponding increase in the share based payment reserve or in minority interest. Non-market vesting conditions are included in assumptions about the number of instruments that are expected to vest. At each reporting financial statement date, the Group revises its estimates of the number of instruments that are expected to vest based on the non-marketing vesting conditions and adjusts the expense accordingly. 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. The grant by the Company of its equity instruments to employees of Group subsidiaries is treated as a capital contribution in the financial statements of the subsidiary. The full expense relating to the grant is recorded in the subsidiary’s income statement. (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 the date of the financial statements and at the date of settlement, with any changes in fair(cid:1)value recognised in income during that period. Sagicor Financial Corporation 89 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.18 Employee benefits (continued) (iii) Measurement of the fair value of equity instruments granted 2.19 Taxes (a) Premium taxes The equity instruments granted consist either of grants of, or options to purchase, common shares of listed entities within the Group. For common shares granted, the listed price prevailing on the grant date determines the fair value. For options granted, the fair value is determined by reference to 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 benefits Termination benefits are payable whenever an employee’s employment is terminated before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminate the employment of current employees according to a detailed formal plan without the possibility of withdrawal or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than twelve months after the date of the financial statements are discounted to present value. Insurers are subject to tax on premium revenues generated in certain jurisdictions. The principal rates of premium tax are as follows: Barbados Jamaica Trinidad and Tobago Life insurance and non-registered annuities 3% - 6% 3% Nil United States of America 0.75% - 3.5% (b) Income taxes Health insurance 4% Nil Nil Nil Property and casualty insurance 4.0% - 4.75% Nil 6% Nil 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 2010 are as follows: Life insurance and non-registered annuities 5% of gross investment income 15% of investment income 15% of investment income Barbados Jamaica Trinidad and Tobago United Kingdom 28% of net income Registered annuities Other lines of business Nil Nil Nil n/a 25% of net income 15% - 33.33% of net income 25% of net income 28% of net income 35% of net income United States of America 35% of net income 35% of net income 90 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.19 Taxes (continued) (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 Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income taxes are computed at tax rates that are expected to apply to the period when the asset is realised or the liability settled. Deferred tax assets are only recognised when it is probable that taxable profits will be available against which the asset may be utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to do so. Deferred tax, related to fair value re-measurement of available for sale investments and cash flow hedges which are recorded in other comprehensive income, is recorded in other comprehensive income and is subsequently recognised in income together with the deferred gain or loss. 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 benefits and future policy dividends, bonuses and other non-guaranteed benefits of the afore-mentioned policies. The rules of this account require that premiums, benefits, 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. 2.20 Participating accounts (continued) Distributable profits of the closed participating account are distributed to the participating policies in the form of declared bonuses and dividends. Undistributed profits remain in the participating account for the benefit of participating policyholders. 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, benefits, 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 profit distribution to shareholders (see below) were also transferred to the account. Distributable profits of the open participating account are shared between participating policies and shareholders in a ratio of 90:10. Profits are distributed to the participating policies in the form of declared bonuses and dividends. Profits which are distributed to shareholders(cid:1) are included in the allocation of Group net income to shareholders. Undistributed profits / (losses) remain in the participating account in equity.(cid:1)(cid:1) Sagicor Financial Corporation 91 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 2. ACCOUNTING POLICIES (continued) 2. ACCOUNTING POLICIES (continued) 2.20 Participating accounts (continued) 2.23 Statutory reserves (c) Financial statement presentation The assets and liabilities of the participating accounts are included but not presented separately in the financial statements. The revenues, benefits and expenses of the participating accounts are also included but not presented separately in the financial statements. However, the overall surplus of assets held in the participating funds over the associated liabilities is presented in equity as the participating accounts. The overall net income and other comprehensive income that are attributable to the participating funds are disclosed as allocations. The initial allocation of additional assets to the participating funds is recognised in equity as a transfer from retained earnings to the participating accounts. Returns of additional assets from the participating funds are accounted for similarly. 2.21 Share capital In exchange for consideration received, the Company has issued common shares that are classified as equity. Incremental costs directly attributable to the issue of common shares are recorded in share capital as a deduction from the share issue proceeds. Where a Group entity purchases the Company’s common shares, the consideration paid, including any directly attributable cost, is deducted from share capital and is recorded as treasury shares. 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 recorded in 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. (cid:1) 92 Sagicor Financial Corporation Statutory reserves are established when regulatory accounting requirements result in lower distributable profits or when an appropriation of retained earnings is required or permitted by law to protect policyholders, insureds or depositors. 2.24 Presentation of current and non-current assets and liabilities In note 41.2, the maturity profiles of financial and insurance assets and liabilities are identified. For other assets and liabilities, balances presented in notes 5 to 8, 10 to 12, 14, 18, 19, 31 and 33 are non-current unless otherwise stated in those notes. (cid:1) 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The development of estimates and the exercise of judgment in applying accounting policies may have a material impact on the Group’s reported assets, liabilities, income and other comprehensive income. The items which may have the most effect on the Group’s financial statements are set out below.(cid:1) (cid:1) 3.1 Impairment of financial assets An available for sale debt security, a loan or a receivable is considered impaired when management determines that it is probable that all amounts due according to the original contract terms will not be collected. This determination is made after considering the payment history of the borrower, the discounted value of collateral and guarantees, and the financial condition and financial viability of the borrower. The determination of impairment may either be considered by individual asset or by a grouping of assets with similar relevant characteristics. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.2 Recognition and measurement of intangible assets The recognition and measurement of intangible assets, other than goodwill, in a business combination involve the utilisation of valuation techniques which may be very sensitive to the underlying assumptions utilised. These intangibles may be marketing related, customer related, contract based or technology based. For significant amounts of intangibles arising from a business combination, the Group utilises independent professional advisors to assist management in determining the recognition and measurement of these assets. 3.3 Impairment of intangible assets (a) Goodwill The assessment of goodwill impairment involves the determination of the fair value of the cash generating business units to which the goodwill has been allocated. Determination of fair value involves the estimation of future cash flows or of income before taxes of these business units and the expected returns to providers of capital to the business units and / or to the Group as a whole. The Group updates its business unit financial projections annually and applies discounted cash flow or earnings multiple models to these projections to determine if there is any impairment of goodwill. (b) Other intangible assets The assessment of impairment of other intangible assets involves the determination of the intangible’s fair value or value in use. In the absence of an active market for an intangible, its fair value may need to be estimated. In determining an intangible’s value in use, estimates are required of future cash flows generated as a result of holding the asset. (cid:1) 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 in the financial statements, will be sufficient without being excessive to provide for the policy liabilities over their respective terms. The amounts set aside for future benefits are dependent on the timing of future asset and liability cash flows. The actuarial liabilities are determined by the amount of assets required to ensure that sufficient monies are available to mature the policy liabilities as they become due, even under adverse economic circumstances. The AA identifies the current economic scenario and the existing investment portfolio as at the date of the actuarial valuation. The investments required to support the policy liabilities are then determined under a variety of future interest rate environments using scenario testing. The total policy liability is determined as the amount of assets required to ensure that sufficient monies are available to meet the liabilities as they become due under the “worst case” economic scenario, that is, the scenario that produces the highest investment requirement. The CALM methodology produces the total reserve requirement for each CALM fund. In general, the CALM methodology is used to determine the net overall actuarial liabilities required by the insurer. Policy premium method (PPM) equivalents are used to determine the amount of reinsurance balances in the reserve, the distribution of the total reserve by country (for statutory reporting), and the distribution of the reserve by policy. 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. The latter provision is established in recognition of the uncertainty in computing best estimate reserves, to allow for possible deterioration in experience and to provide greater comfort that reserves are adequate to pay future benefits. Sagicor Financial Corporation 93 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued) 3.4 Actuarial liabilities (continued) 3.5 Property and casualty insurance contracts (continued) 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. The assumption for operating expenses and taxes is in some instances split by participating, non- participating and universal life / unit linked business. Provisions for adverse deviations are established in accordance with the risk profiles of the business, and are, as far as is practicable, standardised across geographical areas. Provisions are determined within a specific range established by the Canadian Standards of Practice. The principal assumptions and margins used in the determination of actuarial liabilities are summarised in note 13.3. However, the liability resulting from the application of these assumptions can never be definitive as to the ultimate timing or the amount of benefits payable and is therefore subject to future re-assessment. 3.5 Property and casualty insurance contracts (a) Policy benefits payable 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 date of the financial statements, whether reported or not, is subject to the outcome of events that may not yet have occurred. Significant delays are experienced in the notification and settlement of certain types of claims, particularly in respect of casualty contracts. Events which may affect 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 reflections of the likely level of ultimate claims to be incurred. Consequently, the amounts recorded in respect of unpaid losses may change significantly in the short term. Management engages independent actuaries, either to assist in making or to confirm 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 1206 writes a significant proportion of its premium by delegated authority to insurance intermediaries. Due to delays in the notification of complete and accurate premium income written, the premium income earned and the associated reinsurance and commission balances may have to be estimated. Accordingly, premium income written has to be re- assessed in future periods and adjustments made to earned premium, reinsurance and commissions. 4. SEGMENTS The management structure of Sagicor consists of the parent company Board of Directors, the Group Chief Executive Officer (CEO), subsidiary company Boards of Directors and subsidiary company CEOs. For the parent company and principal subsidiaries, there are executive management committees made up of senior management who advise the respective CEOs. The principal subsidiaries have a full management governance structure, a consequence of their being regulated insurance and financial services entities and of the range and diversity of their products and services. 94 Sagicor Financial Corporation (cid:1) Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) (cid:1) The Group CEO serves as Board Chairman or as a Board Member of the principal subsidiaries and is the Group’s Chief Operating decision maker. Through subsidiary company reporting, the Group CEO obtains details of company performance and of resource allocation needs. Summarisation of planning and results and prioritisation of resource allocation is done at the parent company level where strategic decisions are taken. (cid:1) In accordance with the relevant financial reporting standard, the Group has determined that there are four principal subsidiary Groups which represent the reportable operating segments of Sagicor. These segments and other Group companies are set out in the following sections. (a) Sagicor Life Inc (cid:1) This segment comprises Group subsidiaries conducting life, health and annuity insurance business, and pension administration services in the Caribbean region, excluding Jamaica and Cayman Islands. The companies comprising this segment are set out in the following two tables. 4. SEGMENTS (continued) Sagicor Life Inc Segment Associated Companies RGM Limited Principal Activities Property ownership and management Country of Incorporation Effective Shareholders’ Interest Trinidad & Tobago 33% FamGuard Corporation Limited Investment holding company Bahamas 20% Family Guardian Insurance Company Limited Life and health insurance and annuities Bahamas 20% Family Guardian General Insurance Agency Limited General insurance brokerage Bahamas 20% Effective Shareholders’ Interest BahamaHealth Insurance Brokers and Benefit Consultants Limited Insurance brokers and benefit consultants Bahamas 20% Primo Holding Limited Property investment Barbados 38% Barbados 100% The Bahamas 100% Aruba 100% (b) Sagicor Life Jamaica This segment comprises Group subsidiaries conducting life, health, annuity, property and casualty insurance business, and pension administration services and financial services in Jamaica and Cayman Islands. The companies comprising this segment are as follows. Sagicor Life Inc Segment Companies Principal Activities Country of Incorporation Life and health insurance, annuities and pension administration services Life and health insurance, annuities and pension administration services Life and health insurance, annuities and pension administration services Sagicor Life Inc Sagicor Capital Life Insurance Company Limited Sagicor Life Aruba NV Capital Life Insurance Company Bahamas Limited Life insurance The Bahamas 100% Sagicor Panamá, SA Life and health insurance Panamá 100% Nationwide Insurance Company Limited Life insurance Trinidad & Tobago 100% (cid:1) . Sagicor Financial Corporation 95 Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) Sagicor Life Jamaica Segment Companies (continued) Manufacturers Investments Limited Sagicor Property Services Limited LOJ Holdings Limited Principal Activities Country of Incorporation Effective Shareholders’ Interest Investment management Jamaica 51% (3) Property management Jamaica 59% Insurance holding company Jamaica 100% (1) Divested effective January 1, 2010 (3) 64% until November 2009 (2) 45% prior to January 1, 2010 (4) Commenced operations in 2009 (cid:1) . Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) Sagicor Life Jamaica Segment Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor Life Jamaica Limited Life and health insurance and annuities Sagicor Life of the Cayman Islands Limited Sagicor Pooled Investment Funds Limited Life insurance Jamaica The Cayman Islands Pension fund management Jamaica Employee Benefits Administrator Limited Pension administration services Sagicor Re Insurance Limited Property and casualty insurance Jamaica The Cayman Islands Sagicor General Insurance (Cayman) Limited Sagicor Insurance Brokers Limited Sagicor International Administrators Limited (4) Property, casualty and health insurance The Cayman Islands Insurance brokerage Jamaica Insurance brokerage Jamaica Sagicor Insurance Managers Limited Captive insurance management services The Cayman Islands Pan Caribbean Financial Services Limited Development banking and investment management 59% 59% 59% 59% 59% - (1) (2) 59% 59% 59% (2) PanCaribbeanBank Limited Pan Caribbean Asset Management Limited Commercial and merchant banking Investment management Jamaica 51% (3) Jamaica 51% (3) Jamaica 51% (3) 96 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) (c) Sagicor Europe Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) (d) Sagicor Life USA This segment comprises the Sagicor at Lloyd’s insurance operations in the UK and comprises the following. This segment comprises Sagicor’s life insurance operations in the USA and comprises the following. Sagicor USA Segment Companies Principal Activities Sagicor Life Insurance Company Life insurance and annuities Country of Incorporation Effective Shareholders’ Interest Texas, USA 100% Laurel Life Insurance Company Sagicor USA Inc Life insurance Texas, USA 100%(cid:1) Insurance holding company Delaware, USA 100%(cid:1) Sagicor Europe Segment Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor at Lloyd’s Limited Managing agent of Lloyd’s of London insurance syndicates Sagicor Corporate Capital Limited (6) Property and casualty insurance UK UK Sagicor Cayman Reinsurance Company Limited (4) Property and casualty reinsurance The Cayman Islands Sagicor Corporate Capital Two Limited (7) Life insurance Sagicor Syndicate Services Limited Property and casualty insurance agency Sagicor Underwriting Limited Sagicor Syndicate Holdings Limited Property and casualty insurance agency Service company UK UK UK UK Sagicor Claims Management Inc Property and casualty insurance claims management California, USA Sagicor Europe Limited Insurance holding company The Cayman Islands 100% (5) 100% (5) 100% (5) 100% (5) 100% (5) 100% (5) 100% (5) 100% (5) 100% (5) (4) Commenced operations in 2009 (5) Effective voting interest is 86% (see note 30.4) (6) Lloyd’s of London corporate underwriting member participating in Syndicate 1206 (7) Lloyd’s of London corporate underwriting member participating in Syndicate 44 (cid:1) Sagicor Financial Corporation 97 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) 4. SEGMENTS (continued) (e) Head office function and other operating companies These comprise the following: (cid:1) Other Group Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest A statement of income by segment is set in the following table. Total comprehensive income by segment is also shown. Sagicor Financial Corporation Sagicor General Insurance Inc Sagicor Finance Inc Sagicor Asset Management (T&T) Limited, formerly Sagicor Merchant Limited Sagicor Asset Management Inc Barbados Farms Limited Sagicor Funds Incorporated Globe Finance Inc The Mutual Financial Services Inc Sagicor Allnation Insurance Company Group parent company Barbados 100% . Property and casualty insurance Loan and lease financing, and deposit taking Barbados St. Lucia 53% 70% Investment management Trinidad & Tobago 100% Investment management Barbados 100% Farming and real estate development Barbados 77% Mutual fund holding company Barbados 100% Loan and lease financing, and deposit taking Financial services holding company Barbados Barbados 51% 73% Health insurance Delaware, USA 100% Sagicor Finance Limited Group financing vehicle The Cayman Islands 100% 98 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.1 Statement of income by segment Sagicor Financial Corporation Amounts expressed in US $000 2010 Net premium revenue Interest income Other investment income Fees and other revenues Loss on disposal of interest in subsidiary Inter-segment revenues Net policy benefits Net change in actuarial liabilities Interest expense Administrative expenses Commissions and premium taxes Finance costs Depreciation & amortisation Inter-segment expenses Segment income / (loss) before taxes Income taxes Segment income before undernoted items Foreign exchange unwinding (1) Group finance costs (2) Net income / (loss) for the year Net income attributable to shareholders Total comprehensive income / (loss) by segment attributable to shareholders Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office and other Adjustments Total Summary statement of income by segment 215,510 66,412 13,855 10,986 - 4,348 311,111 137,342 33,747 14,153 50,878 34,571 - 5,931 335 276,957 34,154 (5,183) 28,971 - - 28,971 30,236 29,977 212,609 128,935 28,517 19,055 - 762 389,878 121,106 39,793 52,562 67,860 34,975 1,577 5,309 1,627 324,809 65,069 (8,789) 56,280 - - 56,280 31,960 53,992 345,275 3,219 (320) 6,884 - - 355,058 235,705 221 - 38,561 95,216 221 1,531 97 371,552 (16,494) 2,545 (13,949) 825 - (13,124) (13,124) (15,052) 120,044 36,273 4,521 1,900 - - 162,738 44,269 71,823 5,927 22,006 11,776 - 1,566 535 157,902 4,836 (1,692) 3,144 - - 3,144 3,144 7,435 14,708 10,054 1,949 18,146 (498) 14,117 58,476 7,703 - 5,355 32,866 7,074 100 3,932 6,867 63,897 (5,421) (1,885) (7,306) - (18,835) (26,141) (28,161) (29,039) (7,196) - (135) 4,896 498 (19,227) (21,164) - - - (79) (896) 14,471 - (9,461) 4,035 (25,199) (306) (25,505) (825) 18,835 (7,495) (7,495) (9,105) 900,950 244,893 48,387 61,867 - - 1,256,097 546,125 145,584 77,997 212,092 182,716 16,369 18,269 - 1,199,152 56,945 (15,310) 41,635 - - 41,635 16,560 38,208 Sagicor Financial Corporation 99 Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.1 Statement of income by segment (continued) Statement of income by segment A statement of income by segment is set out below. Total comprehensive income by segment is also shown. Summary statement of income by segment Sagicor Financial Corporation Amounts expressed in US $000 Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Summary statement of income by segment Sagicor USA Head office and other Adjustments Total Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office & other Adjustments Total 208,588 231,516 251,009 2009 2009 Net premium revenue Interest income Net premium revenue Other investment income Interest income Fees and other revenues Other investment income Loss on disposal of interest in subsidiary Fees and other revenues Inter-segment revenues Loss on disposal of interest in subsidiary Inter-segment revenues Net policy benefits Net change in actuarial liabilities Net policy benefits Interest expense 65,788 208,588 11,625 65,788 11,062 11,625 - 11,062 3,344 - 300,407 3,344 136,096 300,407 20,718 136,096 16,224 Net change in actuarial liabilities Administrative expenses Interest expense Commissions and premium taxes Administrative expenses Finance costs Commissions and premium taxes Depreciation & amortisation Finance costs Inter-segment expenses Depreciation & amortisation Inter-segment expenses Segment income / (loss) before taxes Income taxes Segment income / (loss) before taxes Segment income before undernoted items Income taxes Foreign exchange unwinding (1) Segment income before undernoted items Group finance costs (2) Foreign exchange unwinding (1) Net income / (loss) for the year Group finance costs (2) Net income attributable to shareholders Net income for the year Total comprehensive income / (loss) by Net income attributable to shareholders segment attributable to shareholders 24,550 48,539 16,224 31,490 48,539 - 31,490 5,477 - 364 5,477 258,908 364 41,499 262,740 (5,413) 37,667 36,086 (5,413) - 32,254 - - 36,086 40,437 32,254 43,812 37,367 100 Sagicor Financial Corporation 149,534 231,516 17,354 149,535 32,345 17,353 - 32,345 714 - 431,463 714 131,657 431,463 46,901 131,657 73,375 46,901 68,705 73,375 35,737 68,705 2,209 35,737 6,087 2,209 2,022 6,087 366,693 2,022 64,770 366,693 (9,182) 64,770 55,588 (9,182) - 55,588 - - 55,588 34,155 55,588 31,172 34,155 2,230 248,776 (401) 2,230 2,801 (401) - 2,801 - - 255,639 - 129,583 253,406 (2,895) 129,583 - (2,895) 26,665 - 73,845 26,665 13 73,845 1,386 13 638 1,386 229,235 5,015 26,404 233,612 (3,431) 19,794 22,973 (3,430) (9,280) 16,364 - (9,280) 13,693 13,693 7,084 17,840 7,084 152,848 29,859 152,848 4,765 29,859 2,224 4,765 - 2,224 - - 189,696 - 39,344 189,696 99,257 39,344 6,309 119,679 20,312 6,309 13,616 20,312 - 13,616 1,632 - 824 1,632 181,294 824 8,402 201,716 (2,941) (12,020) 5,461 4,207 - (7,813) - - 5,461 5,461 (7,813) 10,085 (7,813) 14,299 (15,318) 842,942 10,853 14,299 2,732 10,854 29,121 2,608 (9,493) 29,121 28,708 (9,493) 76,220 33,055 5,881 80,444 (200) 5,881 5,991 (200) 31,640 5,991 6,659 31,640 176 6,659 4,077 13,153 4,630 4,077 58,854 4,630 17,366 71,831 (1,974) 8,613 15,392 (1,974) - 6,639 (15,105) - 287 (3,342) 6,639 (1,595) 3,010 - (13,085) (123) - (9,377) - 9,493 (9,377) (32,766) 9,493 (48,091) (37,113) - (50,082) - - - - 2,501 - (3,539) 2,501 12,977 (3,539) - - (8,478) - 3,461 (12,855) (51,552) (13,893) 3,609 (36,189) (47,943) 3,608 9,280 (32,581) 15,105 9,280 (23,558) (23,558) (23,301) (18,261) (23,301) 258,264 842,942 35,952 258,266 68,176 35,950 68,176 - - - 1,205,334 - 442,561 1,205,334 163,781 442,561 101,899 188,035 198,362 101,899 157,808 198,362 15,375 157,808 18,659 15,375 - 18,659 1,098,445 - 106,889 1,122,699 (19,332) 82,635 87,557 (12,184) - 70,451 - - 87,557 66,846 70,451 83,053 50,502 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) 4. SEGMENTS (continued) 4.1 Statement of income by segment (continued) 4.1 Statement of income by segment (continued) (1) Foreign exchange unwinding represents the impact to segment income of translating unearned premium and deferred acquisition costs at historic rates of exchange instead of at current rates of exchange. This basis of foreign exchange translation within the segment is reported for management purposes. The Group’s accounting policy is explained in note 2.3(c) and the difference in measurement basis is further discussed in note 41.4 (a). The unwinding comprises the items in the following table which have also been added back in the adjustments column. Net premium revenue Commissions Exchange gains / losses Income tax Foreign exchange unwinding 2010 2009 (2,942) 896 3,177 (306) 825 (13,085) 3,539 (3,342) 3,608 (9,280) (2) Group finance costs represent costs of borrowings and facilities initiated at Group level. These include costs relating to the Sagicor 2016 senior notes, a bank loan from the Royal Bank of Canada, the letter of credit facilities from the Bank of Nova Scotia and the reinsurance financing costs relating to Sagicor at Lloyd’s. Where material, these costs have been removed from the individual segment which benefits from these borrowings and facilities. This change in presentation was made this year to conform to the format of information provided by the subsidiary company. Comparative figures have also been restated. (i) Investment gains Fair value investment gains are recognised on: the revaluation of investment property; the revaluation of debt and equity securities classified as at fair value through income; the disposal of debt and equity securities classified as available(cid:1)for sale or loans and - - - receivables. Therefore, significant gains and losses may be triggered by changes(cid:1) in market prices and / or by decisions to dispose of investments. (cid:1) (ii) Allowances for impairment of financial investments Significant impairment losses may be triggered by changes in market prices and economic conditions. (iii) Foreign exchange gains and losses Movements in foreign exchange rates may generate significant exchange gains or losses when the foreign currency denominated monetary assets and liabilities are re-translated at the date of the financial statements. (iv) Gains arising on acquisitions Gains arising on acquisitions may be significant and are non-recurring. Variations in segment income may arise from non-recurring or other significant factors. The most common factors contributing to variations in segment income are as follows. (v) Movements in actuarial liabilities arising from changes in assumptions The change in actuarial liabilities for the year includes the effects arising from changes in assumptions. The principal assumptions in computing the actuarial liabilities on life and annuity contracts relate to mortality and morbidity, lapse, investment yields and operating expenses and taxes. Because the process of changes in assumptions is applied to all affected insurance contracts, changes in assumptions may have a significant effect in the period in which they are recorded. Sagicor Financial Corporation 101 Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.1 Statement of income by segments (continued) Sagicor Financial Corporation Amounts expressed in US $000 The table below summarises by segment the individual line items in the statement of income impacted by the foregoing factors. Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office and other Adjustments Total Variations in income by segment 2010 Investment gains / (losses) Allowances for impairment of financial investments Foreign exchange gains / (losses) Gains on acquisitions 7,512 139 251 27,229 1,561 (5,809) (320) - 5,843 1,248 1,908 - 238 - 7,142 - (2,301) 1,837 42,172 3,186 1,120 - - - - - - - Decrease in policy liabilities from actuarial assumptions (3,337) (7,515) 557 3,157 - - (7,138) 2009 Investment gains / (losses) 8,084 12,997 (401) Allowances for impairment of financial investments 2,572 1,449 - Foreign exchange gains / (losses) 629 6,289 (3,396) Gains on acquisitions Decrease in policy liabilities from actuarial assumptions - (32,734) - (9,734) - - 9,357 4,741 - - 2,309 - 222 - 7,106 (6,105) 32,346 8,984 4,523 - - - 5,282 - - (37,186) 4.2 Other comprehensive income Variations in other comprehensive income may arise also from non-recurring or other significant factors. The most common are as follows. (ii) Changes in actuarial liabilities Changes in unrealised investment gains identified in (i) above may also generate significant changes in actuarial liabilities as a result of the use of asset liability matching in the liability estimation process. (i) Unrealised investment gains Fair value investment gains are recognised on the revaluation of debt and equity securities classified as available for sale. Therefore, significant gains and losses may be triggered by changes in market prices. (iii) Foreign exchange gains and losses Movements in foreign exchange rates may generate significant exchange gains or losses on the re- translation of the financial statements of foreign currency reporting units. 102 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.2 Other comprehensive income (continued) Sagicor Financial Corporation Amounts expressed in US $000 The table below summarises by segment the individual line items in the other comprehensive income impacted by the foregoing factors. Variations in other comprehensive income by segment Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office and other Adjustments Total 2010 Unrealised investment gains / losses 8,042 Changes in actuarial liabilities Retranslation of foreign currency operations (2,282) (369) 2009 Unrealised investment gains / (losses) 12,618 Changes in actuarial liabilities Retranslation of foreign currency operations (3,832) (1,150) 28,363 - 9,672 21,364 - (268) 11,536 (131) - 47,542 - (8,294) - - (10,576) (1,660) - (20) (1,616) 6,007 (257) 11,573 2,423 - 47,721 - (13,274) - - (17,106) (12,996) (21,580) 4,404 - (87) 5,417 Sagicor Financial Corporation 103 Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.3 Statement of financial position by segment A summary statement of financial position by segment is set out below. Eliminations on consideration comprise adjustments to arrive at the Group financial position Sagicor Financial Corporation Amounts expressed in US $000 2010 Financial investments Other investments & assets Inter-segment assets Total assets Policy liabilities Other operating liabilities Inter-segment liabilities Total liabilities Net assets 2009 Financial investments Other investments & assets Inter-segment assets Total assets Policy liabilities Other liabilities Inter-segment liabilities Total liabilities Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office and other Adjustments Total Summary statement of financial position by segment 1,010,885 1,444,391 293,750 111,546 199,239 24,315 235,360 374,208 - 796,043 207,372 339 1,416,181 1,667,945 609,568 1,003,754 1,023,969 66,938 8,766 494,767 858,490 5,127 1,099,673 1,358,384 490,882 26,456 72,939 590,277 654,675 182,459 23,613 860,747 150,153 - 155,850 - 126,657 432,660 (262,857) (262,857) 48,638 - 281,136 - 152,412 482,186 (262,857) (262,857) 3,636,832 1,230,419 - 4,867,251 2,712,931 1,415,479 - 4,128,410 316,508 309,561 19,291 143,007 (49,526) - 738,841 979,805 286,949 64,684 1,248,706 240,015 17,833 192,596 269,785 - 685,454 225,696 167,881 - 163,085 - 1,256 122,704 1,331,438 1,506,554 462,381 912,406 453,670 (206,477) (206,477) 971,288 65,450 8,443 488,264 777,683 4,830 1,045,181 1,270,777 323,200 24,975 69,855 418,030 594,882 177,601 22,669 795,152 41,063 - 314,138 - 100,680 455,881 (206,477) (206,477) 3,274,442 1,185,530 - 4,459,972 2,418,697 1,359,847 - 3,778,544 Net assets 286,257 235,777 44,351 117,254 (2,211) - 681,428 104 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 4. SEGMENTS (continued) 4.4 Additions to non-current assets by segment Segment operations include certain non-current assets comprising investment property, property, plant and equipment, investment in associated companies and intangible assets. Additions to these categories for the year are as follows: Additions to non-current assets by segment Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Sagicor USA Head office and other 2010 2009 7,103 7,054 16,131 3,094 1,444 1,134 1,125 705 3,802 4,713 Total 29,605 16,700 Sagicor Financial Corporation Amounts expressed in US $000 4. SEGMENTS (continued) 4.6 Geographical areas The Group operates in certain geographical areas which are determined by the location of the subsidiary or branch initiating the business. Except for the Sagicor at Lloyd’s Syndicate 1206 business which underwrites risks inside and outside of the UK, the location of the subsidiary or branch is not materially different from the location of customers. Group operations in geographical areas include certain non-current assets comprising investment property, property, plant and equipment, investment in associated companies and intangible assets. Total external revenues and non-current assets (as defined in the foregoing paragraph) by geographical area are summarised in the following table. 4.5 Products and services Total external revenues relating to the Group’s products and services are summarised in the following table. 2010 2009 Barbados Jamaica Trinidad & Tobago Other Caribbean United Kingdom Life, health and annuity insurance contracts issued to individuals 535,724 537,684 USA Life, health and annuity insurance and pension administration contracts issued to groups Property and casualty insurance Banking, investment management and other financial services Farming and unallocated revenues 221,187 251,615 377,925 98,040 23,221 265,517 128,047 22,471 1,256,097 1,205,334 (cid:1) External Revenue Non-current assets 2010 2009 2010 2009 128,727 357,786 112,283 141,686 352,874 162,741 135,699 376,102 109,940 163,020 230,875 189,698 178,869 181,305 91,863 60,562 39,926 32,726 2,938 84,690 60,797 43,805 33,862 3,371 1,256,097 1,205,334 406,884 407,830 Sagicor Financial Corporation 105 Sagicor Financial Corporation Amounts expressed in US $000 Notes to the Financial Statements Year ended December 31, 2010 5. INVESTMENT PROPERTY Investment property is carried at fair value as determined by independent valuers using internationally recognised valuation techniques. Direct sales comparisons, when such data is available, and income capitalisation methods, when appropriate, are included in the assessment of fair values. For some tracts of land which are currently un-developed or which are leased to third parties, the fair value may reflect the potential for development within a reasonable period of time. The movement in investment property for the year is as follows: (cid:1) 2010 2009 Balance, beginning of year Additions at cost 116,845 11,233 Transfers to real estate developed for resale - 107,390 806 (2,642) Transfers from / (to) property, plant and equipment (1,087) 13,231 Disposals and divestitures (Depreciation) / Appreciation in fair values Effects of exchange rate changes (7,341) (3,875) (1,399) 3,077 918 (1,142) Balance, end of year (cid:1) Investment property includes $16,527 (2009 - $17,273) which represents the Group’s proportionate interest in joint ventures summarised in the following table. 116,845 119,169 Description of property Percentage ownership Country Barbados Freehold lands Freehold office buildings Trinidad & Tobago Freehold office building 50% 10%, 33% 60% Pension Funds managed by the Group own the remaining 50% interests of freehold lands in Barbados, and a 33% interest in a freehold office building in Barbados. 106 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 6. PROPERTY, PLANT AND EQUIPMENT Sagicor Financial Corporation Amounts expressed in US $000 2010 2009 Owner-occupied properties Land Land & buildings Office furnishings, equipment & vehicles Operating lease vehicles & equipment Total Owner-occupied properties Land Land & buildings Office furnishings, equipment & vehicles Operating lease vehicles & equipment Total Net book value, beginning of year 35,694 Additions at cost Transfers from / (to) investment property Transfers to intangible assets Transfers (to) / from real estate developed or held for sale Other transfers Disposals and divestitures (Depreciation) / appreciation in fair values Depreciation charge Effects of exchange rate changes - - - - - - - - - 60,443 529 22,694 10,052 128,883 40,079 73,282 23,492 11,426 148,279 10,394 2,383 13,306 - 91 9,001 2,512 11,604 1,087 - - 1,087 (1,581) (11,650) - - (13,231) - - - - - - 169 (169) - - - - - - (1,914) - (2,676) 109 - - (1,914) (2,567) - 270 (270) - - (16) (2,356) (1,160) (3,532) - - (384) (1,364) (1,748) 770 - - 770 (128) 1,304 - - 1,176 (809) (6,462) (2,360) (9,631) - 286 238 - 524 - (917) (2,046) (6,608) (2,524) (623) 2 (10,049) (2,667) Net book value, end of year 35,694 62,459 24,339 8,915 131,407 35,694 60,443 22,694 10,052 128,883 Represented by: Cost or valuation 35,694 64,252 81,360 15,151 Accumulated depreciation - (1,793) (57,021) (6,236) 196,457 (65,050) 35,694 62,069 76,060 15,903 189,726 - (1,626) (53,366) (5,851) (60,843) 35,694 62,459 24,339 8,915 131,407 35,694 60,443 22,694 10,052 128,883 (cid:1) Owner occupied property is carried at fair value as determined by independent valuers using internationally recognised valuation techniques. Direct sales comparisons, when such data is available, and income capitalisation methods, when appropriate, are included in the assessment of fair values. Lands are largely utilised for farming operations. In determining the fair value of lands, their potential for development within a reasonable period is assessed, and if such potential exists, the fair value reflects that potential. Land and buildings consist largely of properties containing occupied office buildings and includes $625 (2009 – $622) which represents the Group’s proportionate interest in office buildings in Belize and Grenada. Sagicor Financial Corporation 107 Sagicor Financial Corporation Amounts expressed in US $000 Notes to the Financial Statements Year ended December 31, 2010 7. INVESTMENT IN ASSOCIATED COMPANIES 2010 2009 Investment, beginning of year 32,674 31,893 Additions Dividends received Share of Income before taxes - 1,606 (1,357) (1,269) 2,478 2,125 Amortisation of intangible assets identified on acquisition Income taxes Other comprehensive income / (loss) Effects of exchange rate changes (557) (216) (28) (65) (557) (621) (217) (286) Investment, end of year 32,929 32,674 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 2010 2009 360,028 234,592 122,296 8,786 351,511 230,444 115,128 5,518 108 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 8. INTANGIBLE ASSETS (a) Analysis and changes for the year Sagicor Financial Corporation Amounts expressed in US $000 2010 Goodwill Customer & broker relationships Syndicate capacity & licences Software Total Goodwill 2009 Customer & broker relationships Syndicate capacity & licences Software Total Net book value, beginning of year 58,289 36,978 21,021 13,140 129,428 59,703 43,293 18,758 13,168 134,922 Additions at cost Identified on acquisitions Transfer from property, plant and equipment (note 6) - - - Amortisation and impairment - Disposals and divestitures (896) Effects of exchange rate changes 555 - - - (3,080) (2,353) 1,024 - 5,066 5,066 - - - 2,684 2,684 - - - - - - 7 - - - 7 - - - 1,914 1,914 (47) - (4,954) (739) (8,081) - (3,441) (47) (4,565) (8,053) (3,988) - - - - - (643) 18 954 (1,421) (2,874) 2,310 (61) (2,046) Net book value, end of year 57,948 32,569 20,331 12,531 123,379 58,289 36,978 21,021 13,140 129,428 Represented by: Cost or valuation 59,761 46,962 20,484 31,997 159,204 60,102 49,439 21,129 28,325 158,995 Accumulated depreciation (1,813) (14,393) (153) (19,466) (35,825) (1,813) (12,461) (108) (15,185) (29,567) 57,948 32,569 20,331 12,531 123,379 58,289 36,978 21,021 13,140 129,428 (cid:1) Sagicor Financial Corporation 109 Notes to the Financial Statements Year ended December 31, 2010 (cid:1) (cid:1) 8. INTANGIBLE ASSETS (continued) (cid:1)(cid:1) (b) Impairment of intangible assets Goodwill arises from past acquisitions and is allocated to cash generating units (CGUs). Goodwill and intangible assets with an indefinite useful life are tested annually for impairment. CGUs and intangible assets with an indefinite useful life by segment are as follows: Operating Segment 2010 2009 Goodwill Intangible assets with indefinite useful life 2009 2010 Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Other operating companies 27,102 21,688 4,290 4,868 57,948 27,116 21,880 4,425 4,868 58,289 - - - - 19,783 20,406 - - 19,783 20,406 (cid:1) The recoverable amount of a CGU is determined as the higher of its value in use or its fair value less costs to sell. A CGU’s value in use is estimated using cash flow projections prepared by management. Detailed cash flow projections are prepared for three years and are extrapolated for subsequent years. The fair value of a CGU is estimated by capitalising its expected earnings over time. Syndicate capacity, which has an indefinite useful life, is also tested for impairment by its value in use. Cash flow discount factors, residual growth rates and earnings multiples utilised in the assessment of recoverable amounts as of December 31, 2010 were as follows: Sagicor Financial Corporation Amounts expressed in US $000 8. INTANGIBLE ASSETS (continued) 2009 Cash flow discount factors Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Other operating companies n/a n/a 12.9%, 12.2% 14.8%, 12.8% Cash flow residual growth rates n/a n/a 1.9%, 2.5% 4.6%, 4.2% Earnings multiples 9.9 5.7 n/a n/a Sensitivity Applying adjusted earnings multiples to the Sagicor Life Inc and Sagicor Life Jamaica segments, would produce the following results. Earnings multiples Sagicor Life Inc segment 9.9 8.58 8.42 Excess of recoverable amount over carrying amount / (impairment) 49,525 - (6,112) Earnings multiples Excess of recoverable amount over carrying amount / (impairment) – representing Sagicor’s 59% interest in the segment Sagicor Life Jamaica segment 6.4 4.55 4.35 73,549 - (7,901) 2010 Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe Other operating companies Cash flow discount factors Cash flow residual growth rates Earnings multiples The assessment of the Sagicor Europe segment goodwill and intangible assets with indefinite useful life is most sensitive to future net claims ratios. Increasing claims ratios from underwriting year 2012 in the model would produce the following results: n/a n/a 11.5% 14.8% n/a n/a 1.5% 4.1% 9.9 6.4 n/a n/a Net claims ratio Excess of recoverable amount over carrying amount / (impairment) Sagicor Europe segment 55% 57.46% 58.00% 61,920 - (13,481) 110 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 (cid:1) 9. FINANCIAL INVESTMENTS 9.1 Analysis of financial investments (cid:1) Sagicor Financial Corporation Amounts expressed in US $000 9. FINANCIAL INVESTMENTS (continued) 9.1 Analysis of financial investments (continued) 2010 2009 2010 2009 Carrying value Fair value Carrying value Fair value Non-derivative financial assets at fair value through income comprise: Held to maturity securities: Debt securities Available for sale securities: Debt securities Equity securities 19,691 20,396 19,547 16,682 1,742,835 1,742,835 1,458,765 1,458,765 87,713 87,713 99,788 99,788 (cid:1) 1,830,548 1,830,548 1,558,553 1,558,553 Financial assets at fair value through income: Debt securities Equity securities Derivative financial instruments (note 41.6) Mortgage loans Securities purchased under agreements to resell 96,333 23,839 12,070 46,876 96,333 23,839 12,070 46,876 71,314 17,058 4,105 48,180 71,314 17,058 4,105 48,180 Assets designated at fair value upon initial recognition 170,030 146,572 Debt securities comprise: Government and government-guaranteed debt securities 1,497,082 1,350,052 Collateralised mortgage obligations Corporate debt securities Other securities 159,574 898,452 53,444 193,487 632,867 47,883 2,608,552 2,224,289 Debt securities include $4,559 (2009 - $3,042) that contain options to convert to common shares of the issuer. 2,982 2,982 10,020 10,020 Corporate debt securities include: (cid:1) 182,100 182,100 150,677 150,677 Loans and receivables: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits 749,693 250,206 123,250 144,065 798,626 674,663 251,461 265,096 130,092 124,017 172,397 135,078 696,966 262,726 129,676 144,918 25,585 25,585 72,295 72,295 311,694 311,694 274,516 274,516 1,604,493 1,689,855 1,545,665 1,581,097 Total financial investments 3,636,832 3,722,899 3,274,442 3,307,009 (i) convertible loans totalling $nil (2009 - $5,199) issued to the Group by an associated company. These loans can be converted into equity or bonds issued by the associated company. (ii) $21,745 (2009 - $14,741) in bonds issued by an associated company. Equity securities include $6,559 (2009 - $6,333) in mutual funds managed by the Group. Sagicor Financial Corporation 111 Notes to the Financial Statements Year ended December 31, 2010 9. FINANCIAL INVESTMENTS (continued) 9. FINANCIAL INVESTMENTS (continued) 9.2 Pledge assets 9.2 Pledged assets Debt securities include $20,894 (2009 - $21,268) and policy loans include $22,461 (2009 - $25,153) in assets held in trust for a reinsurer (note 20). The income from these assets accrues to the reinsurer. Debt and equity securities include $162,100 (2009 - $229,450) as collateral for loans payable and other funding instruments. 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 $5,294 (2009 - $5,442), and mortgages and mortgage backed securities having a total market value of $123,312 (2009 - $124,715). Debt securities are pledged as collateral under repurchase agreements with customers and other financial institutions and for security relating to overdraft and other facilities with other financial institutions. As of December 31, 2010, these pledged assets totalled $581,911 (2009 - $526,273). Of these assets pledged as security, $94,761 (2009 – $204,027) represents 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 $47,029 (2009 – $48,352) pledged as collateral for a letter of credit facility obtained by the Group. 9.3 Returns accruing to the benefit of contract-holders Financial investments include the following amounts for which the full income and capital returns accrue to the holders of unit linked policy and deposit administration contracts. Sagicor Financial Corporation Amounts expressed in US $000 9. FINANCIAL INVESTMENTS (continued) 9.4 Reclassification of financial investments In 2008, the Group reclassified certain securities from the available for sale classification to the loans and receivables classification. The assets reclassified were primarily: (cid:37) (cid:37) Government of Jamaica debt securities with a maturity date of 2018 and after, which are held to back long-term insurance liabilities; and Non-agency collateralised mortgage obligations in the USA. The reclassifications were made because the markets for these securities were considered by management to have become inactive. The following disclosures are in respect of these reclassified assets. 2010 2009 Carrying value Fair value Carrying value Fair value Government debt securities maturing after September 2018 76,095 79,049 134,387 114,233 Other debt securities 15,089 15,968 27,059 25,234 91,184 95,017 161,446 139,467 2010 2009 Cumulative net fair value loss, beginning of year (41,805) (71,210) 2010 2009 Net fair value gains subsequent to restatement Disposals Effect of exchange rate changes 23,835 12,869 216 25,623 2,209 1,573 Cumulative net fair value loss, end of year (4,885) (41,805) Debt securities Equity securities Mortgage loans Securities purchased under agreements to resell 95,156 19,517 46,876 2,982 70,690 12,208 48,180 10,020 164,531 141,098 112 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 9. FINANCIAL INVESTMENTS (continued) 9.4 Reclassification of financial investments (continued) The net fair value gains subsequent to restatement approximate the fair value gains that would have been recorded in total comprehensive income had the reclassification not been made. The disposal amount represents the net loss that would have been reclassified from other comprehensive income to income on disposal. 10. REINSURANCE ASSETS Reinsurers’ share of: Actuarial liabilities (note 13.1) Policy benefits payable (note 14.2) Provision for unearned premiums (note 14.3) Other items 2010 2009 178,078 207,696 57,907 40,909 4,954 35,900 45,766 5,517 281,848 294,879 The provision for unearned premiums and other items disclosed above are expected to mature within one year of the financial statements date. Sagicor Financial Corporation Amounts expressed in US $000 12. MISCELLANEOUS ASSETS AND RECEIVABLES Pension plan assets (note 31) Real estate developed or held for resale Deferred policy acquisition costs Premiums receivable Other accounts receivable 2010 2009 3,826 12,322 60,486 145,175 73,479 295,288 5,087 11,869 46,525 128,794 62,736 255,011 Other accounts receivable include $ 3,097 (2009 – $2,814) due from managed funds. (a) Real estate developed or held for resale Real estate developed for resale includes $2,990 (2009 - $6,290) which is expected to be realised within one year of the financial statements date. These balances also include $231 (2009 - $417)(cid:1) which represents the Group’s proportionate interest in joint ventures. (b) Deferred policy acquisition costs Deferred policy acquisitions costs are expected to mature within one year of the financial statements date. The movement in these balances for the year was as follows: 11. INCOME TAX ASSETS Deferred income tax assets (note 33) Income and withholding taxes recoverable 2010 2009 9,209 18,555 27,764 15,272 16,518 31,790 Gross amount(cid:1) Balance, beginning of year Expensed Additions De-recognised on divestiture Effect of exchange rate changes Balance, end of year 2010 46,525 (102,150) 118,381 (1,238) (1,032) 60,486 2009 28,227 (81,322) 97,007 - 2,613 46,525 Income and withholding taxes recoverable are expected to be recovered within one year of the financial statements date. Sagicor Financial Corporation 113 Notes to the Financial Statements Year ended December 31, 2010 13. ACTUARIAL LIABILITIES 13.1 Analysis of actuarial liabilities Sagicor Financial Corporation Amounts expressed in US $000 13. ACTUARIAL LIABILITIES (continued) 13.2 Movement in actuarial liabilities Gross liability Reinsurers’ share 2010 2009 2010 2009 The movement in actuarial liabilities for the year is as follows: Contracts issued to individuals: Life insurance - participating policies 316,100 306,015 1,497 1,992 Life insurance and annuity - non-participating policies Health insurance Unit linked funds Reinsurance contracts held Contracts issued to groups: Life insurance Annuities Health insurance 995,371 911,860 143,545 169,442 1,981 110,386 13,995 1,456 88,492 12,010 739 696 - - - - 1,437,833 1,319,833 145,781 172,130 30,914 28,183 3,625 3,220 248,111 228,763 28,549 31,754 36,854 35,752 123 592 315,879 292,698 32,297 35,566 Total actuarial liabilities 1,753,712 1,612,531 178,078 207,696 The following notes are in respect of the foregoing table: (cid:1) (cid:1) (cid:1) Life insurance includes coverage for disability and critical illness. Actuarial liabilities include $117,341 (2009 - $121,163) 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. Gross liability Reinsurers’ share 2010 2009 (restated) 2010 2009 Balance, beginning of year 1,612,531 1,450,219 207,696 215,240 Assumed on acquisitions 2,409 1,549 1,345 - Change in actuarial liabilities recorded in income (note 27) Change in actuarial liabilities recorded in other comprehensive income (notes 35 and 38) 117,889 156,285 (27,695) (7,496) 15,041 24,254 - - De-recognised on divestiture (3,489) - (3,260) - Effect of exchange rate changes 9,331 (19,776) (8) (48) Balance, end of year 1,753,712 1,612,531 178,078 207,696 As set out in note 2.13 (a), the changes in actuarial liabilities which arise from asset fair value gains or losses in other comprehensive income (OCI) are now also recorded in OCI. In prior years, this change in actuarial liabilities was recorded in income. The effect of the change in accounting policy in 2009 is summarised in note 38. 114 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 13. ACTUARIAL LIABILITIES (continued) 13. ACTUARIAL LIABILITIES 13.2 Movement in actuarial liabilities (continued) 13.3 Assumptions – life insurance and annuity contracts The changes in actuarial liabilities recorded in income and other comprehensive income are further analysed as follows: (a) Process used to set actuarial assumptions and margins for adverse deviations Gross liability Reinsurers’ share 2010 2009 2010 2009 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. 144,559 214,746 (27,927) (7,496) Any recent changes in actuarial standards and practice are also incorporated in the current valuation. (7,138) (37,186) 232 (8,288) (2,406) 368 63 3,429 5,322 - - - (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 2010 valuation, insurers updated studies of recent mortality experience. The resulting experience was compared to external mortality studies including the Canadian Institute of Actuaries (CIA) 1986 - 1992 tables. Appropriate modification factors were selected and applied to underwritten(cid:1) and non-underwritten business respectively. Annuitant mortality was determined by reference to CIA tables or to other established scales. Assumptions for morbidity are determined after taking into account insurer and industry experience and established guidelines from Actuarial Institutes. (c) Assumptions for lapse - - - - 132,930 180,539 (27,695) (7,496) Lapses relate to the forced termination of policies due to non-payment of premium or to the voluntary termination of policies by policyholders. Normal changes in actuarial liabilities arising from increments and decrements of inforce policies and from the issuance of new policies Effect of changes in actuarial assumptions for mortality, morbidity, lapse, investment yields, and operating expenses and taxes Other changes: Actuarial modelling, refinements, improvements and corrections Changes in margins for adverse deviations Other (cid:1) Lapse studies were updated by insurers for the 2010 valuation, to determine the most recent experience of persistency. Appropriate rates of termination by policy duration were determined and applied in the actuarial valuations. Sagicor Financial Corporation 115 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 13. ACTUARIAL LIABILITIES (continued) 13. ACTUARIAL LIABILITIES (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) (d) Assumptions for investment yields (e) Assumptions for operating expenses and taxes 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 is the assumed rate that will ultimately be earned on government bonds. It is established for each geographic area and is summarised in the following table. Policy acquisition and policy maintenance expense costs for long-term business of each insurer are measured and monitored using internal expense studies. Policy maintenance expense costs are reflected in the actuarial valuation after adjusting for expected inflation. Costs were updated for the 2010 valuations and were applied on a per policy basis. Taxes reflect assumptions for future premium taxes and income taxes levied directly on investment income (see note 32.2). For income taxes levied on net income, actuarial liabilities are adjusted for policy related recognised deferred tax assets and liabilities. Ultimate rate of return: 2010 2009 (f) Asset defaults Barbados Jamaica Trinidad & Tobago Other Caribbean USA 5.0% 7.0% 5.5% 5.0% 7.0% 5.5% 5.0 – 5.5% 5.0 – 5.5% 4.0% 4.0% 116 Sagicor Financial Corporation The AA of each insurer includes a provision for asset default in the modelling of the cash flows. The provision is based on industry and Group experience and includes specific margins for equity securities, debt securities, mortgage loans and deposits. (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: 2010 2009 Mortality and morbidity Lapse Investment yields and asset default Operating expenses and taxes 50,155 39,209 67,620 18,561 41,813 32,203 67,023 16,969 175,545 158,008 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 13. ACTUARIAL LIABILITIES (continued) 14. OTHER INSURANCE LIABILITIES (continued) 13.4 Assumptions – health insurance contracts 14.2 Policy benefits payable 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 date of the financial statements. (a) Analysis of policy benefits payable Gross liability Reinsurers’ share 2010 2009 2010 2009 14. OTHER INSURANCE LIABILITIES 14.1 Analysis of other insurance liabilities Dividends on deposit and other policy balances Policy benefits payable Provision for unearned premiums 2010 2009 70,101 355,395 239,385 664,881 67,784 232,406 201,579 501,769 The provision for unearned premiums is expected to mature within one year of the financial statements date. . Life insurance and annuity benefits 54,969 45,884 10,565 11,134 Health claims 2,647 3,636 2,643 2,633 Property and casualty claims: Notified outstanding claims 174,640 92,216 31,035 12,303 Provision for claims incurred but not reported 123,139 90,670 13,664 9,830 355,395 232,406 57,907 35,900 Property and casualty claims payable contain total discounted amounts of $14,440 in respect of the gross liability and $1,645 in respect of the reinsurers’ share (2009 – $4,826 and $388 respectively). Included within the total discounted amounts are $5,537 (2009 – nil) in the gross liability and $383 (2009 – nil) in the reinsurers’ share representing sub-classes of insurance. These amounts result from the discounting at rates which reflect the achievable yield over 10 years of the insurer’s investment portfolio. The discount rates varied from 0.27% to 3.40% (2009 – 0.31% to 3.48%). (cid:1) (cid:1) (cid:1) Sagicor Financial Corporation 117 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 14. OTHER INSURANCE LIABILITIES (continued) 14. OTHER INSURANCE LIABILITIES (continued) 14.2 Policy benefits payable (continued) (b) Movement in policy benefits payable 14.3 Provision for unearned premiums (continued) (b) Movement in provision for unearned premiums Gross amount Reinsurers’ share 2010 2009 2010 2009 Gross amount Reinsurers’ share 2010 2009 2010 2009 Balance, beginning of year Policy benefits incurred 232,406 626,071 183,971 500,416 35,900 50,861 77,419 58,703 Policy benefits paid (496,884) (458,092) (49,607) (71,964) De-recognised on divestiture (7,014) - (5,701) - Effect of exchange rate changes 816 6,111 (104) (1,700) Balance, end of year 355,395 232,406 57,907 35,900 Balance, beginning of year 201,579 135,543 45,766 36,271 Premiums written 510,217 444,835 111,087 130,107 Premium revenue De-recognised on divestiture Effect of exchange rate changes (454,202) (389,078) (103,984) (121,773) (14,348) - (11,811) - (3,861) 10,279 (149) 1,161 Balance, end of year 239,385 201,579 40,909 45,766 (cid:1) 15. INVESTMENT CONTRACT LIABILITIES 14.3 Provision for unearned premiums (a) Analysis of provision for unearned premiums Property and casualty insurance Health insurance Gross liability Reinsurers’ share 2010 2009 2010 2009 239,385 201,571 40,909 45,766 - 8 - - 239,385 201,579 40,909 45,766 At amortised cost: Deposit administration liabilities Other investment contracts At fair value through income: Unit linked deposit administration liabilities 118 Sagicor Financial Corporation 2010 2009 Carrying value Fair value Carrying value Fair value 109,739 109,739 95,581 95,581 100,752 210,491 101,537 211,276 132,229 227,810 132,416 227,997 83,847 83,847 76,587 76,587 294,338 295,123 304,397 304,584 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 16. NOTES AND LOANS PAYABLE 17. DEPOSIT AND SECURITY LIABILITIES 2010 2009 Carrying value Fair value Carrying value Fair value 7.5% senior notes due 2016 144,028 154,696 144,520 149,771 Other funding instruments At amortised cost: 12.5% cumulative redeemable preference shares due 2013 Bank loans and other funding instruments 7,191 7,191 14,235 14,235 30,666 30,666 42,089 42,089 181,885 192,553 200,844 206,095 Customer deposits Securities sold under agreements to repurchase (cid:1) The Group issued ten year $150,000 senior notes which are repayable in 2016. The notes carry a 7.5% rate of interest fixed for the period and interest is payable semi-annually. The notes are traded and are listed on the Luxembourg Euro MTF Market. At fair value through income: Structured products Derivative financial instruments (note 41.6) 2010 2009 Carrying value Fair value Carrying value Fair value 229,617 168,134 240,875 202,620 233,443 162,989 240,379 146,174 575,716 644,094 501,128 456,825 5,655 1,849 7,504 5,655 1,849 7,504 5,299 2,248 7,547 5,299 2,248 7,547 983,551 1,097,673 907,487 853,305 Bank overdrafts 2,580 2,580 2,380 2,380 976,047 1,090,169 899,940 845,758 The 12.5% cumulative redeemable preference shares were issued by Pan Caribbean Financial Services Limited in February 2008. The shares are denominated in Jamaican dollars. 51.5% of the shares issued in 2008 were redeemed in 2010. In December 2009, the Group received a bank loan of $25,000. Interest is variable at 5.25% above LIBOR at the date of the financial statements (2009 – 3.5% above LIBOR). The initial term of the loan was 6 months, but was extended to March 31, 2011. Other bank loans and funding instruments carry interest rates between 4.75% and 7.5% and are repayable by June 2011. The security for bank loans and other funding instruments are disclosed in note 9.2. Financial covenants in respect of the above liabilities are summarised in note 45.3. . Other funding instruments consist of loans from banks and other financial institutions and include balances of $120,402 (2009 - $122,990) 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. Structured products are offered by a banking subsidiary. A structured product is a pre-packaged investment strategy created to meet specific needs that cannot be met from the standardised financial instruments available in the market. Structured products can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to capitalise on current market trends. Collateral for other funding instruments and securities sold under agreements to resell is set out in note 9.2. Sagicor Financial Corporation 119 Notes to the Financial Statements Year ended December 31, 2010 18. PROVISIONS Pension plans and other retirement benefits (note 31) Other 19. INCOME TAX LIABILITIES Deferred income tax liabilities (note 33) Income taxes payable 2010 2009 32,006 6,828 38,834 27,303 12,056 39,359 2010 2009 16,089 7,711 23,800 7,933 8,557 16,490 Income taxes payable are expected to be settled within one year of the financial statements date. 20. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Sagicor Financial Corporation Amounts expressed in US $000 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. 2010 2009 Number of shares ‘000 $000 Number of shares ‘000 $000 Issued and fully paid common shares of no par value: Balance, beginning of year 290,903 281,142 278,355 260,161 Allotments 438 659 12,548 20,981 Balance, end of year 291,341 281,801 290,903 281,142 Treasury shares: Balance, beginning of year Net shares acquired Balance, end of year (1,201) (1,180) (2,381) (2,890) (1,739) (4,629) (725) (476) (2,008) (882) (1,201) (2,890) 2010 2009 Total share capital 288,960 277,172 289,702 278,252 The Company’s shares are listed on the Barbados, Trinidad & Tobago and London stock exchanges. From June 2008 to September 2009, the Company’s shares were listed on the Jamaica stock exchange. Amounts due to policyholders Amounts due to reinsurers Amounts due to managed funds Other accounts payable and accrued liabilities 18,893 60,714 3,046 104,756 35,119 73,132 4,346 83,070 187,409 195,667 Amounts due to reinsurers include $43,355 (2009 – $46,421) due to a reinsurer in respect of assets held in trust by the Group (see note 9.2). 120 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 22. RESERVES Sagicor Financial Corporation Amounts expressed in US $000 <<<< Fair value reserves >>>> Owner occupied property Available for sale assets Actuarial liabilities Cash flow hedges Currency translation reserves Other reserves Total reserves 594 (73,762) 20,794 (42,609) 2010 Balance, beginning of year, as restated (note 38) 20,444 (5,255) Other comprehensive income 693 28,834 (5,424) (9,844) Value of employee services rendered (net) - - - Disposal interest in subsidiaries - 64 - - - - 1,965 - - Other movements Balance, end of year 2009 (restated) - 594 - (594) - 21,137 24,237 (15,268) - (71,797) Balance, beginning of year (note 38) Other comprehensive income Value of employee services rendered (net) Changes in the ownership interest of subsidiaries (note 37.2) Other movements Balance, end of year 19,214 1,230 (45,155) 37,935 10,840 (16,264) 1,462 (1,011) (73,851) (5,554) - - - - - - - 2,022 - 143 5,643 (57) - - - 20,444 (5,255) (5,424) 594 (73,762) Other reserves comprise share based payment reserves of $7,984 (2009 - $5,663) and statutory reserves of $19,301 (2009 - $15,131). - 2,321 - 4,170 27,285 14,913 - 972 (1,052) 5,961 20,794 21,648 2,321 64 4,170 (14,406) (72,577) 16,336 972 6,756 5,904 (42,609) Sagicor Financial Corporation 121 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 (cid:1) 23. PARTICIPATING ACCOUNTS (cid:1) The movements in the participating accounts during the year were as follows: 24. PREMIUM REVENUE Closed participating account Open participating account 2010 2009 2010 2009 (restated) Life insurance Annuities Health insurance 9,158 10,311 (3,307) 333 Property and casualty insurance Gross revenue Reinsurance expense 2010 2009 331,776 128,295 132,748 454,202 318,379 172,763 146,513 369,871 2010 37,109 622 4,356 2009 38,034 326 5,849 103,984 120,375 1,047,021 1,007,526 146,071 164,584 (2,573) (1,153) 1,326 (3,380) - - (257) (260) Gross revenue includes $92,844 (2009 - $84,504) in reinsurance assumed. Balance, beginning of year, as restated (note 38) Total comprehensive income / (loss) Return of transfer to support profit distribution to shareholders Balance, end of year 6,585 9,158 (2,238) (3,307) The amounts in the financial statements relating to participating accounts are as follows: Closed participating account Open participating account 2010 2009 2010 2009 101,498 97,715 248,922 94,913 10,602 11,392 1,623 211 88,557 251,160 10,202 9,242 1,656 352 33,472 24,704 6,536 873 242,216 245,523 35,223 31,113 6,350 1,063 Assets Liabilities Revenues Benefits Expenses Income taxes (cid:1) (cid:1) (cid:1) (cid:1) 122 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 25. NET INVESTMENT INCOME 25. NET INVESTMENT INCOME (continued) 2010 2009 (a) Interest income Investment income: Interest income Dividend income Rental income from investment property Net investment gains Share of operating income of associated companies Other investment income Investment expenses: Allowances for impairment losses Direct operating expenses of investment property Other direct investment expenses 244,893 258,266 3,988 4,934 4,623 5,618 42,172 32,346 2,478 1,302 2,125 3,608 299,767 306,586 3,186 1,662 1,639 6,487 8,984 1,623 1,763 12,370 Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Other balances 2010 2009 187,055 189,702 24,214 8,268 15,058 3,034 7,115 149 25,954 8,068 17,103 10,246 6,753 440 244,893 258,266 Interest from debt securities includes $2,172 (2009 - $2,078) from an associated company. Net investment income 293,280 294,216 (b) Net investment gains / (losses) The Group operates across both active and inactive financial markets. The financial investments placed in both types of market support the insurance and operating financial liabilities of the Group. Because the type of financial market is incidental and not by choice, the Group manages its financial investments by the type of financial instrument (i.e. debt securities, equity securities, mortgage loans etc). Therefore, the income from financial instruments is presented consistently with management practice, rather than by accounting class. The capital and income returns of most investments designated at fair value through income accrue to the holders of unit linked policy and deposit administration contracts which do not affect net income of the Group. (cid:1) Debt securities Equity securities Investment property Other financial instruments 2010 2009 27,744 22,083 11,168 7,722 (1,399) 3,077 4,659 (536) 42,172 32,346 Sagicor Financial Corporation 123 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 26. FEES AND OTHER REVENUE 28. INTEREST EXPENSE 2010 2009 2010 2009 Fee income – assets under administration Fee income – deposit administration and policy funds Commission income on insurance and reinsurance contracts Other fees and commission income Foreign exchange gains / (losses) Other operating and miscellaneous income 15,587 1,050 16,102 11,559 1,120 16,449 61,867 12,843 1,117 17,351 13,624 4,523 18,718 68,176 Insurance contracts Investment contracts Other funding instruments Deposits Securities Other Items 2,980 20,433 4,535 8,617 38,286 3,146 77,997 3,010 24,015 5,045 10,397 56,750 2,682 101,899 The Group manages its interest-bearing obligations by the type of obligation (i.e. investment contracts, securities etc). Therefore, the interest expense is presented consistently with management practice, rather than by accounting class. The capital and income returns of most financial liabilities designated at fair value through income accrue directly from the capital and income returns of specific assets. Therefore, the interest expense of these financial liabilities does not affect the net income of the Group. (cid:1) (cid:1) (cid:1) 27. POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES Policy benefits: Life insurance benefits Annuity benefits Health insurance claims Property & casualty insurance claims Gross amount Reinsurers’ share 2010 2009 2010 2009 154,950 89,629 97,932 144,225 88,230 119,371 23,574 25,695 12,279 15,058 3,827 4,317 284,679 149,620 41,385 13,815 Total policy benefits 627,190 501,446 81,065 58,885 Change in actuarial liabilities (note 13.2) Total policy benefits and change in actuarial liabilities 117,889 156,285 (27,695) (7,496) 745,079 657,731 53,370 51,389 Gross policy benefits include $84,578 (2009 - $86,644) arising from reinsurance assumed. 124 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 29. EMPLOYEE COSTS 30. EMPLOYEE SHARE BASED COMPENSATION (continued) Included in administrative expenses, commissions and related compensation are the following: 30.1 The Company (continued) 2010 2009 (a) LTI plan – restricted share grants Administrative staff salaries, directors’ fees and other short- term benefits 86,293 91,627 Employer contributions to social security schemes Expense arising from equity-settled share plans (note 30.1 to 30.3) (Credit) / expense arising from cash-settled share plans (note 30.4) Employer contribution to defined contribution pension schemes Costs – defined retirement benefits (note 31 (b)) 7,381 3,862 (1,799) 1,522 8,506 105,765 6,949 2,618 672 1,128 4,721 107,715 30. EMPLOYEE SHARE BASED COMPENSATION 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. Restricted share grants have been granted to designated key management of the Group. Share grants may vest over a four year period beginning at the grant date. The vesting of share grants is conditional upon the relative profitability of the Group as compared to a number of peer companies. Relative profitability is measured with reference to the financial year preceding the vesting date. The movement in restricted share grants during the year is as follows: 2010 2009 Number of grants ‘000 Weighted average price Number of grants ‘000 Weighted Average price Balance, beginning of year Grants issued Grants vested Grants forfeited 353 1,023 US$1.59 374 US$2.35 US$1.43 675 US$1.57 (624) US$1.50 (683) US$1.97 - - (13) US$2.34 Balance, end of year 752 US$1.45 353 US$1.59 (b) LTI plan – share options Share options have been granted to designated key management of the Group during the year. Up to 2008, options were granted at the fair market price of the Company shares at the time that the option is granted. From 2009, options are granted at the fair market price of the Company shares prevailing one year before the option is granted. 25% of the options each vest on the first, second, third and fourth anniversaries of the grant date. Options are exercisable up to 10 years from the grant date. (cid:1) Sagicor Financial Corporation 125 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 30. EMPLOYEE SHARE BASED COMPENSATION (continued) 30. EMPLOYEE SHARE BASED COMPENSATION (continued) 30.1 The Company (continued) 30.1 The Company (continued) The movement in share options during the year is as follows. (c) ESOP (cid:1) 2010 2009 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price During each of the years 2006 to 2010, 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 five years from the award date in order to qualify as a beneficiary. Shares are distributed to beneficiaries upon their retirement or termination of employment. Balance, beginning of year Options granted 5,807 1,749 US $2.26 US $1.60 4,211 US $2.17 1,596 US $2.50 Options lapsed/forfeited (214) US $2.09 - - Balance, end of year Exercisable at the end of the year 7,342 2,966 US $2.07 US $2.17 5,807 US $2.26 1,887 US $2.09 Further details of share options and the assumptions used in determining their pricing are as follows: Share price at grant date US $1.60 – 2.50 Fair value of options at grant date US $0.41 – 0.69 2010 2009 US $1.60 – 2.50 US $0.41 – 0.69 Expected volatility Expected life Expected dividend yield Risk-free interest rate 19.3% - 35.8% 19.3% - 35.8% 7.0 years 2.8% - 3.1% 4.8% – 6.8% 7.0 years 2.8% - 3.1% 4.8% – 6.5% The expected volatility is based on statistical analysis of monthly share prices over the 7 years (2009 – 4 years) prior to grant date. During the year, 1,179,500 common shares were acquired by the Trustees (2009 – 476,000 common shares). 30.2 Sagicor Life Jamaica Limited (SLJ) (a) Long-term incentive plan Effective May 1, 2003, SLJ 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. SLJ 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-specified price at some future date, once a pre-determined performance objective is met. The options are granted each year on the date of the SLJ 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 first December 31 following the grant date and for the next three December 31 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 SLJ stock on March 31 of the measurement year. The exercise price of the options is the closing bid price on March 31 of the measurement year. 126 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 30. EMPLOYEE SHARE BASED COMPENSATION (continued) 30. EMPLOYEE SHARE BASED COMPENSATION (continued) 30.2 Sagicor Life Jamaica Limited (SLJ) (continued) 30.2 Sagicor Life Jamaica Limited (SLJ) (continued) Under the previous Stock Option plan, options were granted on December 31 of each year. The strike price was the closing bid price on the grant date. The number of stock options in each stock option award was calculated based on a percentage of applicable salary divided by the strike price. Options were exercisable beginning one year from the date of grant and had a contractual term of six years from the date of grant. Details of the share options outstanding are set out in the following table. J$ represents Jamaica $. Further details of share options and the assumptions used in determining their pricing are as follows: 2010 2009 Fair value of options outstanding J$78,489,000 J$37,274,000 Share price at grant date J$4.20 – 9.86 J$6.80 – 11.30 Exercise price J$4.20 – 9.86 J$7.92 – 11.30 2010 2009 Standard deviation of expected share price returns 39.0% 34.0% Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Remaining contractual term Risk-free interest rate 1 - 6 years 1 - 5 years 9.4% - 17.5% 16.8% - 17.5% The expected volatility is based on statistical analysis of daily share prices over three years. Balance, beginning of year Options granted Options exercised Options lapsed/forfeited Balance, end of year Exercisable at the end of the year 26,539 20,564 (1,044) (5,142) 40,917 20,040 J$8.04 16,194 J$4.20 26,496 J$5.19 (2,982) J$9.20 (13,169) J$7.42 J$7.92 J$3.90 J$7.98 J$6.04 26,539 J$8.04 J$7.30 14,536 J$8.94 (b) Employee share purchase plan SLJ 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 $459 (2009 – 205). 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. Options vest over four years, 25% each anniversary date of the grant. (cid:1) Sagicor Financial Corporation 127 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 30. EMPLOYEE SHARE BASED COMPENSATION (continued) 30.3 Pan Caribbean Financial Services Limited (PCFS) (continued) 30. EMPLOYEE SHARE BASED COMPENSATION (continued) (cid:1) 30.4 Sagicor Europe Limited (SEL) The movement in share options are set out in the following table. J$ represents Jamaica $. 2010 2009 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price 4,799 8,886 J$18.53 5,457 J$18.91 J$15.10 - - (192) J$12.20 - - Balance, beginning of year Options granted Options exercised Options lapsed / forfeited (2,100) J$17.91 (658) J$21.82 Balance, end of year Exercisable at the end of the year 11,393 4,410 J$16.01 4,799 J$18.53 J$17.77 2,312 J$18.66 Further details of share options and the assumptions used in determining their pricing are as follows: 2010 2009 Fair value of options outstanding J$ 53,767,000 J$ 52,604,000 Share price at grant date J$ 12.20 – 21.75 J$ 16.84 Exercise price J$ 12.20 – 21.75 J$ 18.00 – 21.75 Standard deviation of expected share price returns 10.0% - 21.7% Weighted average remaining contractual term 3 years Risk-free interest rate 11.6% - 21.79% 10.0% 3 years 13.3% The expected volatility is based on statistical analysis of daily share prices over one year. 128 Sagicor Financial Corporation The minority shareholders of Sagicor Europe Limited are participating employees who have subscribed in cash for shares of SEL. As of December 31, the total minority shareholding was 14% of issued shares. SEL intends to issue additional shares to future participating employees until the minority holdings total 15% of issued shares. Each participating employee has contracted with SEL and the Company under a share subscription agreement. Under the provisions of these agreements, participating employees can exercise a put option to the Company to acquire their shares at the prevailing fair value. The put option may be exercised over the period beginning from the 5th anniversary of the agreement, with a maximum of 50% of the employee’s shareholding being put on the 5th anniversary, a further maximum of 10% on the 6th anniversary, a further maximum of 10% on the 7th anniversary, and a further maximum of 30% on the tenth anniversary. The shares subscribed by participating employees, and the relevant fair values at the date of subscription are set out in the following table. 2010 2009 Number of Shares ‘000 Fair value at Subscription (in £ 000) Number of Shares ‘000 Fair value at Subscription (in £ 000) Balance, beginning of year Shares subscribed Shares redeemed Balance, end of year 337 - - 337 2,489 344 2,488 - - 2 63 (9) (62) 2,489 337 2,489 The fair values of SEL shares at subscription dates were established by determining the value in use of Syndicate 1206 from 5 year internal cash flow projections. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 30. EMPLOYEE SHARE BASED COMPENSATION (continued) (cid:1) 30.4 Sagicor Europe Limited (SEL) (continued) 31. EMPLOYEE RETIREMENT BENEFITS (continued) (a) Amounts recognised in the financial statements The put options described above have been accounted for as cash settled share based payment arrangements. As such the valuation of the put options at December 31, 2010 of $4,448 (2009 – $6,467) is recognised in the financial statements. The valuation of the put options have been derived from: (cid:1) (cid:1) Valuation of SEL using a variety of methods; Discounting the expected cash outflows from the put options, assuming the options are exercised at the earliest possible dates. The discount rate used was 11.5% (2009 – 12.5%). The shares issued meet the definition of a financial liability in accordance with IAS 32 Financial Instruments: Presentation. Consequently, SEL is consolidated as a 100% subsidiary, with the change in liability recorded as an expense (see note 29). 31. EMPLOYEE RETIREMENT BENEFITS Certain Group subsidiaries have contributory defined benefit pension schemes in place for eligible administrative staff. Some subsidiaries also offer medical and life insurance benefits that contribute to the health care and life insurance coverage of retirees and beneficiaries. 2010 2009 Fair value of retirement plan assets 94,059 Present value of funded retirement obligations Present value of unfunded retirement obligations Unrecognised actuarial losses Amounts recognised in the financial statements Represented by: Liabilities held on deposit with the Group as deposit administration contracts Other recognised liabilities Total recognised liabilities (note 18) Recognised assets (note 12) (97,922) (3,863) (36,991) 12,674 (28,180) (25,371) (6,635) (32,006) 3,826 (28,180) 81,062 (80,566) 496 (30,386) 7,674 (22,216) (22,432) (4,871) (27,303) 5,087 (22,216) The net benefit defined obligation and experience adjustments for the last 5 years are as follows: (cid:1) Present value of retirement obligations 2010 2009 2008 2007 2006 (134,913) (110,952) (107,161) (106,179) (88,778) Fair value of plan assets 94,059 81,062 75,880 75,870 66,059 Net obligation (40,854) (29,890) (31,281) (30,309) (22,719) Experience adjustment on: Plan liabilities Plan assets 2,362 (759) (2,299) (811) (9,565) (1,649) 9,952 849 7,525 1,006 Sagicor Financial Corporation 129 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 31. EMPLOYEE RETIREMENT BENEFITS (continued) 31. EMPLOYEE RETIREMENT BENEFITS (continued) (b) Amounts recognised in the income statement Distribution of the plan assets 2010 2009 Equity unit linked pension funds under management Other assets Total plan assets 91,887 2,172 94,059 78,354 2,708 81,062 (d) Movement in retirement obligations Retirement obligations, beginning of year 110,952 107,161 2010 2009 Current service cost Interest cost Contributions made by employees Actuarial gains and losses Benefits paid Past service cost Other Effects of exchange rate changes 6,149 5,566 10,979 10,816 2,563 2,587 5,987 (4,302) (4,070) (5,373) 65 278 (158) 2,678 (87) (5,926) Retirement obligations, end of year 134,913 110,952 Current service cost Interest cost Net actuarial (gains) / losses recognised during the year Past service cost Expected return on retirement plan assets Total cost 2010 2009 4,858 10,979 1,282 65 (8,678) 3,961 10,816 (1,052) 278 (9,282) 8,506 4,721 The actual return on retirement plan assets was $9,572 (2009 – $9,920). (c) Retirement plan assets Movement in retirement plan assets 2010 2009 Plan assets, beginning of year Expected return on plan assets Actuarial gains and losses Contributions made by the Group Contributions made by plan participants Benefits paid Other Effects of exchange rate changes Plan assets, end of year 81,062 8,678 (203) 4,780 2,337 (3,560) (1,482) 2,447 94,059 75,880 9,282 172 4,357 2,021 (4,015) (1,331) (5,304) 81,062 For the next financial year, the total employer contributions are estimated at $4,904 (2009- $5,031). 130 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 31. EMPLOYEE RETIREMENT BENEFITS (continued) (e) Principal assumptions 32. INCOME TAXES 32.1 Income tax expense The principal actuarial assumptions by geographic area used for 2010 were as follows: (cid:1) Sagicor Financial Corporation Amounts expressed in US $000 Pension benefits Barbados Jamaica Trinidad Discount rate 7.0%-7.8% 11.0% Expected return on plan assets 7.8%-8.0% 10.0% Future salary increases Future pension increases 3.0%-6.5% 2.0%-2.5% 8.5% 2.0% Portion of employees opting for early retirement Future changes in National Insurance Scheme Ceilings 15.0% 3.5% - - Other retirement benefits Barbados Jamaica Discount rate Expected return on plan assets Future salary increases 7.0% - - Long term increase in health costs 4.5% 11.0% 10.0% 8.5% 10.5% Other Caribbean 7.8% 7.8% Current tax Deferred tax 7.0% 6.5% 2.5%-5.5% 2.0%-3.0% Share of tax of associated companies 1.0% 2.5% - - 2.0% 3.5% 32.2 Derivation of income tax expense Income tax arises from the following sources of income: Investment income subject to direct taxation Net income subject to direct taxation 2010 2009 (restated) 14,816 15,652 278 3,059 216 621 15,310 19,332 2010 96,997 30,938 2009 (restated) 89,491 43,937 (cid:1) The effect of a change of 1% in the assumption for long-term increase in health costs as of December 31, 2010 is estimated as follows: (cid:1) (cid:1) Effect of 1% decrease Effect of 1% increase Revised service cost Revised interest cost Revised accumulated retirement benefit 430 1,037 9,562 667 1,418 13,437 Total income subject to taxation 127,935 133,428 Sagicor Financial Corporation 131 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 32. INCOME TAXES (continued) 33. DEFERRED INCOME TAXES 32.2 Derivation of income tax expense (continued) The income tax on the total income subject to taxation differs from the theoretical amount that would arise using applicable tax rates is set out in the following table. 2010 2009 (restated) Analysis of deferred income tax assets: Pensions and other retirement benefits Unrealised losses on financial investments Unused tax losses Income subject to tax 127,935 133,428 Off-settable deferred income tax liabilities in respect of policy liabilities timing differences and other items Tax calculated at the applicable rates on income subject to tax 27,527 28,271 Adjustments to current tax for items not subject to tax or not allowed for tax (22,470) (16,517) Analysis of deferred income tax liabilities: Other current tax adjustments (26) (178) Accelerated tax depreciation Adjustments for current tax of prior periods (117) 17 Policy liabilities taxable in the future Movement in unrecognised deferred tax asset 6,706 5,333 Pensions and other retirement benefits Other items Total (note 11) Deferred tax (income) / 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 expense that arises from the write down / (income from the reversal of a write down) of a deferred tax asset 1,349 (62) Accrued interest Unrealised gains on financial investments 97 8 Off-settable deferred income tax assets in respect of unused tax losses and other items (34,136) (25,779) 465 (707) Other items Total (note 19) Tax on distribution of profits from policyholder funds - 796 Deferred income tax balances include the following: Other taxes (cid:1) 1,779 2,371 15,310 19,332 Assets to be recovered within one year Liabilities to be settled within one year Unrecognised balances: Tax losses Potential deferred income tax assets 132 Sagicor Financial Corporation 2010 2009 (restated) 694 261 7,579 1,132 8,610 4,487 - (619) 675 9,209 2,184 29,245 11 2,554 13,812 1,662 15,272 2,242 25,564 645 1,032 2,771 2,419 16,089 2,438 9,222 1,458 7,933 8,890 6,124 127,212 32,673 110,968 28,588 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 34. EARNINGS AND DIVIDENDS PER COMMON SHARE 34. EARNINGS AND DIVIDENDS PER COMMON SHARE (continued) 34.1 Earnings per common share 34.1 Earnings per common share (continued) The basic earnings per common share is computed by dividing the net income attributable to shareholders by the weighted average number of shares in issue during the year, after deducting 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). It is calculated by dividing the net income attributable to shareholders by the adjusted weighted average number of shares in issue during the year, after deducting treasury shares. (cid:1) By substituting net income with total comprehensive income, the computations of total comprehensive income (TCI) per share are done similarly to earnings per share. Weighted average number of shares in issue in thousands LTI restricted share grants ESOP shares Adjusted weighted average number of shares in issue 2010 2009 (restated) 2009 (previously stated) 290,037 278,386 278,386 605 815 412 467 412 467 291,457 279,265 279,265 The effect of the changes in accounting policies described in note 2.1 (d) is to increase basic earnings per common share in 2010 by 5.2 cents (5.1 cents on a fully diluted basis). 34.2 Dividends per common share 2010 2009 US cents per share $000 US cents per share $000 2.0 2.0 4.0 5,794 5,797 11,591 2.0 2.0 4.0 5,553 5,564 11,117 2.0 5,779 2.0 5,794 Dividends declared and paid: Final dividend in respect of the prior year Interim dividend in respect of the current year Dividends declared after the date of the financial statements: Final dividend in respect of the current year Net income attributable to shareholders 16,560 66,846 50,502 Basic earnings per common share 5.7 cents 24.0 cents 18.1 cents Fully diluted earnings per common share 5.7 cents 23.9 cents 18.1 cents TCI attributable to shareholders 38,208 83,053 83,775 TCI per common share 13.2 cents 29.8 cents 30.1 cents TCI per common share on a fully diluted basis 13.1 cents 29.7 cents 30.0 cents (cid:1) (cid:1) Sagicor Financial Corporation 133 Notes to the Financial Statements Year ended December 31, 2010 35. OTHER COMPREHENSIVE INCOME The components of other comprehensive income (OCI) and the related income tax effects are as follows: Sagicor Financial Corporation Amounts expressed in US $000 2010 2009 (restated) Group OCI before tax Tax Group OCI after tax OCI after tax Attributable to shareholders Group OCI before tax Tax Group OCI after tax OCI after tax Attributable to shareholders 770 - 770 65,122 (4,057) 61,065 - - - (17,580) (388) (17,968) 770 - 770 47,542 (4,445) 43,097 693 - 693 33,514 (4,680) 28,834 1,176 155 1,331 53,409 (634) 52,775 - - - (5,688) (3,197) (8,885) 1,176 155 1,331 47,721 (3,831) 43,890 1,176 54 1,230 38,788 (853) 37,935 Fair value reserves – owner occupied property: Unrealised gains / (losses) arising on revaluation (Gains) / losses transferred to income on disposal Fair value reserves – available for sale assets: Unrealised gains / (losses) arising on revaluation (Gains) / losses transferred to income on disposal Fair value reserves – actuarial liabilities: Net change in actuarial liabilities (15,041) 4,465 (10,576) (9,844) (24,254) 7,148 (17,106) (16,264) Fair value reserves – cash flow hedges: Unrealised gains / (losses) arising on revaluation - - - (2,551) 850 (1,701) (1,011) Retranslation of foreign currency operations Other items OCI for the year (cid:1) 6,007 (309) 6,007 (309) 1,965 - 52,492 (13,503) 38,989 21,648 (12,996) (129) 14,176 - - (12,996) (129) (887) 13,289 (5,554) (129) 16,207 - - - 134 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 36. CASH FLOWS 36.1 Operating activities Adjustments for non-cash items, interest and dividends: Interest and dividend income Net investment gains Net increase in actuarial liabilities Interest expense and finance costs Depreciation and amortisation Increase in provision for unearned premiums Other items Changes in operating assets: Investment property Debt securities Equity securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreement to resell Deposits Other assets and receivables Sagicor Financial Corporation Amounts expressed in US $000 36. CASH FLOWS (continued 36.1 Operating activities (continued) 2010 2009 The gross changes in investment property, debt securities and equity securities are as follows. Investment property: Disbursements Disposal proceeds Debt securities: Disbursements Disposal proceeds Equity securities: Disbursements Disposal proceeds (cid:1) (248,881) (262,889) (42,172) 145,584 94,366 18,269 46,377 (27,279) (13,736) (32,346) 163,781 117,710 18,659 44,351 (10,690) 38,576 (3,857) 3,058 (260,006) (307,352) (3,520) 16,512 795 (16,650) (1,563) (56,512) (30,339) 18,079 (697) (1,785) 7,158 1,963 (70,528) 2,332 (355,140) (347,772) 2010 2009 (11,233) (806) 7,376 3,864 (3,857) 3,058 (1,730,447) (1,745,626) 1,470,441 1,438,274 (260,006) (307,352) (62,079) (42,943) 58,559 61,022 (3,520) 18,079 Sagicor Financial Corporation 135 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 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 Bank overdrafts Other short-term borrowings 136 Sagicor Financial Corporation 37. DIVESTITURE, ACQUISITIONS AND OWNERSHIP CHANGES 2010 2009 37.1 Divestiture of interest in Sagicor General Insurance (Cayman) Limited (SGC) 109,600 41,425 (14,536) 50,503 (14,154) 41,501 11,925 85,005 (314) (12,881) (9,492) 43,847 168,348 164,081 2010 2009 (13,306) (11,604) 3,054 1,970 (10,252) (9,634) 2010 2009 - 36,833 (14,452) - (14,452) 36,833 2010 2009 218,635 196,020 80,085 141,412 (2,580) (17,072) (2,380) (5,434) 279,068 329,618 Effective January 1, 2010, Sagicor Life of the Cayman Islands Limited (SLC) disposed of its 75% shareholding in SGC. The divestiture has been accounted for as follows: Goodwill attributable to SGC 75% share of net assets of SGC Proceeds on divestiture Gain on divestiture The gain on divestiture is attributable to: Shareholders Minority interests $000 933 9,726 10,659 11,597 938 555 383 At the time of divestiture, SLC purchased the 100% interest in Sagicor Insurance Managers Limited from SGC. This transaction has been accounted for as follows: Net assets of Sagicor Insurance Managers Purchase consideration - cash Balance on acquisition The balance on acquisition is attributable to: Shareholders Minority interests $000 270 307 37 22 15 The balance on acquisition has been net off the goodwill attributable to SGC. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 37. DIVESTITURE, ACQUISITIONS AND OWNERSHIP CHANGES 38. RESTATEMENTS (continued) 37.2 Ownership changes – Pan Caribbean Financial Services (PCFS) Effective November 11, 2009, the Company sold its direct 33% interest in PCFS to Sagicor Life Jamaica (SLJ) for cash consideration. The net disposal proceeds received by the Company amounted to $28,451 giving rise to a net loss to shareholders booked in retained earnings of $11,363. The net loss and other movements in equity are disclosed in the consolidated statement of equity. As a consequence of the transaction the Group reduced its total interest in PCFS from 64% to 51% and SLJ increased its total interest in PCFS from 53% to 86%. (cid:1) 38. RESTATEMENTS As set out in notes 2.13(a) and 13.2, the Group has changed its accounting policy for the recording of changes in actuarial liabilities arising from fair value movements of assets which are recorded in other comprehensive income. The change in accounting policy has been applied retroactively. The effect of the change to the statements of equity, income and comprehensive income for the year ended December 31, 2009 are summarised in the following tables. STATEMENT OF INCOME - 2009 Previously stated Prior year adjustment Restated Income before taxes Income taxes Net income Net income attributed to: Shareholders Participating accounts Minority interest 82,635 (12,184) 70,451 50,502 (5,113) 25,062 70,451 24,254 (7,148) 17,106 16,344 762 - 17,106 106,889 (19,332) 87,557 66,846 (4,351) 25,062 87,557 Previously stated Prior year adjustment Restated STATEMENT OF COMPREHENSIVE INCOME - 2009 Previously stated Prior year adjustment Restated STATEMENT OF EQUITY Balance, January 1, 2009: Shareholders’ equity - reserves (85,272) 12,695 (72,577) Shareholders’ equity - retained earnings Participating account Balance, December 31, 2009: Shareholders’ equity - reserves Shareholders’ equity - retained earnings Participating account 274,870 12,499 202,097 (38,238) 296,927 6,984 265,673 (10,840) 264,030 (1,855) 10,644 - 202,097 (4,371) 5,504 (1,133) (42,609) 302,431 5,851 - 265,673 Net income Other comprehensive income Total comprehensive income 70,451 30,395 100,846 17,106 (17,106) 87,557 13,289 - 100,846 Total comprehensive income attributed to: Shareholders Participating accounts Minority interest 83,775 (5,255) 22,326 100,846 (722) 722 - - 83,053 (4,533) 22,326 100,846 Sagicor Financial Corporation 137 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 39. COMMITMENTS AND CONTINGENT LIABILITIES 39. COMMITMENTS AND CONTINGENT LIABILITIES (continued) 39.1 Commitments In the normal course of business, the Group enters into commitments at the date of the financial statements for which no provision has been made in these financial statements. Non-cancellable commitments for loan disbursements, operating lease and rental payments are disclosed in note 41.2(a). 39.2 Contingent liabilities Guarantee and financial facilities at the date of the financial statements for which no provision has been made in these financial statements include the following: Customer guarantees and letters of credit Letter of credit facility 2010 2009 12,594 81,559 94,153 13,107 84,127 97,234 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, benefits and expenses. Management considers that any liability from these actions, for which provision has not been already made, will not be material. (b) Tax assessments The Group is also subject to tax assessments during the normal course of business. Adequate provision has been made for all assessments received to date and for tax liabilities accruing in accordance with management’s understanding of tax regulations. Potential tax assessments may be received by the Group which are in addition to accrued tax liabilities. No provisions have been made in these financial statements for such potential tax assessments. 138 Sagicor Financial Corporation 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 reflects the current thinking at the time of development. The Group keeps its products under review to ensure that they meet both policyholder and company expectations. One such insurance product is the universal life product which was developed and launched in 1987 in Jamaica. The design of a Universal Life policy is such that on realistic assumptions, the fund value built-up from premiums paid and from investment earnings is required in later years to pay the administrative costs and mortality charges. A review of the Universal Life portfolio revealed that approximately 17,000 policies were affected by fund values which were insufficient to cover these costs through the life of the policies. Once the issue 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. Approximately 95% of these policyholders agreed to adjustments to their policies(cid:18) The Group estimates that less than 1% of the affected policyholders have filed complaints with the FSC, which carried out investigations and made a submission to the Group. The FSC suggested a number of alternatives to remedy the issue. The Group is in discussions with the FSC on the matter. The cost, if any, of resolving this issue cannot be quantified at this time. (d) Hurricane Ivan claims Effective November 30, 2005, Sagicor Life of the Cayman Islands (SLC), a subsidiary of the Company, acquired a 51% stake in Sagicor General Insurance Cayman Ltd (SGC) (formerly Cayman General Insurance Ltd) from Cayman National Corporation Ltd (CNC). On October 22, 2007, SLC purchased an additional 24.2% interest in SGC CNC. Under the terms of the initial Sale and from Purchase Agreement, CNC provided certain warranties to SLC including amounts in relation to Hurricane Ivan claims, not finally settled. Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 39. COMMITMENTS AND CONTINGENT LIABILITIES (continued) 40. RELATED PARTY TRANSACTIONS 39.2 Contingent liabilities (continued) SGC filed suit in February 2006 against certain third parties to recover sums paid for work done in respect of Hurricane Ivan (the "Windsor Village litigation"). The understanding of the parties (SLC and CNC) based on discussions held was that CNC would be entitled to retain any benefits realised from the Windsor Village litigation and as a consequence SLC’s position is that CNC would be responsible for all liabilities that might arise from it. CNC has also been responsible for the conduct of the litigation. In December 2008, SGC withdrew its claims against the third parties and the third parties lodged counterclaims against SGC. Indemnity costs, unpaid invoices, damages and Court awards were paid. In addition, counterclaims related to abuse of process were lodged by third parties against SGC. It is the Group’s view, supported by legal advice received, that there is legal basis for relying on the warranty under the agreement in respect of certain of the counterclaims in the “Windsor Village litigation”. The Group also intends to rely on the understanding arrived at between the parties prior to law suits being filed. As part of the agreement for sale of SGI, SLC placed part of the sale proceeds in an escrow to compensate for the possibility of court awards over and above the provision of $4,750 made by SGI at December 31, 2009. In February 2011, SLC received communication from its legal advisors that judgement had been handed down in respect of the case and recognised an additional liability of $2,500 representing its share of the court awarded costs and interest. Certain related party transactions and balances are included in notes 5, 9, 12, 20, 26, 30, 37 and 47 of the financial statements. (a) Key management transactions and balances 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 are summarised in the following tables: Compensation Salaries, directors’ fees and other short-term benefits Equity-settled and cash settled compensation benefits Pension and other retirement benefits 2010 17,412 1,619 832 19,863 2009 18,334 2,943 928 22,205 Balance, beginning of year Advances Repayments Effects of exchange rate changes Balance, end of year Mortgage loans Other loans Total loans 4,528 305 (688) (2) 4,143 209 286 (176) 5 324 4,737 591 (864) 3 4,467 Interest rates prevailing during the year 5% - 8.0% 5% - 17.95% (cid:1) (cid:1) Sagicor Financial Corporation 139 Notes to the Financial Statements Year ended December 31, 2010 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 financial and other assets, banking and dealing in securities, exposes the Group to various insurance and financial 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 overriding objective of the Group’s risk management framework is to enhance its capital base through competitive earnings growth and to protect capital against inherent business risks. This means that the Group accepts certain levels of risk in order to generate returns, and the Group manages the levels of risk assumed through enterprise wide risk management policies and procedures. Identified risks are assessed as to their potential financial impact and as to their likelihood of occurrence. The effects of financial and insurance risks are disclosed in the sections below and in notes 42, 43 and 44. 41.1 Credit risk Credit risk is the exposure that the counterparty to a financial instrument is unable to meet an obligation, thereby causing a financial loss to the Group. Credit risks are primarily associated with financial investments and reinsurance contracts held. Credit risk from financial investments is minimised through holding a diversified portfolio of investments, purchasing securities and advancing loans only after careful assessment of the borrower, obtaining collateral before advancing loans, and placing deposits with financial institutions with a strong capital base. Limits may be placed on the amount of risk accepted in relation to one borrower. 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. Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) Government and government-guaranteed securities 2010 2009 $000 % $000 % 1,497,082 35.7% 1,350,052 35.2% Collateralised mortgage obligations 159,574 3.8% 193,487 5.0% Corporate debt securities Other securities Total debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Derivative financial instruments Deposits Reinsurance assets Premiums receivable Other accounts receivable Cash resources 898,452 21.4% 632,867 16.5% 53,444 1.3% 47,883 1.3% 2,608,552 62.2% 2,224,289 58.0% 297,082 123,250 144,065 7.1% 2.9% 3.4% 313,276 124,017 135,078 8.2% 3.2% 3.5% 28,567 0.7% 82,315 2.1% 12,070 311,694 240,939 145,175 39,708 218,635 0.3% 7.4% 5.7% 3.5% 0.9% 5.3% 4,105 274,516 249,113 128,794 62,736 196,020 0.1% 7.2% 6.5% 3.4% 1.6% 5.1% Total financial statements exposures 4,169,737 99.4% 3,794,259 98.9% Loan commitments Customer guarantees and letters of credit Total off financial statements exposures 13,002 12,594 25,596 0.3% 0.3% 0.6% 31,029 13,107 44,136 0.8% 0.3% 1.1% Total 4,195,333 100.0% 3,838,395 100.0% The amounts in respect of customer guarantees and letters of credit represent(cid:1)potential claims against(cid:1) customers in the event of a call on customer guarantees and letters of(cid:1)credit issued by the Group. (cid:1) 140 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) Commencing in 2009, the Group developed an internal credit rating for its financial assets and reinsurance exposures. The internal rating is a 10 point scale which allows for distinctions in risk characteristics and is referenced to the rating scales of international credit rating agencies. The scale is set out in the following table. Category Investment grade t l u a f e d - n o N Non- investment grade Watch Default Sagicor Risk Rating 1 2 3 4 5 6 7 8 9 Classification S&P Moody’s Fitch AM Best Minimal risk AAA, AA Aaa, Aa AAA, AA aaa, aa Low risk A Moderate risk BBB Acceptable risk BB Average risk B A Baa Ba B A a BBB bbb BB B bb b Higher risk CCC, CC Caa, Ca CCC, ccc, cc Default Special mention C Substandard Doubtful D C C 10 Loss C D C DDD DD D The 3 default grades are for the Group’s lending portfolios (i.e. mortgage loans, policy loans, finance loans and finance leases). Investment securities and reinsurance exposures use one default grade. Reinsurance exposures are best assessed under realistic disaster scenarios. Therefore the internal rating assessments of reinsurance assets arising from property and casualty insurance risks are set out in note 42.1(e). As internal credit ratings have only been done by the larger subsidiaries within the Group, approximately 89% (2009 - 91%) by value of financial investments and cash balances have been covered. The results are as follows: Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) Category Investment grade Non- investment grade t l u a f e d - n o N Watch Sagicor Risk Rating Classification 2010 2009 Exposure $000 Exposure % Exposure $000 Exposure % 1 2 3 4 5 6 7 8 9 Minimal risk Low risk 708,264 615,763 Moderate risk 759,269 Acceptable risk 193,973 Average risk 1,087,105 Higher risk Special Substandard Doubtful 10 Loss 34,377 20,091 23,849 5,229 2,308 21 18 22 6 32 1 - - - - 749,236 556,182 646,834 255,034 89,827 24 18 20 7 3 854,125 27 12,630 22,882 5,041 1,634 - 1 - - (cid:1) (cid:1) (cid:1) TOTALS 3,450,228 100 3,193,425 100 Sagicor Financial Corporation 141 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) As of the date of the financial statements, the Group’s largest exposures to individual counterparty credit risks are set out below. Sagicor Risk Rating 2010 Sagicor Risk Rating 2009 Debt securities: Government of Jamaica Federal government of USA Federal agencies of the USA Government of Barbados Government of Trinidad and Tobago Deposits & cash: The Bank of Nova Scotia Reinsurance assets: Scottish Re (U.S.) Inc (1) Washington National Insurance Company (2) 5 1 1 3 2 1 7 5 916,457 96,024 143,990 133,168 122,660 113,996 6 1 1 3 2 1 109,624 56,745 Not rated 5 769,958 132,363 143,377 113,541 150,056 102,235 128,563 63,113 (1) The reinsurance asset held in the name of Scottish Re is secured by assets held in trust by a third party and by the Group (see note 9.2). The total assets held in trust amount to $149,819 (2009 - $178,362). (2) The reinsurance asset arises from reinsurance assumed on a block of life insurance policies. Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) Exposure to credit risk is also managed in part by obtaining collateral and guarantees for mortgage loans and finance loans and finance leases. For mortgage loans, the collateral is real estate property, and the approved loan limit is 75% to 95% of collateral value. For finance loans and finance 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 finance loans and finance leases are only granted when the initial amount is less than $15. Exposure to mortgage loans and finance loans and finance leases by geographic area is as follows. (cid:1) Barbados Jamaica Trinidad & Tobago Other Caribbean USA 2010 2009 139,201 127,730 103,886 45,902 24,428 144,344 120,886 106,401 47,681 29,042 441,147 448,354 Policy loans are advanced on the security of the underlying insurance policy cash values. Cash loans are advanced to a maximum of 82% 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. For property casualty insurance premiums receivable, insurers frequently provide settlement terms to customers and intermediaries which extend up to 6 months. 142 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) (a) Past due and impaired financial investments A financial 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 financial investments namely, its debt securities, mortgage loans, finance loans and finance leases. Debt securities are assessed for impairment when amounts are past due, when the borrower is experiencing cash flow difficulties, or when the borrower’s credit rating has been downgraded. Mortgage loans less than 90 to 180 days past due and finance loans and finance 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 amounts for(cid:1)collateral. The tables below summarise the carrying value of financial investments which are past due, but are not considered to be impaired and the estimated fair value of collateral. Sagicor Financial Corporation Amounts expressed in US $000 Debt securities Mortgage loans Finance loans /leases 10,945 1,836 331 33 13,145 2,558 21,164 2,220 766 52 54,833 9,296 6,952 8,127 79,208 136,641 20,237 6,837 6,086 6,100 24,202 39,260 - 112,789 39,908 598 - - 40,506 113,992 18,447 434 - - 18,881 54,036 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) 2010 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 2009 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 (cid:1) (cid:1) Sagicor Financial Corporation 143 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) Balances relating to impaired financial investments are summarised in the following table. The accumulated allowance for impairment reflects the Group’s assessment of total individually impaired investments at the date of the financial statements. Gross carrying value Accumulated allowance for impairment Net carrying value Estimated fair value of collateral 2010 Debt securities Mortgage loans Finance loans and finance leases Total 2009 Debt securities Mortgage loans Finance loans and finance leases 12,811 19,257 6,242 38,310 14,415 18,806 4,184 (6,445) (3,418) (2,706) (12,569) (7,651) (2,310) (2,301) Total 37,405 (12,262) 6,366 15,839 3,536 25,741 6,764 16,496 1,883 25,143 3,955 22,911 25,863 52,729 5,931 26,884 6,329 39,144 Interest of $472 (2009 - $423) has been accrued on impaired financial investments. The Group is also exposed to impaired premiums receivable. However, under the terms of insurance contracts, insurers can usually lapse an insurance policy for non-payment of premium, or if there is a claim, recover any unpaid premiums from the claim proceeds. 144 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.1 Credit risk (continued) (b) Repossessed assets The Group may foreclose on overdue mortgage loans and finance loans and finance 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- financing to a new purchaser on customary terms. (c) Renegotiated assets The Group may renegotiate the terms of any financial investment to facilitate borrowers in financial difficulty. Arrangements to waive, adjust or postpone scheduled amounts due may be entered into. The Group classifies these amounts as past due, unless the original agreement is formally revised, modified or substituted, in which case, the financial investment is classified as renegotiated. The carrying value of financial investments at the date of the financial statements which were renegotiated during the year totalled $6,689 (2009 - $1,190). (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.2 Liquidity risk Liquidity risk is the exposure that the Group may encounter difficulty in meeting obligations associated with financial or insurance liabilities that are settled by cash or by another financial asset. Liquidity risk also arises when excess funds accumulate resulting in the loss of opportunity to increase investment returns. Group companies monitor cash inflows and outflows in each operating currency. Through experience and monitoring, the Group is able to maintain sufficient liquid resources to meet current obligations. Asset liability matching is a tool used by the Group to mitigate liquidity risks(cid:1)particularly in operations with significant maturing short-term liabilities. Certain investment portfolios within the Group contain debt and equity 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. (cid:1) (cid:1) (cid:1) (cid:1) (a) Financial liabilities and commitments Contractual cash flow obligations of the Group in respect of its financial liabilities and commitments are summarised in the following tables. Amounts are analysed by their earliest contractual maturity dates and consist of the contractual un-discounted cash flows. Where the interest rate of an instrument for a future period has not been determined as of the date of the financial statements, it is assumed that the interest rate then prevailing continues until final maturity. Sagicor Financial Corporation Amounts expressed in US $000 Sagicor Financial Corporation 145 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) (cid:1) Financial liabilities: Investment contract liabilities Notes and loans payable Deposit and security liabilities: Other funding instruments Customer deposits Structured products Securities sold under agreements to repurchase Derivative financial instruments Bank overdrafts Sagicor Financial Corporation Amounts expressed in US $000 2010 - Contractual cash flows 2009 - Contractual cash flows Within 1 year 1 to 5 years After 5 years Total Within 1 year 1 to 5 years After 5 years Total 264,112 42,929 179,998 135,637 4,702 578,773 1,372 2,750 27,785 52,963 37,413 38,943 6,057 709 66 - 6,221 151,845 32,707 12,107 2,598 - 411 - 298,118 247,737 250,118 186,687 13,357 579,482 1,849 2,750 286,627 48,713 170,777 128,382 - 507,664 - 2,380 156,205 17,405 73,992 44,430 32,489 4,071 359 199 - 3,166 162,134 37,208 13,064 2,573 307,198 284,839 252,415 173,935 6,644 - 508,023 2,049 - 2,248 2,380 8,774 30,688 195,667 Accounts payable and accrued liabilities 149,510 7,054 30,894 187,458 Total financial liabilities 1,359,783 170,990 236,783 1,767,556 1,300,748 181,719 250,882 1,733,349 Off financial statement commitments: Loan commitments Operating lease and rental payments Total off financial statements commitments 12,793 4,253 17,046 199 6,214 6,413 10 - 10 13,002 10,467 23,469 27,479 4,585 32,064 3,433 9,253 12,686 117 3 120 31,029 13,841 44,870 Total 1,376,829 177,403 236,793 1,791,025 1,332,812 194,405 251,002 1,778,219 146 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) (b) Insurance liabilities Sagicor Financial Corporation Amounts expressed in US $000 The Group’s insurance liabilities mature in periods which are summarised in the following table. Amounts are stated at their carrying values recognised in the financial statements and are analysed by their expected due periods, which have been estimated by actuarial or other statistical methods. 2010 2009 Maturing within 1 year Maturing 1 to 5 years Maturing after 5 years Total Maturing within 1 year Maturing 1 to 5 years Maturing after 5 years Total 79,292 326,522 1,347,898 1,753,712 93,497 284,890 1,234,144 1,612,531 244,530 323,822 88,881 92,085 425,496 415,403 1,439,983 2,179,208 156,785 250,282 66,177 77,228 300,190 351,067 1,311,372 1,912,721 Actuarial liabilities Other insurance liabilities (1) Total (1) Consists of monetary items Sagicor Financial Corporation 147 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.2 Liquidity risk (continued) (c) Financial and insurance assets Sagicor Financial Corporation Amounts expressed in US $000 The Group’s monetary financial and insurance assets mature in periods which are summarised in the following tables. Amounts are stated at their carrying values recognised in the financial statements and are analysed by their contractual maturity dates. Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Derivative financial instruments Reinsurance assets: share of actuarial liabilities Reinsurance assets: other Premiums receivable Other accounts receivable Cash resources Total 2010 2009 Maturing within 1 year Maturing 1 to 5 years Maturing after 5 years Total Maturing within 1 year Maturing 1 to 5 years Maturing after 5 years Total 373,984 682,412 1,552,156 2,608,552 433,425 576,966 1,213,898 2,224,289 25,527 3,958 65,832 28,530 264,670 2,018 15,688 44,921 145,175 33,491 218,635 32,884 14,155 58,481 - 46,270 9,640 53,875 13,366 - 1,174 - 238,671 105,137 19,752 37 754 412 297,082 123,250 144,065 28,567 311,694 12,070 108,515 178,078 4,574 62,861 - 145,175 5,043 39,708 - 218,635 22,081 4,251 56,466 82,315 229,098 274 25,148 33,794 128,043 58,567 196,020 27,471 12,294 51,631 - 44,900 3,345 66,934 3,084 751 653 - 263,724 107,472 26,981 - 518 486 313,276 124,017 135,078 82,315 274,516 4,105 115,614 207,696 4,539 41,417 - 128,794 3,516 62,736 - 196,020 1,222,429 912,257 2,035,051 4,169,737 1,269,482 788,029 1,736,748 3,794,259 148 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.3 Interest rate risk The Group is exposed to interest rate risks. Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. The occurrence of an adverse change in interest rates on invested assets may result in financial loss to the Group in fulfilling the contractual returns on insurance and financial liabilities. The return on investments may be variable, fixed for a term or fixed to maturity. On reinvestment of a matured investment, the returns available on the new investment may be significantly different from the returns formerly achieved. 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 financial 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 fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase or decrease as a result of such changes. Interest rate changes may also result in losses if asset and liability cash flows are not closely matched with respect to timing and amount. The Group is exposed to risk under embedded derivatives contained in a host insurance contract. These risks include exposures to investment returns which may produce losses to the insurer arising from the following contract features: (cid:1) minimum annuity rates which are guaranteed to be applied at some future date; (cid:1) minimum guaranteed death benefits which are applicable when the performance of an interest bearing or unit linked fund falls below expectations; (cid:1) minimum guaranteed returns in respect of cash values and universal life investment accounts. Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) The Group manages its interest rate risk by a number of measures, including where feasible the selection of assets which best match the maturity of liabilities, the offering of investment contracts which match the maturity profile of assets, the re-pricing of interest rates on loans receivable, policy contracts and financial liabilities in response to market changes. In certain Caribbean markets, where availability of suitable investments is often a challenge, the Group holds many of its fixed rate debt securities to maturity and therefore mitigates the transient interest rate changes in these markets. (cid:1) The tables following summarise the exposures to interest rates on the Group’s insurance and financial 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 liabilities are categorised by their expected maturities. (cid:1) (cid:1) (cid:1) (cid:1) Sagicor Financial Corporation 149 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) Sagicor Financial Corporation Amounts expressed in US $000 Exposure within 1 year Exposure 1 to 5 years 2010 Exposure after 5 years Not exposed to interest 2009 Total Exposure within 1 year Exposure 1 to 5 years Exposure after 5 years Not exposed to interest Total Other insurance liabilities (1) 32,554 5,430 56,134 331,378 Investment contract liabilities 257,945 26,400 5,096 4,897 Notes and loans payable 30,527 7,155 145,838 (1,635) Deposit and security liabilities: Other funding instruments Customer deposits Structured products Securities sold under agreements to repurchase Derivative financial instruments Bank overdrafts Accounts payable and accrued liabilities 174,792 125,948 2,309 571,198 - 2,580 264 27,445 31,479 740 649 - - 108 425,496 294,338 181,885 229,617 168,134 5,655 29,483 284,954 36,513 174,177 122,735 - 4,604 16,541 20,005 28,742 27,963 3,765 54,990 211,113 2,738 164 146,811 (2,485) 30,187 337 10,658 1,633 1,534 - 300,190 304,397 200,844 233,443 162,989 5,299 27,033 9,655 1,533 347 1,052 1,073 - - - - 3,869 575,716 492,177 283 1,849 - 1,849 2,580 187,037 187,409 - 2,380 153 - - - - - - 8,668 501,128 2,248 - 2,248 2,380 195,514 195,667 Total 1,198,117 99,406 245,289 529,867 2,072,679 1,142,572 101,903 246,918 417,192 1,908,585 (1) Consists of monetary items (cid:1) 150 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) Sagicor Financial Corporation Amounts expressed in US $000 The tables following summarise the exposures to interest rate and reinvestment risks of the Group’s insurance and financial assets. Assets are stated 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. Debt securities Equity securities Mortgage loans Policy loans Finance loans and leases Securities purchased under agreements to resell Deposits Derivative financial instruments Reinsurance assets: other Premiums receivable Other accounts receivable Cash resources Total (cid:1) Exposure within 1 year Exposure 1 to 5 years 2010 Exposure after 5 years Not exposed to interest Total Exposure within 1 year Exposure 1 to 5 years 2009 Exposure after 5 years Not exposed to interest Total 580,495 567,323 1,416,369 44,365 2,608,552 595,890 527,013 1,056,989 44,397 2,224,289 - 84,318 3,220 64,476 28,401 307,682 845 38 72 415 122,528 - 27,457 13,991 58,318 - 1,389 1,661 114 - 1,159 1,568 - 111,552 111,552 180,850 102,400 20,104 37 431 - 4,457 3,639 1,167 129 2,192 9,564 4,574 58,135 297,082 123,250 144,065 28,567 12,070 62,861 39,708 145,103 145,175 - - - 38,134 94,539 218,635 153,089 - 90,812 3,418 58,399 81,911 196 64 - 398 - 23,554 12,166 50,687 - - 648 182 - 564 - - 116,846 116,846 194,604 104,441 24,875 - 304 - 4,306 3,992 1,117 404 5,406 3,261 4,539 36,632 313,276 124,017 135,078 82,315 274,516 4,105 41,417 - - - 128,794 128,794 61,774 42,931 62,736 196,020 311,694 268,806 1,192,490 672,980 1,724,765 512,976 4,103,211 1,252,983 614,814 1,385,752 449,860 3,703,409 Sagicor Financial Corporation 151 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.3 Interest rate risk (continued) The table below summarises the average interest yields on financial assets and liabilities held during the year. Pan Caribbean Financial Services Limited and its subsidiaries (PCFS) 2010 2009 The following table indicates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, on net income and total comprehensive income (TCI) of PCFS. Financial assets: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased under agreements to resell Deposits Financial liabilities Investment contract liabilities Notes and loans payable Other funding instruments Customer deposits Securities sold under agreements to repurchase a) Sensitivity 8.1% 8.3% 8.6% 11.4% 5.6% 2.5% 8.3% 8.7% 2.0% 5.3% 7.4% 9.8% 8.6% 8.6% 12.9% 15.5% 2.9% 8.1% 8.7% 2.4% 6.7% 11.8% 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 Group’s property and casualty operations are not exposed to a significant degree of interest rate risk, since the majority of its interest bearing(cid:1)instruments has short-term maturities. The sensitivity of the Group’s principal operating subsidiaries engaged in banking, investment management and other financial services are considered(cid:1)below.(cid:1)(cid:1)(cid:1) The sensitivity of income is the effect of the assumed changes in interest rates on net income based on the floating rate of financial assets and financial liabilities. The sensitivity of TCI is calculated by revaluing fixed rate available-for-sale financial 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. (cid:1) 2010 2009 Change in Effect on interest rate JMD USD net income Effect on TCI Change in Effect on interest rate JMD USD net income Effect on TCI - 1% - 0.5% 1,841 10,112 - 8% - 3% 8,394 35,379 + 2% + 0.5% (3,401) (14,974) + 2% + 1% (2,617) (8,471) (cid:1) 41.4 Foreign exchange risk The Group is exposed to foreign exchange risk as a result of fluctuations in exchange rates since its financial assets and liabilities are denominated in a number of different currencies. In order to manage the risk associated with movements in currency exchange rates, the Group seeks to maintain investments and cash in each operating currency, which are sufficient to match liabilities denominated in the same currency. Exceptions are made to invest limited proportions in United States dollar assets which are held to back liabilities in Caribbean 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 by currency are summarised in the following tables. 152 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) Sagicor Financial Corporation Amounts expressed in US $000 2010 ASSETS Financial investments(1) Reinsurance assets Receivables (1) Cash resources Other assets (2) Total assets LIABILITIES Actuarial liabilities Other insurance liabilities(1) Investment contracts Notes and loans payable Deposits and securities Provisions Accounts payable and accruals Other liabilities (2) Total liabilities Net position Barbados $ Jamaica $ Trinidad $ UK £ US $ US$ 000 equivalents of balances denominated in 325,300 4,336 11,109 14,242 354,987 217,804 572,791 403,035 62,412 32,251 - 53,573 11,467 20,022 582,760 14,882 597,642 660,971 515 27,524 9,260 698,270 141,862 840,132 248,201 20,179 69,758 7,192 342,108 7,772 36,538 731,748 12,204 743,952 306,771 7,791 8,971 24,456 347,989 80,029 428,018 238,997 19,739 90,011 - 7,299 6,539 19,346 381,931 17,621 399,552 66,939 17,425 48,788 33,506 166,658 98,314 264,972 2,085 146,242 - - 4,216 4,448 18,253 175,244 79,952 255,196 1,836,535 203,283 53,331 75,669 2,168,818 105,278 2,274,096 729,644 120,193 63,789 174,693 562,405 2,669 77,242 1,730,635 88,252 1,818,887 Other currencies Total 328,764 3,525,280 7,589 35,160 61,502 433,015 54,227 487,242 131,750 56,731 38,529 - 13,950 5,939 16,008 262,907 50,274 313,181 240,939 184,883 218,635 4,169,737 697,514 4,867,251 1,753,712 425,496 294,338 181,885 983,551 38,834 187,409 3,865,225 263,185 4,128,410 (24,851) 96,180 28,466 9,776 455,209 174,061 738,841 (1) Monetary items (2) Non-monetary balances, income tax balances and retirement plan assets Sagicor Financial Corporation 153 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued)(cid:1) (cid:1) Sagicor Financial Corporation Amounts expressed in US $000 2009 ASSETS Financial investments(1) Reinsurance assets Receivables (1) Cash resources Other assets (2) Total assets LIABILITIES Actuarial liabilities Other insurance liabilities(1) Investment contracts Notes and loans payable Deposits and securities Provisions Accounts payable and accruals Other liabilities (2) Total liabilities Net position Barbados $ Jamaica $ Trinidad $ UK £ US $ US$ 000 equivalents of balances denominated in 325,176 3,766 7,365 24,450 360,757 223,658 584,415 385,487 59,314 29,839 - 55,373 10,022 26,713 566,748 15,164 581,912 2,503 492,749 600 21,500 19,057 533,906 146,180 680,086 201,290 18,027 53,346 14,235 258,379 6,646 57,869 609,792 8,090 617,882 62,204 299,953 5,722 7,804 11,420 324,899 80,219 405,118 220,299 16,011 85,648 - 19,269 5,737 12,783 359,747 14,411 374,158 30,960 62,810 4,860 52,769 39,392 159,831 63,604 223,435 1,260 74,498 - - - 6,467 10,260 92,485 63,969 156,454 66,981 1,673,319 225,238 61,249 76,187 2,035,993 84,478 2,120,471 685,917 94,751 100,845 186,609 557,165 376 79,645 1,705,308 79,273 1,784,581 335,890 Other currencies Total 303,589 3,157,596 8,927 40,843 25,514 378,873 67,574 446,447 118,278 37,589 34,719 - 17,301 10,111 8,397 226,395 37,162 263,557 182,890 249,113 191,530 196,020 3,794,259 665,713 4,459,972 1,612,531 300,190 304,397 200,844 907,487 39,359 195,667 3,560,475 218,069 3,778,544 681,428 (1) Monetary items (2) Non-monetary balances, income tax balances and retirement plan assets 154 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) (a) Sensitivity The matching of assets and liabilities by currency prevents economic exposure to currency risk, but it does not prevent exposure to exchange gains or losses in the income statement created as a result of the accounting treatment of monetary and non-monetary items. The gross and reinsurers’ share of the provision for unearned premiums, and the gross and reinsurers share of deferred acquisition costs are non-monetary assets and liabilities which are translated at their average historic rate. This means that these items in the statement of financial position are carried at a different exchange rate to the related assets and liabilities, such as policy benefits payable, premium receivables and cash, with the resulting exchange differences that are created being recognised in the income statement. The phenomenon in the foregoing paragraph occurs in the Sagicor at Lloyd’s Syndicate 1206 operations, which writes a significant proportion of its insurance business in currencies other than the pound sterling, which is its functional currency. Its impact on reported net income is disclosed in note 4.1 as foreign exchange unwinding. The Group is exposed to currency risk in its operating currencies whose values have noticeably fluctuated against the United States dollar (USD). The exposure to currency risk may result in three types of risk, namely: (cid:1) Currency risk relating to the future cash flows of monetary balances This occurs when a monetary balance 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 monetary balances being retranslated at the date of the financial statements and the exchange gain or loss is taken to income (note 26). Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) (cid:1) 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. (cid:1) 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 fluctuate against the USD are the Jamaica dollar (JMD) and the Pound 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. Sagicor Financial Corporation 155 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41. FINANCIAL RISK (continued) 41.4 Foreign exchange risk (continued) 41.4 Foreign exchange risk (continued) (i) JMD currency risk (ii) GBP currency risk The effect of a 10% depreciation in the JMD relative to the USD arising from JMD reporting units as of December 31, 2010 and for the year then ended are considered in the following table. The effect of a 15% depreciation in the GBP relative to the USD arising from JMD reporting units as of December 31, 2010 and for the year then ended are considered in the following table. Amounts denominated in JMD USD Total amounts Effect of a 10% depreciation Amounts denominated in GBP USD Total amounts Effect of a 15% depreciation Financial position: Assets Liabilities Net position Represented by: 836,085 743,781 617,299 1,453,384 439,942 1,183,723 92,304 177,357 269,661 (76,008) (67,617) (8,391) Financial position: Assets Liabilities Net position Represented by: 263,280 245,147 18,133 226,052 183,011 43,041 489,332 428,158 61,174 Currency risk of the Group’s investment in foreign operations (8,391) Currency risk of the Group’s investment in foreign operations (34,335) (31,970) (2,365) (2,365) Income statement: Revenue Benefits Expenses Income taxes Net income Represented by: 271,751 47,760 319,511 (146,583) (16,453) (163,036) (95,739) (10,121) (1,963) (616) (97,702) (10,737) 19,308 28,728 48,036 Currency risk relating to the future cash flows of monetary balances Currency risk of reported results of foreign operations (8,904) 13,326 8,704 920 14,046 15,801 (1,755) 14,046 Income statement: Revenue Benefits Expenses 135,239 134,865 270,104 (5,084) (124,266) (80,101) (204,367) 16,212 (63,989) (44,624) (108,613) 8,348 Income taxes 1,739 - 1,739 (227) Net income Represented by: (51,277) 10,140 (41,137) 19,249 Currency risk relating to the future cash flows of monetary balances 12,559 Currency risk of reported results of foreign operations 6,690 19,249 An 8.33% appreciation in the JMD relative to the USD would have equal and opposite effects to those disclosed above. An 11.54% appreciation in the GBP relative to the USD would have equal and opposite effects to those disclosed above. 156 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.5 Fair value of financial instruments Sagicor Financial Corporation Amounts expressed in US $000 Financial instruments carried at fair value in the financial statements are measured in accordance with a fair value hierarchy. This hierarchy is as follows: (a) (b) Level 1 – unadjusted quoted prices in active markets for identical instruments. Level 2 – inputs other than quoted prices in Level 1 that are observable for the instrument, either directly or indirectly. Level 3 – inputs for the instrument that are not based on observable market data. (c) A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other independent source, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Group considers that market transactions should occur with sufficient frequency that is appropriate for the particular market, when measured over a continuous period preceding the date of the financial statements. If there is no data available to substantiate the frequency of market transactions of a financial instrument, then the Group does not consider the instrument to be traded in an active market. Certain investment portfolios of the Group which are classified as available for sale contain corporate and government debt securities which are not quoted and which have been valued using internal models which contain inputs that are not based on observable market data. These assets are classified as Level 3 in the fair value hierarchy. Included in the assets designated at fair value through income are mortgage loans and securities purchased under agreements to resell for which the full income return and capital returns accrue to holders of unit linked policy and deposit administration contracts. As these assets are valued with inputs other than observable market data, they are classified as Level 3 in the fair value hierarchy. Certain of the group’s policy liabilities are unit linked, i.e. derive their value from a pool of assets which are carried at fair value. The Group assigns a fair value hierarchy of Level 2 to the contract liability if the liability represents the unadjusted fair value of the underlying pool of assets. The following table shows the financial assets and financial liabilities carried at fair value by level of the fair value hierarchy. Sagicor Financial Corporation 157 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.5 Fair value of financial instruments (continued) Sagicor Financial Corporation Amounts expressed in US $000 2010 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Available for sale securities: Debt securities Equity securities Financial assets designated at fair value: Debt securities Equity securities Mortgage loans Securities purchased under agreements to resell Derivative financial assets: Equity indexed options Interest rate swap Foreign currency put option, currency forward and collar option 377,490 57,770 435,260 14,699 15,548 - - 1,323,030 22,038 1,345,068 79,283 3,969 - - 30,247 83,252 - - - - 521 - 368 889 42,315 7,905 50,220 2,351 4,322 46,876 2,982 56,531 8,675 2,506 - 1,742,835 87,713 1,830,548 96,333 23,839 46,876 2,982 367,245 64,554 431,799 2,179 10,628 - - 1,006,847 27,219 1,034,066 66,462 1,580 - - 170,030 12,807 68,042 9,196 2,506 368 11,181 12,070 - - - - 817 - 80 897 84,673 8,015 92,688 2,673 4,850 48,180 10,020 65,723 2,365 843 - 3,208 1,458,765 99,788 1,558,553 71,314 17,058 48,180 10,020 146,572 3,182 843 80 4,105 Total assets 465,507 1,429,209 117,932 2,012,648 Total assets by percentage 23% 71% 6% 100% 444,606 1,103,005 161,619 1,709,230 26% 65% 9% 100% There have been no material transfers between Level 1 and Level 2 during 2010 and 2009. 158 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.5 Fair value of financial instruments (continued) Policy liabilities: Unit linked deposit administration liabilities Non-derivative financial liabilities: Structured products Derivative financial liabilities: Exchange traded funds Equity indexed options Total liabilities Total liabilities by percentage Sagicor Financial Corporation Amounts expressed in US $000 2010 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total - - 1,328 - 1,328 1,328 1% 83,847 - 83,847 - - 521 521 84,368 93% 5,655 5,655 - - - 5,655 6% 1,328 521 1,849 91,351 100% - - 1,431 - 1,431 1,431 2% 76,587 - 76,587 - - 817 817 77,404 92% 5,299 5,299 - - - 5,299 6% 1,431 817 2,248 84,134 100% There have been no material transfers between Level 1 and Level 2 during 2010 and 2009. For Level 3 instruments, reasonable changes in inputs which could be applied to the valuation of available for sale instruments would affect other comprehensive income. Level 3 available for sale securities comprise primarily of corporate and government agency debt instruments issued in the Caribbean, with significant amounts in Jamaica and Trinidad. The fair values of these instruments have been derived from December 31 market yields of government instruments of similar durations in the country of issue of the instruments. Reasonable changes in inputs which could be applied to the valuations of assets designated at fair value are largely offset in income, since the changes in fair value are borne by contract holders. The following tables present the movements in Level 3 instruments for the year. Sagicor Financial Corporation 159 Notes to the Financial Statements Year ended December 31, 2010 41. FINANCIAL RISK (continued) 41.5 Fair value of financial instruments (continued) Sagicor Financial Corporation Amounts expressed in US $000 2010 Available for sale assets Assets designated at fair value Derivative assets Total assets 2009 Total assets 2010 2009 Non- derivative liabilities Total liabilities Total liabilities Balance, beginning of year 92,688 65,723 3,208 161,619 165,201 5,299 5,299 Additions Issues 5,015 7,480 4,362 16,857 31,055 390 390 - - - - - 48 48 552 13,604 - Transfers into Levels 3 95 - - 95 8,706 - - Fair value changes recorded in income (101) 1,493 2,359 3,751 3,685 - - Fair value changes recorded in other comprehensive income 690 - 1,516 2,206 1,849 - - - - - Disposals and divestitures (34,715) (18,705) (264) (53,684) (39,917) - - - Settlements - - - - - (77) (77) (10,009) Transfers from Level 3 (15,507) - - (15,507) - - - - Effect of exchange rate changes 2,055 540 - 2,595 (8,960) Balance, end of year 50,220 56,531 11,181 117,932 161,619 (5) 5,655 (5) 1,152 5,655 5,299 Fair value changes recorded in income for instruments held at end of year - 1,432 2,223 3,655 - - - - The carrying values of the Group’s financial assets and financial liabilities carried at amortised cost approximate their fair value, except as disclosed in notes 9, 15, 16 and 17. The Group is exposed to other price risk arising from changes in equity prices. The group mitigates this risk by holding a diversified portfolio and by minimising the use of equity securities to back its insurance and financial liabilities. 160 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41. FINANCIAL RISK (continued) 41.5 Fair value of financial instruments (continued) 41.6 Derivative financial instruments and hedging activities (continued) (a) Sensitivity The sensitivity to fair value changes in equity securities arises from those instruments classified as available for sale. There is no significant sensitivity to those instruments classified at fair value through income, since fair value changes are borne by policy contract holders. The effects of an across the board 20% change in equity prices of the Group’s available for sale equity securities as of December 31, 2010 on total comprehensive income before tax (TCIBT) are as follows. Available for sale equities Carrying value Effect of a 20% change on TCIBT Listed on Caribbean stock exchanges and markets Listed on US stock exchanges and markets Listed on other exchanges and markets 28,433 47,657 11,623 87,713 5,687 9,531 2,325 17,543 (cid:1) 41.6 Derivative financial instruments and hedging activities Derivatives are carried at fair value and presented in the financial statements as separate assets and liabilities. Asset values represent the cost to the Group of replacing all transactions with a fair value in the Group’s favour assuming that all relevant counterparties default at the same time, and that transactions can be replaced instantaneously. Liability values represent the cost to the Group counterparties of replacing all their transactions with the Group with a fair value in their favour if the Group were to default. Derivative assets and liabilities on different transactions are only set off if the transactions are with the same counterparty, a legal right of set-off exists and the cash flows are intended to be settled on a net basis. The fair values are set out below. 2010 2009 Assets Liabilities Assets Liabilities 70 - - 298 9,196 2,506 12,070 - 12,070 - 1,328 - - 521 - 1,849 - 1,849 - - 80 - 3,182 - 3,262 843 4,105 - 1,431 - - 817 - 2,248 - 2,248 Derivatives held for trading: Currency forward Exchange traded funds – short sale Foreign currency put option Foreign exchange collar option Equity indexed options Interest rate swap Derivatives designated as cash flow hedges: Interest rate swap (i) Currency forward Currency forwards represent commitments to buy and sell foreign currencies on a gross basis at future dates at specified prices. The credit risk is evaluated for each contract and is collateralised where deemed necessary. The currency forward contracts are settled on a net basis. The contract expires in January 2011. Sagicor Financial Corporation 161 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 41. FINANCIAL RISK (continued) 41. FINANCIAL RISK (continued) 41.6 Derivative financial instruments and hedging activities (continued) 41.6 Derivative financial instruments and hedging activities (continued) (ii) Exchange traded funds – short sale During 2009, the Group entered into transactions to sell euro currencies that were borrowed from a broker. The Group benefits if there is a decline in the asset price between the sale and the repurchase date. The contract expires in January 2011. (ii) Foreign currency put option Foreign currency put options are contractual agreements under which the seller grants the purchaser the right but not the obligation to sell at a set date, a specified amount of a foreign currency at a predetermined price. The seller receives a premium from the purchaser in consideration for the assumption of foreign exchange risk. (iii) Foreign exchange collar option During the year the Group entered a collar to sell a call option and buy a put option; the notional amount was £963,000 and will be settled on a net basis. The contract expires on various settlement dates ending in December 2012. (iv) Equity indexed options The Group has purchased equity indexed options in respect of structured products and in respect of life and annuity insurance contracts. For certain structured product contracts with customers (note 17), equity indexed options give the holder the ability to participate in the upward movement of an equity index while being protected from downward risk. The Group is exposed to credit risk on purchased options only, and only to the extent of the carrying amount, which is their fair value. For certain universal life and annuity insurance contracts, the Group has purchased custom options that are selected to materially replicate the policy benefits that are associated with the equity indexed components within the policy contract. These options are appropriate to reduce or minimise the risk of movements in specific equity markets. Credit risk that the Group has regarding the options is mitigated by ensuring that the counterparty is sufficiently capitalised. Both the asset and the associated actuarial liability are valued at fair market value on a consistent basis, with the change in values being reflected in the income statement. The valuations combine external valuations with internal calculations. (v) Cash flow hedge – interest rate swap The cash flow hedge is used to protect against exposures to variability in future interest cash flow of a floating rate available-for-sale financial instrument. The notional principal amount of the outstanding interest rate swap contract is $20,000. The fixed interest rate is 10.2% and the floating rate is USD-LIBOR-BBA. The amounts and timing of future cash flows, representing both principal and interest flows are based on their contractual terms. The critical terms of the interest rate swap had been negotiated to match the terms of available-for-sale financial instrument. Both the interest rate swap and the floating rate available-for-sale financial instrument mature in 2015. The interest rate swap is settled on a net basis. During the year, the Group discontinued hedge accounting as the hedge relationship was no longer effective arising from the Jamaica Debt Exchange programme. Hedge accounting was therefore ceased from January 1, 2010. Consequently, effective January 1, 2010, changes in fair value of the interest rate swap are now recognised in revenue in the statement of income. The amount recognised in the current year is $1,063, net of deferred tax. The hedge accounting gains and losses up to December 31, 2009 will be transferred to the statement of income as interest income is recognised on the floating rate financial instrument. 162 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK 42. INSURANCE RISK (continued) From an insurance risk perspective, the Group’s insurance business can be summarised into three categories, which are discussed below. 42.1 Property and casualty insurance risks (continued) (b) Claims risk 42.1 Property and casualty insurance risks (a) Pricing risk Pricing risk is the risk that insurance contracts are priced too low for the insurance risk assumed. In determining the pricing of an insurance contract, the insurer considers the nature and amount of the risk assumed, and recent experience and industry statistics of the benefits payable. This is the process of underwriting, which establishes appropriate pricing guidelines, and may include specific tests and enquiries which determine the insurer’s assessment of the risk. Insurers may also establish deductibles, exclusions, and coverage limits which will limit the potential losses incurred. The pricing of a contract therefore consists of establishing appropriate premium rates, deductibles and event limits. Pricing inadequacy risk may arise either from the use of inadequate experience and statistical data in deriving pricing factors or from market softening conditions. Insurance losses are triggered by an event. Insurance losses may be categorised as: (cid:1) attritional losses, which are expected to be of reasonable frequency and are less than a pre-determined amount; (cid:1) large losses, which are expected to be relatively infrequent and more than a pre- determined amount; (cid:1) catastrophic losses, which are an aggregation of losses arising from one incident or proximate cause, affecting one or a number of insurance classes. These losses are infrequent and are generally very substantial. The insurer records claims based on submissions made by claimants. In certain instances, the insurer obtains additional information from loss adjustors, medical reports and other specialist sources. However, the possibility exists that claim submissions are either fraudulent or are not covered under the terms of the policy. The initial claim recorded may only be an estimate, which has to be refined over time until final settlement occurs. During the period to final settlement, the insurer has to record these estimates as outstanding liabilities. A proportion of risks assumed are written by third parties under delegated underwriting authorities. The third parties are assessed in advance and are subject to authority limits and reporting procedures. The performance of contracts written by each delegated authority is monitored periodically. In addition, experience and industry statistics indicate that at any particular date, there are incurred but not reported (IBNR) claims. Statistical and actuarial techniques are used to estimate IBNR claim liabilities at each date of the financial statements. Claims risk is the risk that incurred claims may exceed expected losses. Claims risk may arise from (cid:1) (cid:1) (cid:1) (cid:1) invalid claim submissions; the frequency of incurred claims; the severity of incurred claims; the development of incurred claims. Sagicor Financial Corporation 163 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 42. INSURANCE RISK (continued) 42.1 Property and casualty insurance risks (continued) (c) Concentration of insurance risk Insurance risk may be concentrated in geographic locations, altering the risk profile of the insurer. The most significant exposure for this type of risk arises where a single event could result in a large number of claims. The concentration of insurance risk is illustrated by the distribution of premium revenue by geographical location of the risk. 2010 Premium revenue by geographical location Gross Ceded Net Barbados Jamaica Trinidad & Tobago Other Caribbean United Kingdom USA Rest of the world & worldwide Total 22,197 567 28,563 12,094 124,495 108,280 158,006 454,202 17,315 138 19,412 6,761 14,295 19,827 26,236 103,984 4,882 429 9,151 5,333 110,200 88,453 131,770 350,218 42.1 Property and casualty insurance risks (continued) (cid:1) Realistic disaster scenarios modelled for 2010 resulted in estimated losses in the originating currencies. Four scenarios are listed below. Scenario: Gross loss Net loss in offshore energy A $112,500,000 industry loss from a Gulf of Mexico hurricane loss of approximately resulting losses of $107,000,000 $5,500,000 and mainland property including the consideration of demand surge and storm surge. insured North East Windstorm: A $78,000,000 industry loss, for a major hurricane making landfall in New York State, with damage also occurring in neighbouring states. California Quake - San Francisco. A $78,000,000 industry property (shake and fire following) loss, including consideration of demand surge, from an earthquake originating from the San Andreas Fault (North) near San Francisco. 62,684 14,684 72,373 16,524 75,118 16,316 Hurricane affecting Barbados and St. Lucia having a 100 year return period. 220,053 5,000 (d) Reinsurance risk Concentration of risk is mitigated through risk selection, event limits, quota share reinsurance and excess of loss reinsurance. The Group assesses its exposures by modelling realistic disaster scenarios of potential catastrophic events. Claims arising from wind storms, earthquakes, floods, terrorism, failure or collapse of a major corporation (with liability insurance cover) and events triggering multi coverage corporate liability claims are considered to be the potential sources of catastrophic losses arising from insurance risks. To limit its exposure of potential loss on an insurance policy, the insurer may cede certain levels of risk to a reinsurer. Reinsurance however does not discharge the insurer’s liability. Reinsurance risk is the risk that reinsurance is not available to mitigate the potential loss on an insurance policy. The risk may arise from (cid:1) (cid:1) (cid:1) the credit risk of a reinsurer; the unavailability of reinsurance cover in the market at adequate levels or prices; the failure of a reinsurance layer upon the occurrence of a catastrophic event. 164 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 42. INSURANCE RISK (continued) 42.1 Property and casualty insurance risks (continued) 42.1 Property and casualty insurance risks (continued) 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. Insurers also place reinsurance coverage with various reinsurers to limit their exposure to any one reinsurer. 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 specified 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. Excess of loss catastrophe reinsurance treaties typically cover up to four separate catastrophic events per year. Caribbean operations Retention by insurers - currency amounts in thousands Property risks Motor and liability risks (cid:1) maximum retention of $3,750 for a single event; (cid:1) maximum retention of $5,000 for a catastrophic event; (cid:1) quota share retention to maximum of 25% in respect of treaty limits; quota share retention is further reduced to a maximum of $500 per event. (cid:1) (cid:1) maximum retention of $500 for a single event; (cid:1) quota share retention a maximum of 50% in respect of treaty limits treaty limits apply. For other insurance risks, insurers limit their exposure by event or per person by excess of loss or quota share treaties. (cid:1) 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. Claim amounts in excess of reinsurance treaty limits revert to the insurer. Principal features of retention programs used in the Group’s Caribbean and UK operations are summarised in the tables below. However, these arrangements are not exhaustive and do not represent a complete schedule of all reinsurance arrangements for each line of insurance business written. Miscellaneous accident risks (cid:1) maximum retention of $75 for a single event; treaty limits apply. Engineering business risks (cid:1) maximum retention of $250 for a single event; (cid:1) treaty limits apply. Property, motor, and engineering risks (cid:1) (cid:1) 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. (cid:1) (cid:1) . Sagicor Financial Corporation 165 Notes to the Financial Statements Year ended December 31, 2010 42. INSURANCE RISK (continued) Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 42.1 Property and casualty insurance risks (continued) 42.1 Property and casualty insurance risks (continued) UK operations - underwriting year 2010 Direct property risks Personal accident risks Retention by insurers - currency amounts in thousands (cid:1) maximum retention of $2,500 per risk; (cid:1) maximum retention of $15,000 for 1st loss, $5,000 for 2nd loss, $5,000 for 3rd loss, for catastrophe exposed events; treaty and aggregate limits apply. (cid:1) (cid:1) maximum retention of $3,000 per risk; (cid:1) maximum retention of $3,000 per event; (cid:1) maximum retention of $2,000 per person (cid:1) maximum retention of £300 per travel and medical risk; (cid:1) treaty limits apply (e) Credit risk – reinsurance exposures As set out in note 41.1, the Group has an internal credit rating scale for its reinsurance exposures. In order to assess the potential reinsurance recoveries on the occurrence of a catastrophic insurance event, these exposures are assessed using the following realistic disaster scenarios: (cid:1) North East Windstorm: A $78,000,000 industry loss, for a major hurricane making landfall in New York State, with damage also occurring in neighbouring states; (cid:1) Hurricane with a 250 year return period affecting Barbados and St. Lucia and an earthquake with a 250 year return period affecting Trinidad within a 24 hour period. The reinsurance recoveries derived from the above are assigned internal credit ratings as follows: lines (liability) and Special liability International treaty property Direct motor (cid:1) maximum retention of £5,000 per event; (cid:1) treaty limits apply. (cid:1) maximum retention of £5,000 per event; (cid:1) treaty limits apply. (cid:1) 70% quota share retention per event (cid:1) maximum retention - £500 per event; (cid:1) treaty limits apply The effects of reinsurance ceded are disclosed in notes 14, 24 and 27. Information on reinsurance balances are disclosed in notes 10, 20 and 41. Sagicor Risk Rating 1 2 3 4 5 6 Category Investment grade Non- investment grade Watch t l u a f e d - n o N (cid:1) (cid:1) (cid:1) 166 Sagicor Financial Corporation Classification Minimal risk Low risk Moderate risk Average risk Higher risk TOTAL Exposure $000 Exposure % 275,055 553,755 - - - 32 65 - 3 - - 856,834 100 Acceptable risk 28,024 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 42. INSURANCE RISK (continued) 42.2 Term life, health and critical illness insurance risks 42.2 Term life, health and critical illness insurance risks (continued) (a) Pricing risk Pricing risk is the risk that insurance contracts are priced too low for the insurance risk assumed. In determining the pricing of an insurance contract, the insurer considers the nature and amount of the risk assumed, and recent experience and industry statistics of the benefits payable. This is the process of underwriting, which establishes appropriate pricing guidelines, and may include specific medical tests and enquiries which determine the insurer’s assessment of the risk. Insurers may also establish deductibles and coverage limits for health risks which will limit the potential claims incurred. Term life and critical illness risks have limitations of insured amounts. The pricing of a contract therefore consists of establishing appropriate premium rates, deductibles and coverage limits. Pricing inadequacy risk may arise either from the use of inadequate experience and statistical data in deriving pricing factors or from market softening conditions. (b) Mortality risk and morbidity Mortality risk is the risk that worsening mortality rates will result in an increase of death claims. Morbidity is the incidence of disease or illness. Insurance claims are triggered by the incurral of a medical claim, the diagnosis of a critical illness or by death of the person insured. For contracts providing death benefits, higher mortality rates would result in an increase in death claims. The Group annually reviews its mortality experience and compares it to industry mortality tables. This review(cid:1)may result in future adjustments to the pricing or re-pricing of these contracts. (cid:1) The cost of health related claims depends on the incidence of beneficiaries becoming ill, the duration of their illness, and the cost of providing medical services. An increase in any of these three factors will result in increased health insurance claims. In such circumstances, the insurer may adjust the(cid:1) pricing or re-pricing of these contracts. Critical illness claims arise from the diagnosis of a specific illness in a policy beneficiary. The Group annually reviews its critical illness claim experience and compares it to industry statistics. This review may result in future adjustments to the pricing or re-pricing of these contracts. 42.3 Life and annuity insurance risks (with investment returns) Life and annuity insurance risk of contracts with investment returns arise from long-term contracts which in most instances have durations greater than 5 years. Under the contract, the policyholder is required to pay either a single premium at the contract inception, or periodic premiums over the duration of the policy contract. From the premium(s) received, acquisition expenses and maintenance expenses are financed. Investment returns are credited to the policy and are available to fund surrender, withdrawal and maturity policy benefits. The principal risks associated with these policies are: (cid:1) Mortality risk (cid:1) Lapse risk (cid:1) Expense risk (cid:1) Financial risk (a) Mortality risk Mortality risk is the risk that worsening mortality rates will result in an increase of death claims and that improving mortality rates will lengthen the payout period of annuities. (b) Lapse risk Lapse risk is that, on average, policyholders will terminate their policies ahead of the insurer’s expectation. Early lapse may result in the following: (cid:1) Acquisition costs are not recovered from the policyholder; (cid:1) In order to settle benefits, investments are liquidated prematurely resulting in a loss to the insurer; (cid:1) Maintenance expenses are allocated to the remaining policies, resulting in an increase in expense risk. (cid:1) Sagicor Financial Corporation 167 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 42. INSURANCE RISK (continued) 42.3 Life and annuity insurance risks (with investment returns) (continued) 42.4 Concentration risk (life, annuity and health insurance) (continued) (c) Expense risk The Group has significant inforce policies in which it either does not have the ability or has limited ability to re-price the contract for an increase in expenses caused by inflation or other factors. This means that planned growth in the Group’s policy maintenance expenses has to be funded by increasing the volume of inforce policies and/or by productivity gains. Failure to achieve this will result in an increase in actuarial liabilities. (d) Financial risk In addition to the risks outlined in note 41, for inforce long-term contracts the Group has adopted a policy of investing in assets with cash flow characteristics that closely match the cash flow characteristics of its policy liabilities. The primary purpose of this matching is to ensure that cash flows from these assets are synchronised with the timing and the amounts of payments that must be paid to policyholders. Mis-matches in asset and liability cash flows generally have the effect of increasing financial risk which will result in an increase in actuarial liabilities. 42.4 Concentration risk (life, annuity and health insurance) Total insurance coverage on insurance policies quantifies some of the risk exposures. Typically, claims arising in any one year are a very small proportion in relation to the total insurance coverage provided. The total amounts insured by the Group at December 31, gross and net of reinsurance, are summarised below. Gross amount insured Net amount insured 2010 2009 2010 2009 Contracts issued to individuals – life insurance Contracts issued to groups – life insurance 19,480,346 17,767,943 15,853,511 14,417,374 10,470,005 8,288,414 7,804,779 6,539,084 For health insurance, the concentration of insurance risk is illustrated by the distribution of premium revenue by the location of the insured persons. (a) Mortality and morbidity risk 2010 Premium revenue by location of insureds Gross Ceded Net Mortality and morbidity risk may be concentrated in geographic locations, altering the risk profile of the insurer. The most significant exposure for this type of risk arises where a single event could result in a large number of claims. Many beneficiaries of life insurance policies issued by the Group (the insured population) are resident in certain countries within the Caribbean. It is estimated that the insured populations in Antigua, Barbados, Cayman Islands, Jamaica, Netherlands Antilles, St Lucia and Trinidad and Tobago represent respectively over 5% of the population of each. Barbados Jamaica Trinidad & Tobago Other Caribbean USA Total 19,083 70,938 16,178 26,259 290 1,076 1,412 634 1,019 215 18,007 69,526 15,544 25,240 75 132,748 4,356 128,392 168 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 42. INSURANCE RISK (continued) 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES 42.5 Reinsurance risk (life, annuity and health insurance) 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. 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. For life, annuity and health insurance risks, insurers limit their exposure 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. The principal features of retention programs used by insurers are summarised in the tables below: Type of insurance contract Retention by insurers - currency amounts in thousands Health insurance contracts with individuals Retention per individual to a maximum of $75 Health insurance contracts with groups Retention per individual to a maximum of $75 Life insurance contracts with individuals Retention per individual life to a maximum of $783 Life insurance contracts with groups Retention per individual life to a maximum of $783 Actuarial liabilities comprise 73% of total insurance liabilities (2009 – 76%). The determination of actuarial liabilities is sensitive to a number of assumptions, and changes in those assumptions could have a significant 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: (cid:1) (cid:1) (cid:1) (cid:1) 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 9 economic scenarios. These tests have been done and the results of the valuation provide adequately for liabilities derived from the worst of these different scenarios. The assumption for future investment yields has a significant impact on actuarial liabilities. The different scenarios tested under CALM reflect the impact of different yields. The other assumptions which are most sensitive in determining the actuarial liabilities of the Group are: Operating expenses and taxes Lapse (cid:1) (cid:1) (cid:1) Mortality and morbidity Life insurance and annuity blocks of contracts 0% to 37.5% retention on policy liabilities The scenarios developed and tested by insurers were as follows. 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. (cid:1) (cid:1) (cid:1) . Sagicor Financial Corporation 169 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES (continued) 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES (continued) 43.1 Sensitivity arising from the valuation of life insurance and annuity contracts (continued) 43.1 Sensitivity arising from the valuation of life insurance and annuity contracts (continued) Sensitivity Scenario Sagicor Life Inc segment Sagicor Life Jamaica segment Sagicor USA segment Lapse rates were either doubled or halved, and the more adverse result was selected. For business which produces higher valuation reserves with an increase in lapse rates, the scenario lapse rates were doubled. For business which produces higher valuation reserves with a decrease in lapse rates, the scenario lapse rates were halved. Assumed increases in the investment portfolio yield rates of 0.25% per year for 5 years. increases in Assumed the investment portfolio yield rates of 0.5% for 10 years. A 1% flat increase was applied to the statutory and pricing interest rate. Assumed decreases in investment portfolio yield rates of 0.25% per year for 5 years. Assumed decreases in investment portfolio yield rates of 0.5% per year for 10 years. Mortality and morbidity rates for insurance and critical illness products were increased by 3% of the base rate per year for 5 years. For annuity products, decreased by 3% of the base rate for 5 years. the mortality rates were A 1% flat decrease was applied to the statutory and pricing interest rate. life For insurance products only, the base assumed rates were increased annually by 3% cumulatively over the next five years. Worsening rate of lapse High interest rate Low interest rate Worsening mortality and morbidity Higher expenses Policy unit maintenance expense rates were increased by 5% for 5 years above those reflected in the base scenario. 170 Sagicor Financial Corporation was The assumed rate annually cumulatively over next five years. inflation increased 5% the by The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities for insurers by segment. Correlations that may exist between scenario assumptions were not explicitly taken into account. Sagicor Life Inc segment Sagicor Life Jamaica segment Sagicor USA segment 2010 2009 2010 2009 2010 2009 759,399 730,013 347,449 300,801 454,397 367,048 change in liability change in liability change in liability 64,978 62,576 37,183 32,783 19,022 15,366 Base net actuarial liability - $000 Scenario Worsening rate of lapse High interest rate (62,479) (45,587) (57,884) (54,373) (27,401) (22,134) Low interest rate 106,512 66,075 93,590 62,269 31,559 25,493 Worsening mortality / morbidity 24,830 19,714 24,229 20,480 8,795 7,104 Higher expenses 30,509 28,673 19,967 16,641 1,166 942 . Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 43. SENSITIVITY ANALYSIS OF ACTUARIAL LIABILITIES (continued) 44. ANALYSIS OF PROPERTY AND CASUALTY CLAIM LIABILITIES 43.2 Dynamic capital adequacy testing (DCAT) 44.1 Development of claim liabilities DCAT is a technique used by the Group to assess the adequacy of the insurer’s financial position and financial condition in the light of different future economic and policy experience scenarios. DCAT assesses the impact over the next 5 years on the insurer’s financial position and financial condition(cid:1) under specific scenarios.(cid:1)(cid:1) 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 following tables, estimates of total ultimate claims incurred and recoverable from reinsurers for each year are provided at successive year ends. The most recent estimate is then reconciled to the recognised liability. For Caribbean operations, the disclosures are by accident year. Accident year is the financial period in which the claim is incurred. (cid:1) For UK operations, the disclosures are by underwriting year. Underwriting year is the period to which a policy’s annual premium has been allocated. The financial position of an insurer is reflected by the amounts of assets, liabilities and equity in the financial statements at a given date. The financial position therefore relies on the valuation assumptions used for establishing the actuarial liabilities being adequate to measure future adverse deviations in experience. The financial position does not offer any indication of an insurer’s ability to execute its business plan. The financial condition of an insurer at a particular date is its prospective ability at that date to meet its future obligations, especially obligations to policyholders, those to whom it owes benefits and to its shareholders. The financial condition analysis examines both an insurer’s ability to execute its business plan and to absorb adverse experience beyond that provided for when its actuarial liabilities are established. The purpose of the DCAT is (cid:1) (cid:1) (cid:1) to develop an understanding of the sensitivity of the total equity of the insurer and future financial condition to changes in various experience factors and management policies; to alert management to material, plausible and imminent threats to the insurer’s solvency; and to describe possible courses of action to address these threats. Full DCAT is conducted periodically by insurers within the Group. Sagicor Financial Corporation 171 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 44. ANALYSIS OF PROPERTY AND CASUALTY CLAIM LIABILITIES (continued) 44.1 Development of claim liabilities CARIBBEAN OPERATIONS - BY ACCIDENT YEAR Estimate of gross claims incurred as of December 31 9,206 2006 One year later Two years later Three years later Four years later Most recent year Cumulative payments to date Gross liability recognised Liability for prior years Total liability Net favourable (unfavourable) development Estimate of reinsurers’ share as of December 31 One year later Two years later Three years later Four years later Most recent year Cumulative receipts to date Recoverable recognised Recoverable for prior years 2007 21,325 16,247 15,305 15,237 2008 2009 2010 Total 16,953 15,521 18,643 81,648 16,256 15,215 - - 16,101 - - - - - - - - - - - - 15,237 (14,320) 917 16,101 (14,050) 2,051 15,215 (11,194) 4,021 18,643 73,982 (9,215) 9,428 (56,560) 17,422 8,658 8,535 8,368 8,786 8,786 (7,781) 1,005 - - - - - 1,217 - - - - - 18,639 420 1,266 886 884 999 6,088 9,922 6,693 6,327 852 9,411 9,540 9,392 6,293 - 306 8,392 - 7,666 11,020 40,011 8,207 - - - - - - - - 975 - - - - - 975 (951) 6,293 (6,204) 24 89 9,392 (8,226) 1,166 8,207 (6,060) 2,147 11,020 (4,969) 35,887 (26,410) 6,051 9,477 - - - - - (235) 9,242 4,124 Total recoverable from reinsurers - - - - - Net (favourable) unfavourable development 291 3,629 19 185 - 172 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 44. ANALYSIS OF PROPERTY AND CASUALTY CLAIM LIABILITIES (continued) Sagicor Financial Corporation Amounts expressed in US $000 44.1 Development of claim liabilities UK OPERATIONS - BY UNDERWRITING YEAR Estimate of gross claims incurred as of December 31 One year later Two years later Three years later Four years later Most recent year Cumulative payments to date Claims on unearned premiums Gross liability recognised Liability for prior years Total liability 2006 48,285 36,547 34,571 33,610 2007 55,700 57,384 58,385 2008 109,814 119,218 2009 193,513 2010 262,362 Total 669,674 212,784 - - 131,771 - - - 58,748 - - - - 32,931 - - - - - 32,931 (30,954) 58,748 (53,629) - - 1,977 5,119 131,771 (92,159) (16) 39,596 212,784 (93,347) (10,072) 109,365 262,362 (14,686) (140,641) 107,035 - - - - - - - - - - Net favourable (unfavourable) development 15,354 (3,048) (21,957) (19,271) - Estimate of reinsurers’ share as of December 31 13 - 8,114 14,650 One year later Two years later Three years later Four years later Most recent year - 94 24 50 50 Cumulative receipts to date - 2,777 2,043 2,125 (1,184) Recoverable from claims on unearned premiums - - 14,634 - - 17,691 - - - 2,125 - - - - - - - - - 9,869 6,738 17,691 (7,164) (5) 10,522 Recoverable recognised Recoverable for prior years 50 941 - - - - - Total recoverable from reinsurers - - - - - 14,634 14,650 49,150 (2,563) - (10,911) (731) 11,340 (4,033) 10,617 (4,769) 33,470 1,984 35,454 698,596 (284,775) (150,729) 263,092 16,046 279,138 (28,922) 32,646 Net (favourable) unfavourable development (37) (2,125) (7,822) (6,520) - (16,504) Sagicor Financial Corporation 173 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 44. ANALYSIS OF PROPERTY AND CASUALTY CLAIM LIABILITIES (continued) 45. CAPITAL MANAGEMENT (continued) 44.2 Sensitivity of claim liabilities 45.1 Capital resources (continued) The effect of a 5% increase in the property and casualty net claims ratio would result in a decrease in income before taxes of $17,511 (2009 – $12,475). 45. CAPITAL MANAGEMENT The Group manages its capital resources according to the following objectives: (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) To comply with capital requirements established by insurance, banking and other financial 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 benefits and returns to policyholders, depositors, note-holders and shareholders; To provide adequate returns to shareholders; To maintain a strong capital base to support the future development of Group operations. (cid:1) 45.1 Capital resources The principal capital resources of the Group are as follows: Shareholders’ equity Minority interest Notes and loans payable Total financial statements capital resources Letter of credit facilities, net of collateral assets Total off financial statements resources 2010 2009 565,552 168,942 181,885 916,379 34,530 34,530 538,074 137,503 200,844 876,421 35,775 35,775 Total capital resources 950,909 912,196 174 Sagicor Financial Corporation 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 financial services. The capital is deployed in such a manner as to ensure that subsidiaries have adequate and sufficient 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 (cid:1) (a) Life insurers 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 requirements. To assist in evaluating the current business and strategy opportunities, a risk-based capital approach is a core measure of financial 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%. A number of jurisdictions in the Caribbean region have no internationally recognised capital adequacy requirements, and in accordance with its objectives for managing capital, the Group has adopted the Canadian MCCSR standard. The consolidated MCCSR for the Sagicor Group as of December 31 is set out below. Sagicor Group (cid:1) 2010 224% 2009 273% Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 45. CAPITAL MANAGEMENT (continued) 45. CAPITAL MANAGEMENT (continued) 45.2 Capital adequacy (continued) (cid:1) (b) Sagicor at Lloyd’s: Syndicates 1206 & 44 45.2 Capital adequacy (continued) 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 and there is a clearly defined link between risk and capital setting. Sagicor at Lloyd’s has adopted an approach whereby risks identified as having a material effect on the capital requirements are documented within a risk register are shown as prime risks. It is recognised that this register is(cid:1)dependent on both the identification and subsequent analysis of individual risks by management. The risk register is subject to regular(cid:1)review and is updated to reflect the changes in the syndicate’s risk profile. The risk classes comprise insurance, credit, market, liquidity, Group and(cid:1) 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% confidence 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 letters 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 profits 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 requirements for the Syndicates at the beginning of each underwriting are as follows: (cid:1) (cid:1) FaL requirement: Syndicate 1206 Syndicate 44 Represented by: Banker’s letters of credit Deposits at Lloyd’s of London Reinsurance financing Solvency surplus Underwriting year 2011 - £000 2010 - £000 2009 - £000 137,241 4,438 141,679 52,100 31,622 60,000 - 98,440 4,899 103,339 52,100 30,934 18,750 1,555 65,000 2,833 67,833 52,100 733 15,000 - 143,722 103,339 67,833 (c) 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 filed with the respective Regulatory Authorities at stipulated intervals. The BOJ and the FSC require each regulated entity to: (cid:1) Hold the minimum level of regulatory capital; (cid:1) Maintain a minimum ratio of total regulatory capital to the risk-weighted assets. Sagicor Financial Corporation 175 Notes to the Financial Statements Year ended December 31, 2010 45. CAPITAL MANAGEMENT (continued) 45.2 Capital adequacy (continued) (cid:1) The risk-weighted assets are measured by means of a hierarchy of five risk weights classified according to the nature of each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off financial statements exposure, with some adjustments to reflect the more contingent nature of the potential losses. The table below summarises the ratios of the regulated companies within the PCFS Group for the years ended December 31, 2010 and 2009. During those two years, the individual entities within this 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) and PanCaribbeanBank Limited (PCB). Sagicor Financial Corporation Amounts expressed in US $000 45. CAPITAL MANAGEMENT (continued) 45.3 Financial covenants (continued) Permitted liens are defined to be liens existing on the date of issue of the senior notes, certain liens which would arise in the course of normal business, and other liens as long as the aggregate outstanding principal amount of such secured indebtedness of the Group, taken as a whole, does not exceed 10% of the consolidated net tangible assets. The latter is defined in the indenture. As of December 31, 2010, the Group satisfied this requirement. (b) Letter of credit facilities The financial covenants entered into by the Group on the issue of letter of credit facilities by the Bank of Nova Scotia are summarised below. PCFS PCB 2010 2009 2010 2009 (i) Tangible net worth Actual capital base to risk weighted assets 46% 61% 32% 33% Required capital base to risk weighted assets 10% 10% 10% 10% The Group is required to maintain a tangible net worth greater than $250,000 at all times, such covenant to be tested annually based on the consolidated audited financial statements. Tangible net worth is defined in the agreements to establish letter of credit facilities. As of December 31, 2010 and 2009, the Group satisfied this requirement. 45.3 Financial covenants (a) 7.5% senior notes due 2016 Under an indenture entered into by the Group on the issue of the senior notes (see note 16), the Group has to comply with a restrictive covenant which will not allow the Company or any of its subsidiaries to directly or indirectly, incur or permit to exist any lien to secure any indebtedness or any guarantee of indebtedness, other than permitted liens, without effectively providing that the senior notes are secured equitably and rateably with (or, if the obligation to be secured by the lien is subordinated in right of payment to the senior notes, prior to) the obligations so secured for so long as such obligations are so secured. (cid:1) (cid:1) . (cid:1) 176 Sagicor Financial Corporation Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 45. CAPITAL MANAGEMENT (continued) 45. CAPITAL MANAGEMENT (continued) 45.3 Financial covenants (continued) 45.3 Financial covenants (continued) (ii) Interest coverage ratio (i) Equity The Group is required to maintain an interest coverage ratio of at least 5:1 at all times, such covenant to be tested annually based on the consolidated audited financial statements. Interest coverage ratio is defined in the agreements to establish letter of credit facilities. The Group is required to maintain Equity of at least $575,000 at all times. As of December 31, 2010 and 2009, the Group satisfied this requirement. For the years ended December 31, 2010 and 2009, the Group’s interest coverage ratio was 5.6:1 and 7.6:1 respectively. (iii) Financial strength Under the agreements to establish the letter of credit facilities, Sagicor Life Inc is required to maintain minimum financial strength ratings of BBB- from Standard & Poor’s and of B+ from A.M. Best. A further requirement is that a material adverse change in the financial condition of Sagicor Life Inc should not occur. As of December 31, 2010 and up to the date of issue of these financial(cid:1)statements, Sagicor Life Inc maintained the required financial strength ratings. (iv) Permitted liens The covenant described in part (a) of this note also forms a covenant under the agreements to establish the letter of credit facilities. (c) Loan from the Royal Bank of Canada (RBC) The financial covenants entered into by the Group on the receipt in December 2009 of a loan of $25,000 by the Royal Bank of Canada are summarised below. (cid:1) (ii) Interest coverage ratio The Group is required to maintain an interest coverage ratio of at least 1.75:1 at all times, such covenant to be tested quarterly based on the consolidated financial statements. Interest coverage ratio is defined in the agreement to establish the loan. For the year ended December 31, 2010 and 2009, the Group’s interest coverage ratio was 1.80:1 and 1.86:1 respectively. 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 $1,262,023 (2009 - $1,100,760) 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. Sagicor Financial Corporation 177 Notes to the Financial Statements Year ended December 31, 2010 Sagicor Financial Corporation Amounts expressed in US $000 47. FIDUCIARY RISK 48. EVENTS AFTER DECEMBER 31, 2010 (continued) 48.2 Insurance catastrophe events Since the date of these financial statements, insurance catastrophe events have occurred in the southern hemisphere to which the Group is exposed through its Sagicor at Lloyd’s operations. The events and initial estimates of claims are as follows: (cid:77) Toowoomba & Brisbane floods estimated at $5,500; (cid:77) Cyclone Yasi estimated at $4,700; (cid:77) Christchurch Earthquake, estimated at $7,800. Sagicor at Lloyd’s exposure in these events is protected by reinsurance above $7,800 per event. In addition to the above, the recent Japan Earthquake will also have a material impact on the 2011 results; however, it is too early to quantify the effect of this event. 48.3 International Finance Corporation (IFC) In February 2011, the Company announced that it had entered into discussions with IFC for the latter to invest up to $100,000 in the Company, in the form of common and preference shares. The investment by IFC is subject to completion of negotiations and all necessary regulatory and shareholder approvals. The Group provides investment management, administration and corporate trust services to investment funds and other corporate entities which involve the Group making allocation, purchase and sale decisions in relation to a wide range of investments. These assets are held in a fiduciary capacity and are not included in these financial statements. These services give rise to fiduciary risk that may expose the Group to claims for mal-administration or under-performance of these funds. In the ordinary course of business, the Group manages assets of pension funds, mutual funds, unit trusts and other corporate entities which are not included in the Group’s financial statements. The investments and cash under administration are as follows: 2010 2009 1,134,473 348,593 987,096 327,776 1,483,066 1,314,872 Pension and insurance fund assets Mutual fund, unit trust and other investment fund assets 48. EVENTS AFTER DECEMBER 31, 2010 48.1 Joint venture Sagicor Life Jamaica Ltd (SLJ) entered into a joint venture agreement with an investment services company incorporated in Costa Rica on February 2, 2011 to explore insurance business and insurance related services in Central America. Under the terms of the agreement SLJ will provide technical expertise, administrative services and operating systems to support joint venture operations. The joint venture partner will provide marketing know-how and local support to the joint venture. The agreement is subject to regulatory approval in the applicable countries in Central America. (cid:1) (cid:1) 178 Sagicor Financial Corporation All that we are is the result of what we have thought. SHAREHOLDER INFORMATION SHARES The following Shareholders own more than 5% and 3% respectively of the capital of the Company as at December 31, 2010: Name National Insurance Board, Barbados: Republic Bank Limited – 1162: Number of Shares 18,950,000 10,998,300 Percentage 6.5 3.8 The total number of common shares issued in 2010 was 438,183, which were issued on July 22, 2010 as vested restricted stock under the Long-Term Incentive Plan for Executives (LTI). The total number of issued common shares as at December 31, 2010 was therefore 291,341,344 (2009: 290,903,161). The Tables below show grants of restricted stock and stock options as at December 31, 2010 under the LTI. Year 2008 2009 2009 2010 Value - US$ 2.50 2.50 1.58 1.60 Totals Award 596,914 674,828 430,122 1,033,548 2,735,412 Less: allocated for settlement of tax Total converted to shares RESTRICTED STOCK GRANTS Vested 2008 Vested 2009 Vested 2010 Forfeited Balance 298,459 0 0 0 278,505 331,449 430,122 0 298,459 1,040,076 9,216 235,530 0 379,490 624,236 (186,053) 438,183 10,734 10,106 0 0 20,840 0 97,743 0 654,058 751,801 Sagicor Financial Corporation 180 STOCK OPTIONS Year 2006 2007 2008 2009 2010 Exercise Price - US$ Award Awards Lapsed / Forfeited Adjusted Award Vested 2007 - 2009 Vested 2010 Vested Awards Lapsed / Forfeited Total Vested Options Exercised Options not Exercised Adjusted Award Balance 1.98 2.01 2.5 2.5 1.6 932,387 (130,232) 802,155 699,291 198,705 (95,841) 802,155 (120,443) 681,712 681,712 2,049,598 (239,686) 1,809,912 1,024,800 452,480 (119,838) 1,357,442 (72,839) 1,284,603 1,737,073 1,422,949 (180,820) 1,242,129 355,737 310,534 (45,201) 621,070 1,595,496 (83,033) 1,512,463 2,169,066 0 2,169,066 0 0 378,117 0 0 0 378,117 0 0 0 0 621,070 1,242,129 378,117 1,512,463 0 2,169,066 Totals 8,169,496 (633,771) 7,535,725 2,079,828 1,339,836 (260,880) 3,158,784 (193,282) 2,965,502 7,342,443 DIVIDENDS An interim dividend of US 2 cents per share, approved for the half-year ended June 30, 2010, was paid on October 15, 2010 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 15, 2010. A ﬁnal dividend of US 2 cents per share, payable on May 16, 2011, was approved for the ﬁnancial year ended December 31, 2010 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 20, 2011. The total dividend for the 2010 ﬁnancial year amounted to US 4 cents per share. Sagicor Financial Corporation 181 ANALYSIS OF SHAREHOLDING Number of Shareholders by Size of Holding as at December 31, 2010 (with 2009 Comparison) Size of Holding Number of Shareholders Percentage of Shareholders Total Shares Held Percentage of Shares Held 1 - 1,000 1,001 - 2,500 2,501 - 5,000 5,001 - 10,000 10,001 - 25,000 25,001 - 100,000 100,001 - 1,000,000 1,000,001 - & above 2010 6,577 15,625 7,324 4,229 3,073 693 225 18 2009 6,335 15,709 7,406 4,275 3,079 690 229 17 2010 17.42 41.38 19.39 11.20 8.14 1.84 0.60 0.05 2009 16.79 41.62 19.62 11.33 8.16 1.83 0.60 0.05 2010 2009 4,014,284 3,928,961 25,962,039 26,098,842 25,430,237 25,715,179 30,231,859 31,319,508 44,284,005 44,370,941 32,351,711 32,208,066 65,236,735 65,279,966 63,830,474 61,981,698 2010 1.38 8.91 8.73 10.38 15.20 11.10 22.39 21.91 2009 1.35 8.97 8.84 10.77 15.25 11.07 22.44 21.31 Total 37,764 37,740 100.00 100.00 291,341,344 290,903,161 100.00 100.00 Number of Shareholders by Country of Residence and by Type as at December 31, 2010 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shareholders % Shareholders % Shareholders % Shareholders % 61 139 25 12 11 248 24.60 56.05 10.08 4.84 4.44 100.00 468 229 32 51 5 785 59.62 29.17 4.08 6.50 0.64 15,999 12,199 7,317 193 1,023 43.56 33.20 19.92 0.53 2.79 16,528 12,567 7,374 256 1,039 43.77 33.27 19.53 0.68 2.75 100.00 36,731 100.00 37,764 100.00 Sagicor Financial Corporation 182 Number of Shareholders by Country of Residence and by Type as at December 31, 2009 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shareholders % Shareholders % Shareholders % Shareholders % 45 133 2 6 17 182 21.98 73.08 1.10 2.75 1.10 503 256 33 51 5 59.32 30.19 3.89 6.01 0.59 16,082 11,919 7,255 350 1,083 43.83 32.49 19.77 0.95 2.95 16,630 12,308 7,290 407 1,105 44.06 32.61 19.32 1.08 2.93 100.00 848 100.00 36,689 100.00 37,740 100.00 Number of Shares by Country of Residence and by Type as at December 31, 2010 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shares 459,429 2,700,650 68,298 548,000 184,052 % 11.60 68.19 1.72 13.84 4.65 Shares 32,930,332 33,764,569 450,516 3,652,034 162,880 % 46.41 47.58 0.63 5.15 0.23 Shares 105,070,214 66,667,115 20,706,220 3,482,243 20,494,792 % 48.55 30.80 9.57 1.61 9.47 Shares 138,459,975 103,132,334 21,225,034 7,682,277 20,841,724 % 47.53 35.40 7.29 2.64 7.15 3,960,429 100.00 70,960,331 100.00 216,420,584 100.00 291,341,344 100.00 Sagicor Financial Corporation 183 Number of Shares by Country of Residence and by Type as at December 31, 2009 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago 524,267 10.00 44,912,819 Shares % Shares 3,209,019 2,884 61.18 0.05 38,272,936 523,516 1,099,146 20.96 2,920,314 409,861 7.81 890,354 % 51.32 43.72 0.60 3.34 1.02 Shares 105,512,632 64,033,380 22,104,085 1,976,788 4,511,160 % 53.25 32.32 11.16 1.00 2.28 Shares 150,949,718 105,515,335 22,630,485 5,996,248 5,811,375 % 51.89 36.27 7.78 2.06 2.00 5,245,177 100.00 87,519,939 100.00 198,138,045 100.00 290,903,161 100.00 Barbados Eastern Caribbean Other Caribbean Other Total Sagicor Financial Corporation 184 ADVISORS AND BANKERS APPOINTED ACTUARY Sylvain Goulet, FCIA, FSA, MAAA, Afﬁliate Member of the (British) Institute of Actuaries and Afﬁliate Member of the Caribbean Actuarial Association 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, LLB (Hons), Barbados Hobsons, Trinidad and Tobago Shutts & Bowen LLP, Florida, USA BANKERS Butterﬁeld Bank (Barbados) Limited FirstCaribbean International Bank Limited RBTT Bank Limited RBC Royal Bank (Barbados) Limited The Bank of Nova Scotia Sagicor Financial Corporation 185 OFFICES Sagicor Corporate Head Ofﬁce SAGICOR FINANCIAL CORPORATION Cecil F deCaires Building Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com Website: www.sagicor.com 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: info_antigua@sagicor.com Grenada The Mutual/Trans-Nemwil Ofﬁce Complex The Villa, St George’s Tel: (473) 440-1223 Fax: (473) 440-4169 Email: info_grenada@sagicor.com St Lucia Sagicor Financial Centre Choc Estate, Castries Tel: (758) 452-3169 Fax: (758) 450-3787 Email: info_stlucia@sagicor.com 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: info_dominica@sagicor.com 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 Kitts Sagicor Life Inc C/o The St Kitts Nevis Anguilla Trading and Development Co. Ltd Central Street, Basseterre Tel: (869) 465-9476 Fax: (869) 465 6437 St Vincent Incorporated Agencies Limited Kenmars Building, Halifax Street Kingstown Tel: (784) 456-1159 Fax: (784) 456-2232 SAGICOR GENERAL INSURANCE INC Beckwith Place, Lower Broad Street Bridgetown, Barbados Tel: (246) 431-2800 Fax: (246) 426-0752 Email: sgi-info@sagicorgeneral.com Sagicor Financial Corporation 186 Sagicor General Insurance Branch Ofﬁces Barbados Mall Internationale Haggatt Hall St Michael Tel: (246) 431-2886 Fax: (246) 426-8245 Sagicor Financial Centre Lower Collymore Rock St Michael Tel: (246) 467-7650 Fax: (246) 428-6269 Building #2 Chelston Park Culloden Road St Michael Antigua Sagicor Life Inc Sagicor Financial Centre 9 Factory Road PO Box 666 St Johns Trinidad and Tobago Sagicor Financial Centre 16 Queen’s Park West Port of Spain Tel: (868) 628-1636/7/8 Fax: (868) 628-1639 Sagicor General Insurance Agencies HHV Whitchurch & Company Limited Old Street PO Box 771 Roseau Dominica Tel: (767) 448-2181 Fax: (767) 448-5787 WillCher Services Inc 44 Hillsborough Street Corner Hillsborough & Independence Street Roseau Dominica Tel: (767) 440-2562 Fax: (767) 440-2563 JE Maxwell & Company Limited PO Box GGM507 Bridge Street Castries St Lucia Tel: (758) 451-7829 Fax: (758) 451-7271 GLOBE FINANCE INC 6 Rendezvous Court, Rendezvous Main Road Christ Church, Barbados Tel: (246) 426-4755 Fax: (246) 426-4772 Website: www.globeﬁnanceinc.com SAGICOR 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 SAGICOR FINANCE INC Sagicor Financial Centre Choc Estate, Castries Tel: (758) 452-4272 Fax: (758) 452-4279 SAGICOR ASSET MANAGEMENT (TRINIDAD AND TOBAGO) LIMITED Sagicor Financial Centre 16 Queen’s Park West, Port of Spain Tel: (868) 628-1636/7/8 Fax: (868) 628-1639 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 Financial Corporation 187 BARBADOS FARMS LIMITED Bulkeley St George Barbados Tell: 427-5299 Fax: 437-8873 SAGICOR PANAMA SA Ave Samuel Lewis y Calle Santa Rita Ediﬁcio Plaza Obarrio 3er Piso Oﬁcina 201 Panama City, Panama Tel: (507) 223-1511 Fax: (507) 264-1949 Email: capital1@sinfo.net SAGICOR CAPITAL LIFE INSURANCE COMPANY LIMITED Registered Ofﬁce M B & H Corporate Services Limited, Mareva House, 4 George Street, Nassau, Bahamas Sagicor Capital Life Branch Ofﬁces 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@betlinks.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 CAPITAL LIFE INSURANCE COMPANY BAHAMAS LIMITED C/o ColinaImperial Insurance Limited 56 Collins Avenue, P O Box 4937 Nassau, Bahamas Tel: (242) 393-9518 Fax: (242) 393-9523 SAGICOR LIFE ARUBA NV Fergusonstraat #106 AHMO Plaza Building, Suites 1 and 2 Oranjestad, Aruba Tel: (297) 823967 Fax: (297) 826004 Email: calico@setarnet.aw Lyder Insurance Consultants Seroe Blanco 56A Tel: (297) 582-6133 LOJ HOLDINGS LTD 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 SAGICOR LIFE JAMAICA LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com Sagicor Financial Corporation 188 EMPLOYEE BENEFITS ADMINISTRATORS LTD 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com HEALTH CORPORATION JAMAICA LTD ST ANDREW’S DEVELOPERS LIMITED SAGICOR INSURANCE BROKERS LIMITED 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 INSURANCE MANAGERS LIMITED 1st Floor Harbour Place 103 South Church Street George Town Grand Cayman Tel: (345)-949-7028 Fax: (345)-949-7457 SAGICOR PROPERTY MANAGEMENT SERVICES LTD 78a Hagley Park Road, Kingston 10, Jamaica Telephone: (876) 929-9182-6 Facsimile: (876) 929-9187 SAGICOR RE INSURANCE LTD Global House, 198 North Church Street George Town, Grand Cayman Cayman Islands Tel: (345) 949-8211 Fax: (345) 949-8262 Email: global@candw.ky LESTED DEVELOPERS LIMITED PANCARIBBEAN 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 PANCARIBBEANBANK LIMITED PANCARIBBEAN INVESTMENTS LIMITED PANCARIBBEAN ASSET MANAGEMENT LIMITED PANCARIBBEAN SECURITIES LIMITED MANUFACTURERERS INVESTMENTS LIMITED SAGICOR USA, INC 4010 Boy Scout Blvd, Suite 800 Tampa, Florida 33607 USA Telephone: 813-287-1602 Fax: 813-287-7420 SAGICOR LIFE INSURANCE COMPANY 4343 N. Scottsdale Road, Suite 300 Scottsdale, Arizona 85251 Tel: 1-800-531-5067 Fax: (345) 949-8262 Website: www.sagicorlifeusa.com LAUREL LIFE INSURANCE COMPANY SAGICOR EUROPE LIMITED Maples Corporate Services Limited Ugland House South Church Street George Town, Grand Cayman Cayman Islands SAGICOR CAYMAN REINSURANCE, LTD Maples Corporate Services Limited Ugland House South Church Street George Town, Grand Cayman Cayman Islands SAGICOR AT LLOYD’S LIMITED 1 Great Tower Street London United Kingdom EC3R 5AA Tel: +44 (0)20 3003 6800 Fax: +44 (0)20 3003 6999 Website: www.sagicor.eu Email: info@sagicor.eu SAGICOR SYNDICATE HOLDINGS LIMITED SAGICOR SYNDICATE SERVICES LIMITED SAGICOR CLAIMS MANAGEMENT INC Sagicor Financial Corporation 189 SAGICOR CORPORATE CAPITAL LIMITED SAGICOR COPORATE CAPITAL TWO LIMITED LLOYD’S SYNDICATE 1206 LLOYD’S SYNDICATE 44 SAGICOR UNDERWRITING LIMITED 1 Great Tower Street London United Kingdom EC3R 5AA Tel: +44 (0)20 3003 6969 Fax: +44 (0)20 3003 6997 Website: www.sagicorunderwriting.com Email: sul@sagicor.eu SAGICOR FINANCE LIMITED Maples Corporate Services Limited Ugland House South Church Street George Town, Grand Cayman Cayman Islands Associated Companies 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 RGM LTD Albion Plaza Energy Centre, 22-24 Victoria Avenue, Port of Spain, Trinidad W.I. Ofﬁce: (868) 625-6505 ext. 26 Fax: (868) 624-7607 Mobile: (868) 678-3181 Direct: (868) 624-6975 Email: gpd@rgm.co Sagicor Financial Corporation 190 Cover Design: Blammo Worldwide Layout and Artwork: GENESIS Graphics Pre-Press and Printing: COT Media Group

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