Sagicor Financial Company Ltd.
Annual Report 2014

Plain-text annual report

ANNUAL REPOR T 201 4 O U R J O U R N E Y • O U R S U C C E S S • O U R F U T U R E 175 YEARS OUR VISION To be a great company, committed to improving the lives of people in the communities in which we operate. TABLE OF CONTENTS Trust Stability About Sagicor Chairman’s Statement Financial Highlights Community Corporate & Social Responsibility Service Innovative Vision Human Capital Report Operating & Financial Review Board of Directors Responsibility Corporate Governance Leadership Executive Management Wisdom Index of Financial Statements Financial Statements Notes Commitment Shareholder Information Advisors & Bankers Offices 6 10 12 17 36 42 58 64 78 84 88 93 198 205 206 175 years of trust We have 175 years of trust placed in us. Those who look to Sagicor for service, advice and help need to know that we will always honour that trust, and we will never let them down. ABOUT SAGICOR Sagicor is a dynamic, indigenous Group which has been redefining financial services in the Caribbean. Following a carefully crafted business strategy, the company transformed from a local single-line life insurance company to a financial services group with a solid regional base, before expanding into the international financial services market. After the company demutualised in 2002, Sagicor Financial Corporation was formed as a publicly-listed holding company. Sagicor, the company name, means “wise judgment”, and reflects the nature of the financial advice and services we offer. Sagicor now operates in 23 countries in the Caribbean, the USA, the UK and Latin America. For 175 years, Sagicor’s business has been based on long-term relationships with its employees, communities and customers, who entrust us with their future financial well-being. Our name and identity draw on the strength, stability and financial prudence that are our heritage, and this identity also defines the flexibility that wise financial thinking can bring to our customers throughout their lives. Local expertise and partnerships with world-class asset managers, reinsurers, and sound risk management, ensure that Sagicor is truly able to improve peoples’ lives through “wise judgment”, and will continue to meet their financial needs now and in the future. It is Sagicor’s view that the entire business of wealth-creation and protection is about social investment. For many decades, Sagicor has provided financial support and voluntary assistance, primarily in the areas of health, education, youth development and sports, to a number of organisations and institutions. Sagicor continues to provide significant support for the prevention of non-communicable diseases, by promoting healthy living, and improving access to and facilities for health-care in the region. Sagicor supports education at the primary, secondary and tertiary level, and sponsors a number of adult education and development activities. As we continue to move forward through these challenging times in the economic life of our region and the rest of the world, Sagicor’s core business strategies will continue to provide a wide range of financial products and services, while we continue to be committed to our vision, “To be a great company, committed to improving the lives of people in the communities in which we operate.” 6 2014 Annual Report The Mutual Building, on Lower Broad Street in Barbados, was the first purpose-built Head Office constructed by the Barbados Mutual Life Assurance Society in 1894/95. Sagicor Financial Corporation175 years of stability 175 years is a long time. With every year, we get stronger, wiser and better. The base we have formed in the communities we serve can never be shaken, so long as we remember how it was built. CHAIRMAN’S STATEMENT translated premiums in US dollars in 2014. Net investment income closed the period at US $307.2 million, and was an improvement over the prior year amount, which stood at US $279.4 million. Fees and other revenue amounted to US $83.3 million, compared to US $103.1 million in 2013, and was impacted by the lower reinsurance commissions earned as a result of lower new annuity business written in the USA segment. On June 27, 2014, the Group completed the acquisition of RBC Royal Bank’s Jamaica banking operations, and rebranded the business as Sagicor Bank. After determining the fair value of acquired assets and liabilities of the business, the Group recorded negative goodwill on acquisition of US $29.1 million. At the same time, the Jamaica segment incurred US $10.5 million in integration, restructuring and re-branding costs associated with the acquisition. These non-recurring costs have been included in Administrative Expenses. Total benefits incurred from continuing operations totalled US $542.2 million, and is a reduction from the comparative amount in 2013 of US $592.8 million. This reduction is the result of the lower annuity business written in the USA segment, together with the impact of the deterioration of the Jamaica dollar to the US dollar on the Jamaica segment. Expenses (including agents’ and brokers’ commissions) closed the year at US $385.9 million, compared to US $348.1 million for the prior year. The increase of US $37.8 million included restructuring and rebranding costs, along with operating expenses now incurred within the banking division, following the acquisition of RBC Royal Bank’s Jamaica banking operations. Total comprehensive income was significantly improved when compared to the prior year. Other comprehensive income showed a positive result of US $6.7 million, compared to a loss of US $54.6 million for 2013. Included in comprehensive income were net gains on financial assets of US $15.6 million and net gains on defined benefit plans of US $13.2 million. A decline in the Jamaica dollar against the US dollar contributed to currency retranslation losses of US $22.0 million. The Jamaica dollar depreciated against the US dollar by 7.8% during 2014, compared to 14% during 2013. With the continued improvement in the Jamaican economy, we expect the currency to stabilise against the US dollar and further depreciation to be lower than previous years. Stephen McNamara Chairman I am pleased to report to you on the 2014 performance of the Sagicor Group. The Group’s financial statements in 2014, consistent with 2013 and 2012, have been presented with continuing operations being separated from the discontinued Sagicor Europe run-off operations. The Sagicor Group had a solid year’s performance, recording net income for the year of US $73.9 million, compared to US $4.1 million for 2013. The continuing operations, comprising our businesses in the Caribbean and in the USA, continued to perform well, recording net income of US $100.3 million for 2014, compared to US $79.6 million for 2013, an increase of US $20.7 million. Net income from continuing operations attributable to shareholders was US $53.7 million, compared to the prior year result of US $39.1 million, an improvement of US $14.6 million. Earnings per common share from continuing operations was US 17.3 cents, and represented an annualised return on common shareholders’ equity of 11.2%. Total revenue closed the year at US $1,045.2 million, compared to the prior year amount of US $1,039.5 million. Net premium revenue stood at US $625.6 million, compared to US $657.0 million for the prior year. When compared to 2013, the lower premium income resulted from lower new annuity business written in our USA segment, together with the impact of the deterioration of the Jamaica dollar to the US dollar on 10 2014 Annual Report Sagicor Financial CorporationThe discontinued operation represents our UK business, which was sold on December 23, 2013. The terms of the sale required the Sagicor Group to retain an interest in the 2011, 2012 and 2013 underwriting years of account. Although actuarial reserves are established to cover best estimates of this liability, exposure to any fluctuations in experience continues until 2018. During 2014, the discontinued business experienced a net loss of US $26.4 million, resulting from adverse movements in our claims provisioning for 2013 and prior years. As part of the 2014 review of the discontinued business, we have decided to explore the purchase of reinsurance to cover this residual exposure. This would effectively transfer any retained risk to the reinsurer, and would effectively close this discontinued operation at the end of 2014. Subsequent to year-end, management completed the negotiation of the reinsurance, at a cost of US $12.2 million. The cost of this reinsurance will be accounted for during the 2015 financial year. In the statement of financial position as at December 31, 2014, assets amounted to US $6.2 billion, an increase of US $0.9 billion over the amount of US $5.3 billion at December 2013. Similarly, liabilities closed at US $5.4 billion, compared to US $4.6 billion, an increase of US $0.8 billion. The increase in assets and liabilities largely reflects the acquisition of RBC Royal Bank’s Jamaica banking operations. Sagicor’s Group equity totalled US $773.5 million (2013, US$725.2 million). The Group’s debt, which is included in other liabilities, totalled US $298.9 million (2013, US $290.2 million). The resulting debt to equity ratio was 38.7% compared to 40.0% for the prior year. The Board has declared dividends of US 3.25 cents per preference share and US 2.0 cents per common share, payable on May 15. On behalf of the Board of Sagicor, I wish to thank our Shareholders and Customers for their continued support. Stephen McNamara Chairman March 27, 2015. 2014 Annual Report 11 Sagicor Financial CorporationFINANCIAL HIGHLIGHTS Amounts in US$ millions unless otherwise stated NET INCOME 1 54 39 60 45 30 15 0 15 10 5 0 SHAREHOLDER RETURNS DIVIDENDS 12 12 BOOK VALUE PER SHARE Amounts in US cents 173 165 300 200 100 0 2014 2013 2014 2013 2014 2013 1 from continuing operations NET INCOME 100 80 125 100 75 50 25 0 GROUP RESULTS 1 REVENUE 1,045 1,039 1500 1000 500 0 2013 Earnings per share 1 17.3¢ 12.5¢ Return on shareholder’s equity 1 11.2% 7.7% 2014 BENEFITS 1000 500 542 593 0 2014 2013 2014 2013 2014 2013 12 2014 Annual Report 1 from continuing operations Sagicor Financial Corporation Amounts in US$ millions unless otherwise stated GROUP FINANCIAL POSITION ASSETS OPERATING LIABILITIES EQUITY & DEBT CAPITAL 7000 6,180 5,298 3500 0 6000 3000 0 5,108 4,283 1500 1000 500 0 1,073 1,015 2014 2013 2014 2013 2014 2013 2014 2013 Debt to Equity 38.6% 40.0% 273% 259% MCCSR SAGICOR LIFE INC - NET INCOME SAGICOR JAMAICA- NET INCOME SAGICOR USA - NET INCOME SEGMENT RESULTS 51 45 60 40 20 0 78 65 100 50 0 20 10 0 12 8 2014 2013 2014 2013 2014 2013 Revenue Assets 2014 362 2013 351 1,773 1,706 Revenue Assets 2014 486 2013 464 2,495 1,880 Revenue Assets 2014 153 2013 185 1,743 1,484 2014 Annual Report 13 Sagicor Financial Corporation 175 years of community We pride ourselves on giving back to our community, because it is in the community that we forge our strongest connection. Our initiatives continue to build upon this valuable link, helping in the present to create a better future. I N O U R C O M M U N I T I E S - Education As one of the four pillars outlined in the Sagicor Vision, we consider the value of education to be immeasurable. We offer strong support across the region to learning institutions from primary to tertiary, catering to traditional studies and education for those with special needs. 1 3 6 2 4 5 1 Students of Holy Innocents Primary School in Barbados performing a short skit about healthy eating at the launch of the EduDrama programme. 2 Jai Patel, accepting the award from SLIC President and COO Bart Catmull, on behalf of Walker Middle School, for their winning Sagicor Visionaries Project, “Higher or Lower, Which angle is the best?” 3 Sagicor GSAT scholar, Alex Knibb, receives his award from SLJ’s President and CEO, Richard Byles, at the company’s annual GSAT Awards Ceremony. 4 SLI President & CEO, Dr Patricia Downes-Grant, and CEO & Director of Cave Hill School of Business, Dr Jeannine Comma, at the signing of the CHSB-UWI MOU. Dexter Moe, Vice President, Sagicor Asset Management Inc, and Dr Charmaine Gardner, Chairperson of the Board of Directors, Cave Hill School of Business, UWI, look on. 5 Students of the Abram Zuil Secondary School, Guyana, pictured with their winning Sagicor Visionaries project, “Paddy Husk Particle Board”. 6 Students of the Bishop Martin High School, Belize, demonstrating their winning Sagicor Visionaries project, “Chaya-Mayan Power for Modern Times”. CORPORATE AND SOCIAL RESPONSIBILITY In addition to a commitment to deliver quality products and services, Sagicor is also committed to improving the lives of people within its communities. In strengthening its role as a good corporate citizen, Sagicor supports various initiatives that provide financial and voluntary assistance, primarily in the areas of education, health, community and youth development and sports. These areas of investment have become the four pillars of Sagicor’s corporate and social responsibility programme, as they, individually and collectively, lend a hand in maintaining and improving societal attitudes and values conducive to quality living. Dominica Winner: St Martin Secondary School - Techno Gardener 1st Runner Up: Dominica State College - Asphalt Emission Filtration System 2nd Runner Up: Isaiah Thomas Secondary School - Biogas Generator St Lucia Winner: St Mary’s College - Biodegradable Plastic 1st Runner Up: Sir Arthur Lewis Community College - Rhizo Bacteria 2nd Runner Up: St Joseph’s Convent - Expenergies Sagicor takes this opportunity to commend its staff members across the Group who were very active throughout 2014, giving of their time to work with a number of organisations to provide support and assistance to those in need. Guyana Winner: Abram Zuil Secondary School - Paddy Husk Particle Board 1st Runner Up: Queen’s College - Amazing Algenol 2nd Runner Up: St Stanislaus College - D.A.R.A.I.C.O. Drainage Project EDUCATION Secondary school students from the Caribbean region were once again invited to participate in the second Sagicor Visionaries Challenge to showcase their talents in Science, Technology, Engineering and Mathematics (STEM) subjects. Students worked with their teachers at their educational institutions, identified a problem facing their school or community, and used STEM to develop effective, innovative and sustainable solutions. The winning schools and their respective projects in the National competitions are listed below: Antigua & Barbuda Winner: Christ the King High School - Nova Oven 1st Runner Up: Antigua Girls’ High School - Air Purifier 2nd Runner Up: Antigua Girls’ High School - Solar Powered Fans Barbados Winner: Queen’s College - The Green Way to Get Styrofoam Away 1st Runner Up: Harrison College - Daytime Lighting System 2nd Runner Up: Harrison College - Traffic Monitoring and Alert Belize Winner: Bishop Martin High School - Chaya-Mayan Power for Modern Times 1st Runner Up: St Catherine Academy - StyroNOam 2nd Runner Up: St Catherine Academy - Female vs Female 18 2014 Annual Report Trinidad & Tobago Winner: Five Rivers Secondary School - Cardboard Box Pallet 1st Runner Up: El Dorado West Secondary School - Life After Plastics 2nd Runner Up: St Joseph’s Convent (Port of Spain) - Waving Goodbye to Microwaves USA Winner: Walker Middle School - Higher or Lower, Which Angle is Best? The winners will be rewarded with a prize for one student and teacher to attend the Sagicor Visionaries Ambassadors Programme, arranged as part of the Museum of Science and Industry’s (MOSI) Summer Science Camp, in Tampa, Florida, in July, 2015. Special Prizes were also awarded to schools who demonstrated particular competencies in the categories of: • Best Plan and Project Design; • Most Creative and Innovative; • Best Presentation; • Best Use of STEM; • Most Relevant to Sustainable Caribbean Communities, and Best Innovation. Sagicor Financial CorporationIn collaboration with the Caribbean Science Foundation (CSF) and the Caribbean Examinations Council (CXC), the Sagicor Visionaries Challenge aims to: the financial sector, and Mr John believes his studies in computer science will play a role in the development of St Vincent & the Grenadines. He looks forward to returning home to either teach or open his own business. • Ignite an interest in innovation among secondary school students, through STEM, to help build and integrate sustainable communities throughout the Caribbean. • Integrate knowledge gained from formal and informal education to enable tomorrow’s leaders to build a more sustainable Caribbean. • Encourage and boost institutional capacity in STEM in secondary schools within the region. In July 2014, Sagicor Financial Corporation (SFC) and the Cave Hill School of Business, UWI (CHSB-UWI) in Barbados, finalised a Memorandum of Understanding to facilitate capacity building at the institution. The funding, to be disbursed annually over a five year period, will provide necessary resources for the School’s Professional/Executive Education and developmental initiatives, as well as research in the field of business education. CHSB-UWI will be re-branded to reflect Sagicor’s endowment. The institution will offer scholarships for the Executive Diploma in Management and Executive Masters in Business Administration programmes. Additionally, research will be conducted on best practices and leadership in the region. SFC will also draw on the expertise of the Cave Hill School of Business-UWI to develop their leaders through a custom-designed Corporate University, which will offer a High Potential Leaders’ Programme, along with Management and Leadership Development and Performance Management Initiatives. In Barbados, Sagicor Life Inc(SLI) continued its Academic Scholarship Programme with the University of the West Indies, Cave Hill Campus. Each year, Sagicor opens the programme to nationals of the Bahamas, Barbados, the OECS, Jamaica and Trinidad and Tobago, who have gained admission to the University and are majoring in the field of Business Studies. Eligible students must be majoring in the field of Accounting, Computer Science or Business Administration, and must have completed at least one academic year leading to a degree in one of those disciplines. Following several Interviews conducted by a Sagicor panel in February 2014, two scholarships were awarded: the first to Shaneka Greene, a Barbadian student studying Accounting and Finance, and the second to Tracey John, a Vincentian enrolled in the Computer Science Programme. Ms Greene is a civic-minded young woman who aims to contribute to her country through her work in During 2014, SLI, the Ministry of Education and the Barbados National Non-Communicable Diseases (NCD) Commission (a division of the Ministry of Health) joined forces on an initiative to educate children about chronic diseases and the importance of healthy lifestyles at an early age. The Edu-Drama Programme, launched in September 2014, uses dramatisation to convey the wellness message to students. Using a format known as “a play-in-a-day”, Class 3 students in seven primary schools learned about the dangers of chronic diseases and the health benefits of indigenous Caribbean foods. At the end of the school day, this information was presented to their teachers, peers and parents in the form of a dramatic performance. It is hoped that the children will share what they have learned with family and friends. In the long-term, this programme can have a major impact on reducing the instances of chronic non-communicable diseases in our society. SLI and Sagicor Finance Inc in St Lucia assisted the St Lucia School of Music (SLSM) with the acquisition of a grand piano. This purchase has enabled the school to offer courses with higher levels of certification. The St Lucia School of Music was founded in 1988, and currently has a role of 500 students in eight locations. Programmes include education in a variety of music disciplines, as well as social inclusion projects for at-risk children. In recognition of Autism Awareness Month, the staff of SLI in Antigua and Barbuda presented a donation to the parents, students and staff of the Victory Center, a non-profit school catering to children with special needs. This funding assisted the school with activities such as swimming, music and speech therapy, all of which enhance motor and communication skills of special needs children. The Victory Center, founded in 2012, currently caters to 19 students with Autism and other special needs profiles. The school offers an adapted Antigua & Barbuda School Curriculum from kindergarten to 5th form level, in order to help students with varying abilities achieve their full potential. Sagicor Life Trinidad and Tobago (SLI TT) also supported Autism Month by raising funds through a raffle and the sale of pins and bookmarks, with many departments and branches also choosing different fundraisers to aid the effort for the LIFE Centre. The LIFE Centre is a non-profit organisation 2014 Annual Report 19 Sagicor Financial Corporationdevoted to providing a school environment dispensing special education to children with medium-to-severe Autism and related communication disorders, while helping their families to better cope with the significant challenges of having an autistic family member. Sagicor Life Jamaica (SLJ) donated scholarship funds to more than 220 students at all levels of education as part of the Sagicor Education Scholarships Programme. 14 recipients received awards in this year’s GSAT, and prizes were also awarded to the Champion Boy and Girl from the JTA/ Sagicor Primary and Junior High Athletic Championships. Those children will receive their full scholarships upon entering high school. In total, 84 students are presently benefitting from full scholarships throughout Jamaica. A further 119 successful applicants at both the primary and secondary level received awards at the Corporate Staff Education Function. The recipients were children of staff members. An additional 19 students at the University of the West Indies and the University of Technology in Jamaica benefitted from scholarship grants through the Sagicor Scholar Programme, a programme that has been active for over eight years. Sagicor Life Insurance Company (SLIC) in the USA supported “Step Up For Students”, a Florida-based non-profit corporation created to alleviate the enormous educational challenges faced by children in Florida who live in or near poverty. The organisation provides Tax Credit Scholarships to students in K-12 from low-income families. These scholarships allow students to enroll in a private school or an out-of-district public school that better suits their needs. The Programme recognises that children learn in different ways, and seeks to help students who are greatly disadvantaged in modern education. Step Up for Students’ mission is to be a partner in the larger solution of giving disadvantaged families the best learning options for their children. 1 (L - R) Suzy de Verteuil of the LIFE Centre, accepting a donation from SLI Trinidad and Tobago Staff members Teona Evans, Melissa Frederick, Melissa Agard and Corporate Communications Manager, Marlene Chin. 2 (L – R) Piano teacher, Natalie McAllister of the SLSM, with student, Shan Lucien, and Administrative Manager, Joan Michel, along with Rae Atkinson, General Manager and Principal Representative of SLI St Lucia, and Richard Payne, Executive Director, SLSM, at the presentation of a Grand Piano. 20 2014 Annual Report 1 2 Sagicor Financial Corporation1 3 2 4 1 GSAT Scholarship awardees proudly displaying their certificates with SLJ’s Chairman, Hon. R. Danny Williams (L) and SLJ President and CEO, Richard Byles (R). 2 Students of St Mary’s College, St Lucia, with their winning Sagicor Visionaries project, “Biodegradable Plastic”. 3 Recipients of SLIC’s “Step Up for Students” Tax Credit Scholarship Programme, Florida. 4 Students of the Five Rivers Secondary School, Trinidad and Tobago, demonstrating their winning Sagicor Visionaries project, “Cardboard Box Pellet”. 2014 Annual Report 21 Sagicor Financial CorporationI N O U R C O M M U N I T I E S - Health The Sagicor Vision outlines our commitment to initiatives and developments which will enhance the long-term quality of life in the communities in which we operate. From this perspective, we have made health a priority area of our corporate support. As a regional leader in the industry, we lead by example, both within and outside of the organisation. 1 1 An aerial view of the start of the 2014 Sagicor Sigma Corporate Run in Jamaica. 2 Participants in the Sagicor Globe-athon Walk to End Women’s Cancers in Barbados. 3 Branded steps with messages to raise awareness of ‘Below-the-Belt’ Cancers at an SLI Barbados office. 2 3 HEALTH During 2014, several wellness and weight management programmes took place across the Group. Activities such as Fitness Road Shows, 10,000 Step Challenges, Wellness Days, Lunch and Learn Wellness seminars and Hikes and Biking events dominated Sagicor’s annual calendar. These programmes were targeted to staff and clients in an effort to improve the appreciation of lifestyle changes that reduce chronic lifestyle diseases, and so reduce national costs for medical care and health insurance costs. The ongoing partnership between SLI in Barbados and the regional entity, the Healthy Caribbean Coalition (HCC), produced a landmark initiative on chronic non-communicable diseases (CNCDs). The HCC is a non-profit organisation, established with a mission to harness the power of civil society in collaboration with government, private enterprise, academia, and international partners as appropriate, in the development and implementation of plans for the prevention and management of chronic diseases among Caribbean people. In March 2014, at the NCD Child Conference in Trinidad & Tobago, the HCC launched the Caribbean NCD Regional Status Report. The Report is a compilation of data detailing the status of national NCD activities from the perspective of civil societies. This data will serve as a roadmap for the necessary actions needed to be undertaken by governments, as well as civil societies, as they continue their work in combating these diseases. In 2012, SLI and the HCC signed an MOU, which provides the HCC with core funding for capacity building, and increased support of regional CNCD civil society organisations. In September 2014, SLI made a greater commitment to efforts to reduce the instances of ‘below-the-belt’, or gynaecological cancers, by taking title sponsorship of the Barbados Globe-athon Walk to End Women’s Cancers. This annual event saw a 75% increase in participants with approximately 2,000 persons participating, including over 300 runners. SLI’s contribution will go a long way towards assisting in awareness of and access to affordable screening and effective prevention and control measures such as Pap tests, human papilloma virus (HPV) testing and vaccinations against HPV, all of which can help reduce the number of incidents of gynaecological cancer. The funds raised through the Globe-athon event are managed by the Barbados Cancer Society, and donated to improve various aspects of the Gynae- Oncology services at the Queen Elizabeth Hospital. Messages of support and awareness were displayed for customers of SLI through special designs on building steps of offices and decals along the route of the Walk and Run. In February, 2014, Sagicor Life Jamaica (SLJ) invited Jamaica’s business community, groups and individuals to come together to participate in one of the Group’s largest sponsorships and the largest race in the Caribbean – the Sigma Run. A major event on the Jamaican calendar, the Sagicor Sigma Corporate Run is a unique road-running event designed to inspire fun, fitness and camaraderie among all participants. More than 22,000 walkers, runners and wheelchair participants came together and raised over JMD $21.7 million for the Sickle Cell Unit TMRI at the University of the West Indies; the Sickle Cell Trust, Mandeville; The Special Care Nursery at the UHWI and The Jamaica Kidney Kids Foundation. Since 1999, SLJ has donated JMD $140 million to charities through the Sigma Run. The Run was held under the patronage of Her Excellency Lady Patricia Allen, World and Olympic Champion, Shelly-Ann Fraser-Pryce, OD, and NBC’s The Voice winner - Tessanne Chin. SLJ was title sponsor for the Keeping Abreast Luncheon, an annual event hosted by the Jamaica Cancer Society. Cancer survivors and supporters in attendance had the opportunity to hear specially-invited guest and President of Reach to Recovery International, Catherine Brice-Hirsch, who shared how her experience equipped her to help other cancer victims in the fight against the disease. The Tampa Bay Lightning of the USA National Hockey League held its 13th annual Bolt Run, partly sponsored by SLIC, at the Tampa Bay Times Forum in Tampa. The St Patrick’s Day-themed event consisted of 5K, 5-mile and 1-mile fun runs that featured pre and post-race parties on the Forum’s plaza. All proceeds went to the Leukemia and Lymphoma Society, and more than 2400 runners came out to enjoy the day and support the cause. Members of SLIC staff volunteered their time in support of the Phoenix Children’s Hospital (PCH) in Arizona. Each year, PCH partners with a television station to host a telethon, along with a radio station to host a radiothon. While SLIC made a monetary donation, staff from the Scottsdale office volunteered to work at the phone bank, answering calls and taking pledges. For the second time, SLIC’s Plantation office sponsored the Vital Flight’s “Special Day for Special Kids” event. During this event, volunteer pilots provided the opportunity for seriously ill children to enjoy a free airplane ride, entertainment and refreshments. The goal was to share the thrill of flying, and children from Palm Beach, Broward and Miami-Dade counties 24 2014 Annual Report Sagicor Financial Corporationwere invited to participate. Vital Flight is a non-profit, volunteer pilot organisation that coordinates air transportation for medical, compassionate and humanitarian needs. Federal Aviation Administrators and licensed pilots provide their time and aircraft at no charge to those seeking assistance. SLIC staff in Arizona participated in the “Relay for Life” event, sponsored by the American Cancer Society (ACS) to raise money for the fight against all forms and types of cancer. 56 SLIC staff joined together to form 4 teams for the cause - Happy Feet; Sagicor Walks the Walk; Hope without Wavering and the Sagicor Steppers. Participants were also able to purchase luminaries in memory of someone who fought, or is currently fighting cancer. Staff from SLIC’s Scottsdale office took part in the City of Hope’s Walk for Hope to Cure Breast Cancer event at the Phoenix Zoo. The occasion attracted 1,860 participants, of which 40 were members of the SLIC team: 20 were employees, while the others were friends and families of employees. Walk for Hope is a national movement that unites survivors and supporters in the fight against breast and women’s cancers, and raises necessary funds to continue ground-breaking research, treatment and education at the City of Hope Organisation. 1 (L-R) Karlene Mason and Professor Graham Serjeant of the Sickle Cell Trust in Mandeville, Jamaica, receiving a donation from the proceeds of the 2014 Sagicor Sigma Corporate Run, from SLJ’s Willard Brown, Executive Vice President, Employee Benefits Division, and Suzette Shaw-Reid, Assistant Manager, Public Relations. 2 SLIC staff in Arizona volunteer at the Phoenix Children’s Hospital’s Telethon. 1 2 2014 Annual Report 25 Sagicor Financial CorporationI N O U R C O M M U N I T I E S - Community and Youth Involvement Sagicor’s footprint spans over 23 countries worldwide. As we grow and develop, our presence is mirrored in each local community. Our support for the growth and development of people and social infrastructure is unwavering. This is a legacy of which we are proud. 1 2 1 Parish Ambassadors with Barbadian community stalwart, Marseta Walcott, illuminating Bridgetown at the Sagicor Life Inc Lighting Ceremony. 2 SLIC staff dispatching items collected and donated for the School Supply Drive. 3 SLIC staff at the Tampa office with their “Boxes of Hope” collected for a food drive. 3 COMMUNITY AND YOUTH INVOLVEMENT SLI in Barbados once again sponsored the Sagicor Life Inc Lighting Ceremony, a cultural festival which embraces and encourages nationalism among Barbadians. The theme of the 2014 celebration was “Uniting a Nation, One Community at a Time”. The festival featured local artistes and talented performers who showcased Barbadian culture through dance, music and theatre performances. The Ceremony marked the beginning of a month of celebrations leading up to Independence Day on November 30th, when several buildings in Bridgetown, roundabouts along the highways and various parks and landmarks are illuminated. SLI staff in Barbados supported Sagicor’s Mornings at the Breakfast Club. This programme is organised by the Young Women’s Christian Association (YWCA), and provides breakfast for children who need assistance during the school term. Sagicor employees volunteer their time to this programme, which now caters to approximately 300 children per day. The Sagicor Sports and Social Club in Barbados hosted its Children’s Christmas Party. Among the 450 guests, the Club catered for 33 children from Government-managed homes, and a total of 316 gifts were distributed to children at special government-run homes and institutions at the end of this Christmas programme. SLIC’s Plantation office sponsored the Palm Beach Zoo’s inaugural “Save the Panther” 5k Run. This event coincided with the Zoo’s debut of its newest Florida Panther, “Mira”. After the race was completed, a special “Panther Talk” officially welcomed Mira to the Zoo and provided participants and race attendees with the opportunity to ask questions about the Florida Panther. SLIC was also sponsor of the Florida Panther Exhibit, which was on display during the course of 2014. on the outfield wall and behind home plate for all 81 home games during the season, but it also provides SLIC with the opportunity to partner with the Rays on important community initiatives. In 2014, SLIC continued its popular “Kids Spirits Day” hospital visits with the Tampa Bay Rays. During the season, SLIC and the Rays conducted a series of visits to the All Children’s Hospital in St Petersburg, Florida. Rays’ players, the Rays’ mascot, Raymond, along with SLIC staff, interacted with the young patients and their parents. Players donated Sagicor-branded baseball-shaped pillows to the children, posed for pictures and signed autographs. SLIC implemented a social responsibility programme to encourage greener practices within its offices. This resulted in practices such as mandatory dual-sided printing, and the use of water-filtering systems to eliminate the use of plastic water bottles, and to eliminate/reduce use of plastic and paper cups. The programme included a “Clean Air Programme,” which encompassed a Vanpool system, whereby employees shared transportation to and from the workplace; offered incentives for carpooling, and discounts for the use of the public bus system. Another activity was SLIC’s “Corporate Giving” programme. Features of this programme included: • The establishment of Business Resource Groups in Arizona, Florida, Oklahoma and South Florida. • Providing employees with 8 hours of annual paid time for volunteering to a selection of organisations. (Volunteering has been incorporated into each job description, and is a mandatory requirement for all SLIC employees) • “Dollar for Dollars” – a system whereby the company matches funds donated by SLIC employees to select organisations. The All Children’s Hospital Development Council hosted its 26th Annual VIP Auction in April, 2014, with many Tampa Bay area residents and businesses supporting the Auction by purchasing tickets for the evening and donating items for sale. SLIC donated a Martin acoustic/electric guitar and case for the event, and the final bid was more than double its original cost. The Auction was a huge success, and raised over USD $200,000 for the Hospital. In August 2014, SLIC in Tampa completed a very successful school supply drive. The items collected were presented to the offices of the Hillsborough County Education Foundation in downtown Tampa. In addition to personally donating towards the drive, staff members also conducted in-office fundraising events. 28 2014 Annual Report SLIC’s sponsorship of the Tampa Bay Rays Major League Baseball team not only provides SLIC with significant in-stadium promotional signage In December 2014, SLIC staff came together for the Annual Holiday Party. In addition to preparing a delicious buffet dinner, staff and their guests, in conjunction with the organisation “Feeding Children Sagicor Financial CorporationEverywhere,” were tasked with assembling approximately 14,000 meals for the less fortunate. The meals were donated to a local charity that distributed them to the less fortunate within the Tampa Bay area. SLIC staff at the Tampa Corporate Office and the Tampa Sales Office held a food drive challenge for families in need. Employees skipped a lunch and used their lunch money to buy items of food and gift cards. Each “Box of Hope” provided a complete holiday meal for a family of 4. 1 Representatives from SLIC and the All Children’s Hospital at the presentation of funds raised by SLIC Staff. 2 SLIC staff preparing Christmas meals to be donated to “Feeding Children Everywhere”. 3 Tampa Bay Rays’ team member with the Tampa Bay Rays’ mascot, Raymond, on a “Kids Spirit Day” visit to the All Children’s Hospital in St Petersburg, Florida. 1 2 3 2014 Annual Report 29 Sagicor Financial CorporationI N O U R C O M M U N I T I E S - Sports Nations and companies alike are built on teamwork and sportsmanship. Sagicor views these traits as character-building, and through our support of sporting events, seeks to nurture their importance across all genders, races and ages. 1 1 One of the children participating in a “Sagicor Kids on the Greens” practice session at the St Andrew’s Golf Club in Trinidad & Tobago. 2 SGI Twenty 20 Spartan team celebrating their win in Barbados. 2 SPORT Sagicor General Insurance (SGI) in Barbados has long been associated with cricket throughout the region, and 2014 welcomed the successful hosting of the Sagicor General Insurance Twenty 20 Competition and the Sagicor General Shield. The T20 Competition opened the 2014 Barbados Cricket Association season with 18 teams divided into three zones playing 5 preliminary series, Quarter and Semi Finals and Finals. The Finals, held in June 2014, saw Spartan team emerge as the victors with a prize purse of BBD $20,000. The Sagicor General Shield Tournament attracted several local Barbadian teams, with the Barbados Fire Service defeating the team from the Psychiatric Hospital by eight wickets in the Finals at Kensington Oval. SGI, as a keen sports sponsor, supports a wide range of sports, as well as sportsmen and women in their individual endeavours. For example, 2014 saw SGI playing a role in assisting Barbadian body builders to attend the 2014 Central American and Caribbean Championships (CAC) in St Maarten. In years past, Barbadian body builders have made their mark in international body building, and SGI’s sponsorship further supported the country’s legacy in hemispheric body building at the highest level. The Sagicor Sports and Social Club of SLI TT participated in the 23rd CariFin Games, hosted by the CariFin Health and Fitness Club. The Games, designed to promote health and fitness among workers in the financial sector, were staged as a series of events over several months, and included a Torch Run, the Urban Challenge, a Fitness Burnout, a Cross Fit Qualifier and a Cross Country Run. Golf featured in several sponsorships across the Sagicor Group during 2014. In September, SLI TT sponsored a team in the St Augustine Rotary Club Golf Tournament. The Rotary Club is part of an international organisation that unites businesses and professionals to work together for humanitarian goals. In this case, proceeds from the Tournament were donated to “Heartbeat International Trinidad and Tobago”, an organisation which works to help people in need of cardiovascular treatment and implantable devices. SLI TT also hosted the Sagicor St Andrew’s Golf Invitational, one of Trinidad and Tobago’s most popular golf tournaments. 132 golfers from six golf clubs played in support of the Autism Society of Trinidad and Tobago. Both SGI Barbados and SLI TT hosted family-oriented golf tournaments during 2014. In Trinidad and Tobago, “Sagicor Kids on the Greens” invited staff members and their children to tee off, after some practice sessions on the putting green with the coach from St Andrew’s Golf Club. SGI Barbados hosted the Sagicor General Family Championship at the Barbados Golf Club. 72 players, comprising 36 two-member teams, contested in several divisions, such as Parent and Child, Husband and Wife and the Open Division. SLI TT hosted the Sagicor Junior Lawn Tennis Tournament at the Nelson Mandela Park. 150 contenders vied for top trophies and cash prizes in the six-day event, which has been a staple feature of SLI TT’s event calendar. 2014 also heralded the first ever edition of the “Red Star Under-10 Tournament”. This introductory beginner’s Tournament is open to all children interested in taking up the sport of tennis. SLJ is synonymous with sports sponsorships and has, over the years, forged several long-standing relationships with key stakeholders within its communities, as well as various athletic associations and clubs. One such relationship is that with the Jamaica Teachers’ Association, with which SLJ partnered to host the National Primary, All-Age and Junior High School Athletic Championships. This partnership staged the two-day track and field event held at the National Stadium, benefitting over 1,200 young athletes from across the island. Sagicor has supported this event for over 20 years. SLJ is well-known among the Guild of Students at the University of the West Indies, Mona Campus, through the sponsorship of the Sagicor/UWI Guild Champions League. During 2014, teams formed by UWI students competed in football matches for a chance to win a cash prize, as well as the associated bragging rights. Teams were fully subscribed, and over 1,500 students came to each game, while the Finals attracted several thousand students. SLJ donated valuable computer equipment to the Manchester High School, which assisted students at the CXC, GCE and ‘A’ Levels. SLJ’s Knutsford Branch gave their adopted school, Evangelistic Basic School, a much- needed facelift, while the Ocho Rios Branch donated stationery to the Ocho Rios Primary School in the Special Education Unit. The Sagicor/UTECH National Debating Championships, hosted by SLJ, established UTECH as the undisputed leader in British Parliamentary Debating in Jamaica, beating a record 60 teams. 32 2014 Annual Report Sagicor Financial CorporationIn conjunction with the Tampa Bay Rays’ sponsorship, the “Sagicor Junior Announcer Sweepstakes” and “Sagicor Salute to Education” both enjoyed another successful year. The Junior Announcement Sweepstakes provided children aged 8 to 16 years with the chance to be an announcer for one inning, announcing the batter’s name as they came up to bat. Junior Announcers were selected for every Sunday home game throughout the season. The Salute to Education Programme was developed to recognise outstanding Tampa Bay area educators. For every other home game, 40 in total, an educator and guest were provided with VIP seating to watch a Rays’ game, during which the honoured teacher was recognised on the stadium’s video scoreboard as SLIC’s Outstanding Educator. The George Estock Baseball Scholarship sent its second child to the Rays’ Baseball Camp for a week. The 10-year Scholarship programme was set up in 2013 in honour of George Estock, a former Sagicor President and CEO of SLIC, at retirement. Each year a deserving child will attend a week-long baseball camp with the Tampa Bay Rays, free of charge. The Rays’ Baseball Camp operates during the summer, and 2014’s scholarship recipient was the son of a military veteran who, without the scholarship, would not have been able to attend the Camp. 1 Walkers and runners from SLI TT at the CariFin Green Mile Event. 2 (L to R) Huit Johnson, Chairman of the JTA National Sports Committee & Dr Mark Nicely, President of the JTA, receiving a sponsorship cheque from SLJ’s Alysia White, Public Relations & Promotions Manager & Barrington Groves, Brand Manager. 3 Winners at the Sagicor Junior Lawn Tennis tournament in Trinidad & Tobago, with their Coach, Tournament Director, President of the Tennis Association of Trinidad & Tobago, and members of the SLI TT management team. 1 2 3 2014 Annual Report 33 Sagicor Financial Corporation175 years of service No matter how big we grow, how much we change, or how far we go, we must never forget that our most important purpose is to serve. HUMAN CAPITAL REPORT TALENT MANAGEMENT AND WORKFORCE PLANNING • Mr Anthony Bowen - Executive Vice President, Sales and Marketing - EMPLOYEE DEPLOYMENT In March 2014, Group President and Chief Executive Officer of Sagicor Financial Corporation, Mr Dodridge Miller, announced a strategic initiative, the Sagicor PRO (Process Review and Optimisation) Project to review operating systems and procedures. The Project is expected to reduce complexity and enhance management efficiency with appropriate metrics for measurement, analysis and continuous improvement. This Project, which is ongoing, is expected to deliver a better and more efficient work environment and enhance customer engagement. In January 2014, Sagicor Life Jamaica (SLJ) welcomed approximately 500 employees into the Sagicor family, through the acquisition of RBC Royal Bank (Jamaica) Limited. This acquisition significantly expanded the banking division of SLJ’s local operations. EXECUTIVE APPOINTMENTS During 2014, there were several key executive appointments throughout the Group. The appointments were: • Mr Willard Brown, Executive Vice President, Employee Benefits Division, Sagicor Group Jamaica • Mrs Althea Hazzard, General Counsel and Corporate Secretary & Chief Compliance Officer, Sagicor Financial Corporation and Sagicor Life Inc • Mr Rohan Miller, President & Chief Executive Officer, Sagicor Investments Jamaica Limited Sagicor Life Inc • Mr Errol McKenzie - Executive Vice President, Employee Benefits Division - Sagicor Group Jamaica • Ms Maxine MacLure - Executive Vice President, Corporate Services & Chief Compliance Officer - Sagicor Financial Corporation. The Board, Management and Staff at Sagicor thank these individuals for their sterling contribution over the years. SUCCESSION PLANNING Group Companies reviewed and updated succession plans to ensure that there are adequate people with the capabilities required to match the Group’s ambitions. The Human Resources Committee of the Board of Directors continuously reviews the bench strength at the top tiers of the Group, while the HR Department, working with Heads of Departments, reviews bench strengths for all other key roles. Evergreen succession plans inform recruitment and training and development programmes. Sagicor Life Jamaica, through its Sagicor Experience Internship Programme, gave recent university graduates an opportunity to gain valuable work experience, build business confidence, and introduce them to the insurance and financial services industry. It provided the company with a talent incubator, supporting its succession plan. The Internship Programme has grown from 16 interns in 2013 to 60 in 2014. Since the Programme’s inception, 27 of these interns have successfully transitioned to become members of the SLJ team. • Mr Donovan Perkins, President & Chief Executive Officer, Sagicor TRAINING AND DEVELOPMENT Bank Jamaica Limited • Mr Juan Carlos Martinelli Remond, General Manager, Sagicor LEADERSHIP TRAINING Panama, S.A. RETIREMENTS Sagicor Group bid farewell to the following individuals who retired at the end of 2014. 36 2014 Annual Report LIMRA facilitated the second phase of the Executive Development Programme with two workshops for senior managers in Sagicor Life Inc in June 2014. Workshop topics included Executive Development, Innovation Advantage, and Creating a Culture of Achievement. Sagicor Financial CorporationSagicor Life Insurance in the USA (SLIC) implemented a Leadership Development Training programme for key resources as part of the company’s succession planning process. Provisions under the Deed of Covenant provide for a number of exciting developmental opportunities for Senior Managers, high-potential employees and for institutional strengthening, including: SLI Trinidad and Tobago continued the Leadership Development Programme started in 2013, with the successful completion of the 12-month Management Development Programme, HarvardManagementor11. A 6-month comprehensive supervisory development programme provided training for 26 Sagicor Supervisors. • A corporate University exclusive for Sagicor Life Inc, which will target the company’s senior level high achievers who are on the track for promotion within the next 3 to 5 years. The selected employees will work with coaches to improve their leadership skills and to make the most of identified areas of strength. Product training for administrative staff continued during 2014, with a view to improving customer service by enhancing understanding and appreciation of the Sagicor product suite, and providing support to the sales strategy. COMPETENCY-BASED TRAINING FUND In December 2014, SLI in Barbados was informed of its successful bid to access training through the Competency-Based Training Fund, an Inter- American Bank initiative in Barbados. Through this arrangement, SLI Barbados will have access to US$400,000 for certification in a number of business competencies in Management, Leadership, Customer Service, Sales, Business Communication, Conflict, Time and Stress Management under the National Vocational Qualifications (NVQ) Occupational Standards. The Barbados Institute of Management and Productivity (BIMAP) will deliver the training to develop Sagicor’s employees’ competencies. Workshops commenced February 2015, and will be followed by the formal assessment of skills to ensure that participants have achieved the Barbados (NVQ) Occupational Standards. CORPORATE UNIVERSITY & MENTORSHIP PROGRAMME SLI Barbados and the Cave Hill School of Business (CHSB), University of the West Indies, announced a collaborative agreement between the two organisations for the provision of a US$2.5m endowment to the CHSB in Barbados. • A Management Skills Certificate Programme, which will target new and more experienced Managers and Senior Supervisors. The selected employees will be equipped with skills which will be developed into a competitive advantage. • Performance Management Initiatives, which will develop the mentoring and coaching skills of the company’s Managers and leaders. There will also be a Personal Mastery Programme, which will develop key competencies required by employees in executing the company’s business strategies. CUSTOMER SERVICE Several customer service improvement projects drove the strategic decision to differentiate Sagicor from its competitors: “Priority You” - a customer-care project in SLI in Trinidad and Tobago redefined the customer-care vision; developed customer-care standards and trained employees and advisors in the delivery of exceptional service. “Creating Memorable Experiences” - a customer-service philosophy which was launched in 2014 in Barbados and the Eastern Caribbean, following the roll-out of the service standards in 2013. Online product training, as well as classroom workshops, continued in 2014, to enhance the customer-service experience at Sagicor. CODE OF ETHICS AND AML TRAINING The Sagicor Group continues to reinforce its corporate standards and business ethics through compulsory training, using an online platform 2014 Annual Report 37 Sagicor Financial Corporationfor employees and advisors across the SLI Group, using an online platform, as well as the annual disclosure process. FATCA Administrative employees and Brokers throughout Barbados, the Eastern Caribbean and Capital Life offices attended sessions on the new Foreign Account Tax Compliance Act (FATCA). The workshops were facilitated by the consulting firm, Deloitte. FATCA, which took effect on July 1, 2014, addresses tax abuse by US persons, and the new regulations will ensure that they report financial accounts held outside of the USA. Most Group companies reported incremental improvements in their survey results for 2014. Positive trends on all dimensions for Morale, Employee Engagement, Leadership, Recognition and Rewards and Quality of Work Life, the latter recording 3% improvement on the previous year, is an important indicator that Sagicor is experiencing some success in providing a work environment where employees feel engaged and can excel. Management reviews survey results and recommendations, and develops programmes which support initiatives and addresses concerns within the business plans of the entities. NATIONAL AWARDS PERFORMANCE MANAGEMENT The Sagicor Group of Companies proudly celebrated national and other awards conferred in 2014: Having completed the pilot project for 360 degree feedback during 2014, we will roll out this element of our performance management process on the Sagicor Success – HR Technology platform in 2015. Group companies will upgrade to the updated Success Factors platform used to manage performance in 2015. EMPLOYEE ENGAGEMENT While USA business reports indicated that the USA markets were making a strong recovery with promising gains in the job markets, negative economic forecasts in the Caribbean continued to stifle merit pay and cost-of-living adjustments (COLA) increases across the region. Group Companies focused on their Performance Management Programmes and Employee Rewards and Recognition Programmes to recognise and reward star performers, while keeping a close eye on the metrics that monitor employee engagement. EMPLOYEE OPINION SURVEYS Group companies continued to monitor employee engagement using the Life Office Management Association (LOMA). This survey seeks to measure the state of emotional and intellectual commitment of employees, and is composed of a series of 29 opinion statements. • Dr Pat Downes-Grant: President and Chief Executive Officer of Sagicor Life Inc, was one of nine outstanding Barbadian citizens honoured in the Queen’s 2014 Birthday Honours List. She received the Commander of the Order of the British Empire (CBE) for service to the financial sector. Dr Downes-Grant was also awarded an Honorary Doctorate of Laws from the University of the West Indies for outstanding leadership in the financial sector. • Mr Richard Byles: President and Chief Executive Officer, Sagicor Group Jamaica, was awarded the 2014 Business & Civic Leadership Award for Excellence from the American Chamber of Commerce. • Mr Timar Jackson, Actuarial Analyst, Corporate Actuarial Services at Sagicor Life Jamaica was a 2014 Rhodes Scholarship recipient. • Mr Ricardo Allen, Structured Product Analyst, Treasury & Capital Markets Department at Sagicor Group Jamaica was a 2014 Fulbright Scholarship recipient. • Sagicor Group Jamaica received the Jamaica Bureau of Standards - “National Quality Awards” for ‘Excellence in Human Resource Focus’. 38 2014 Annual Report Sagicor Financial CorporationCORPORATE STRUCTURE The following organisational changes in Sagicor Life Inc were implemented with a view to improving efficiency and complying with new regulatory requirements. • Sagicor Life Inc and Sagicor Capital Life Inc were amalgamated on December 31, 2014. • Sagicor Life (Eastern Caribbean) Inc was registered in St Lucia on October 10, 2014. 2014 Annual Report 39 Sagicor Financial Corporation175 years of innovation Our corporate footsteps show where we’ve been, and where we are going. With reliable information, we can ensure the best quality in service for today and tomorrow. OPERATING AND FINANCIAL REVIEW OVERVIEW The Sagicor Group is a leading provider of insurance products and related services in the Caribbean region. It also provides insurance products in the United States of America (USA) and banking services in Jamaica. The main insurance lines are life insurance, annuities and pension management, health insurance and property and casualty insurance. The customer base is predominately individuals, but certain lines are marketed to employers to provide employee benefits and to commercial enterprises to provide property and casualty products. EXTERNAL ENVIRONMENT The external environment impacts the operating and financial performance of the Sagicor Group. Economic factors, such as economic growth, employment levels and disposable income, impact the levels of both new business and renewal life insurance and annuity products offered by the Group. Interest rates and investment yields affect the level of savings and investment returns offered for life insurance, annuities and banking products, and ultimately the profit margins that the Group can generate from these product lines. The health and mortality of insured customers and beneficiaries impacts the levels of death, disability and health benefits the Group is required to meet. Property and casualty insurance products offer policyholders financial protection against loss or damage to property, accidents, and liability to third parties. The Group’s operating units are all regulated by insurance, banking and securities regulations. The Group therefore has to meet statutory and reporting requirements to governments and government agencies. Economic Environment 42 2014 Annual Report The 2014 financial year saw variability in the pace of economic recovery across the developed world, as evidenced through relatively moderate growth of 2.4% in the United States of America (USA), while the economies of Europe and Japan experienced growth of 0.8% and 0.1% respectively. Despite the positive signs in the USA, global growth remained tenuous as recessionary headwinds stagnated growth in Europe and Japan. This necessitated the prolongation of the accommodative fiscal and monetary policies, particularly within developed economies throughout 2014. Furthermore, the unexpectedly sharp and extended decline in oil prices negatively impacted oil- exporting emerging market countries, namely Russia. In light of the general anaemic economic conditions which prevailed in the broader developed and emerging market economies, the International Monetary Fund revised downward its projections for global growth by 0.3% to 3.5% for 2015. In the USA, economic indicators showed improvement. Consumer spending increased during the fourth quarter of 2014, while the unemployment rate declined to 5.6% in December, the lowest level since 2008. Against the backdrop of encouraging economic data, the Federal Reserve concluded its bond repurchase programme in October 2014. However, the protracted decline of global oil prices further constrained the already subdued level of inflation, which stood at 1.3% in November 2014, and prompted the continuance of near zero interest rates for the foreseeable future. In Europe, the low level of inflation, coupled with the generally weak investment climate and persistently high unemployment, continued to weigh on economic growth. Therefore, the European Central Bank (ECB) maintained its relaxed fiscal policy stance and held interest rates constant at an unprecedentedly low level. Regionally, economic growth across the majority of Caribbean islands trended positively, albeit at relatively low levels. However, the protracted economic challenges of burdensome fiscal deficits, increasing debt levels as well as dwindling foreign direct investment, remained hindrances to the economic stability of the region. Conversely, there was an incipient recovery in the tourism sector which generally showed moderate improvement, but remained well below the pre-crisis levels prior to 2008. The Barbados economy experienced modest expansion of 0.3% in 2014, which was supported by growth within the tourism and construction sectors. Trinidad & Tobago and Jamaica experienced real GDP growth Sagicor Financial Corporationfor 2014 of 2.0% and 0.9%, respectively. The level of unemployment remained high across the region, while the level of inflation trended lower and remained positively correlated with the decline in global oil prices. In Jamaica, areas of expansion were in tourism, services, transportation, mining and telecommunications, while the growth in the Trinidad & Tobago economy was underpinned by positive contributions from the energy and non-energy sectors. Given the dampening impact of the decline of global energy prices on the performance of Trinidad & Tobago’s economy as an exporter of oil, the budgetary price assumptions for oil have been revised downwards for 2015. In tandem with an anticipated increase in short-term interest rates in the USA, Trinidad & Tobago’s Repo rate increased to 3.25% by year-end, relative to 2.75% in 2013, with an additional 25 basis points increase to 3.5% in January 2015. Throughout 2014, the US dollar rallied against major international currencies. In the region, the Jamaica dollar depreciated relative to the US dollar by an annualised 7.8%. Insurance Regulation There has been no significant legislative change in the insurance sphere in the Caribbean. Governments and regulators either have initiated, or are contemplating enhancements to insurance regulation, as a response to the recent failure of insurance subsidiaries of CL Financial in the region. GROUP RESULTS Revenues from continuing operations in 2014 totalled US $1,045 million, and were US $6 million higher than the prior year amount of US $1,039 million, and included US $29.1 million in negative goodwill on the acquisition of a banking operation in Jamaica. Revenues were also impacted by lower annuity premiums written in the United States, when compared with 2013. Insurance and other benefits also decreased in 2014 to a total of US $542 million, compared to a total of US $593 million in 2013. This reduction was largely as a result of lower annuity business written in the United States of America as indicated above. Expenses and taxes increased and reached US $403 million in 2014, as compared to a total of US $366 million in 2013. Expenses now include 6 months of operating costs on the banking business acquired in Jamaica, as well as non- recurring restructuring and rebranding costs. Total comprehensive income from continuing operations increased significantly to US $107 million in 2014, compared to US $6 million in 2013. CONSOLIDATED INCOME 1 - $ millions Revenue Benefits Expenses & taxes Net income 2014 1,045 (542) (403) 100 2013 1,039 (593) (366) 80 COMPREHENSIVE INCOME 2014 2013 Other comprehensive (loss) Total comprehensive income 1 from continuing operations 7 107 (74) 6 Other comprehensive income was US $7 million, compared to a loss of US $74 million in 2013. Comprehensive income in 2014 was impacted by US $16 million in net movements related to investment assets, gains on defined benefit plans of US $13 million, and losses on foreign currency retranslation of US $22 million. In December 2012, the Board and Management made a decision to dispose of Sagicor Europe, which owned the Sagicor at Lloyd’s operations. In accordance with International Financial Reporting Standards, the results of Sagicor Europe have been separated from the Group’s continuing operations and presented as a discontinued operation. Sagicor Europe was sold on December 23, 2013. The results of the Group’s continuing operations are further analysed under the next several sub-headings. The results of the discontinued operation are discussed and analysed in the Operating Segments section. 2014 Annual Report 43 Sagicor Financial CorporationShareholder Returns Revenue The Group’s net income and comprehensive income are allocated to the equity owners of the respective Group companies in accordance with their results. As some Group companies have minority shareholders, particularly in the Sagicor Jamaica operating segment, the Group’s net income is allocated accordingly between holders of Sagicor’s common shares and the minority interest shareholders. There is also an allocation to Sagicor Life Inc’s policyholders who hold participating policies, an arrangement which was established at the demutualisation of Barbados Mutual Life Assurance Society (now Sagicor Life Inc). For the 2014 financial year, US $54 million of net income from continuing operations was allocated to the holders of common shares of Sagicor Financial Corporation, which corresponded to earnings per share of US 17.3 cents. The comparative amounts for 2013 were US $39 million of net income and earnings per share of US 12.5 cents. The respective annual returns on shareholders’ equity were 11.2% for 2014 and 7.7% for 2013. Dividends declared to common shareholders in respect of 2014 totalled US $12 million, and represented US 4 cents per share. The same amounts were declared for 2013. COMMON SHAREHOLDER RETURNS 1 2014 2013 Net income - $ millions Dividends - $ millions Earnings per share - cents Dividends per share - cents Return on equity - % 54 12 17.3 4.0 11.2 39 12 12.5 4.0 7.7 1 from continuing operations except for dividends. The sources of the Group’s revenue are insurance premiums from customers, investment income, fee income and other revenues. The following table summarises the main items of revenue. REVENUE - $ millions 2014 2013 Net insurance premiums: Life and annuity Health Property & casualty Net investment income Fees and other revenues Gain arising on acquisition 461 146 19 626 307 83 29 498 141 18 657 279 103 - 1,045 1,039 Premium revenue from life insurance and annuity was US $461 million, and represented 74% of total premium revenue. The comparative amounts for 2013 were US $498 million and 76%. The reduction in revenue occurred largely as a result of lower new annuity business written in the USA, when compared to 2013, and the impact of the deterioration of the Jamaica dollar to the US dollar on conversion of the premiums. The Group markets a range of life and annuity products, most of which are long-term contracts for which a monthly premium is paid by the customer. For some long-term contracts, however, a single premium (usually a lump sum) is paid at the beginning of the contract. There are also annual renewable contracts which are marketed largely to employers to provide coverage to their employees on a group basis. The Group also markets annual renewable health insurance contracts to employers and associations. These provide benefits against medical costs incurred by insured persons. Premium revenue from health 44 2014 Annual Report Sagicor Financial Corporationinsurance totalled US $146 million, an increase of US $5 million over the 2013 total. Benefits The Group also markets property and casualty insurance contracts in the Caribbean region. These are marketed to individuals and commercial enterprises. Premium revenue from these classes of insurance totalled US $19 million, up from US $18 million in 2013. Income is generated from the investments made by the Group. The annual yields achieved on financial investments were as follows. INTEREST YIELDS Debt securities Mortgage loans Policy loans 2014 6.3% 6.6% 7.5% 2013 6.6% 7.5% 7.1% Finance loans & finance leases 11.4% 10.0% Securities purchased for resale Deposits 5.6% 1.7% 3.7% 1.8% Income from fees and other revenues totalled US $83 million, as compared to the 2013 level of US $103 million. The reduction in revenue occurred largely as a result of lower commissions income on lower new annuity business written in the USA. On June 26, 2014, the Group completed the acquisition of RBC Royal Bank’s Jamaica banking operation, and rebranded the business as Sagicor Bank. After determining the fair value of acquired assets and liabilities of the business, the Group experienced negative goodwill on acquisition of US $29 million. The table below summarises the expense incurred by the Group in providing benefits. BENEFITS - $ millions Net insurance benefits: Life and annuity Health Property and casualty Interest expense 2014 2013 363 108 8 479 63 542 415 113 7 535 58 593 Insurance benefits comprise amounts payable to policyholders and beneficiaries in accordance with the contract terms of insurance policies issued or assumed by the Group. Interest payable to investment contract-holders or financial institutions which have placed funds with the Group are treated as interest benefits. Current life insurance and annuity benefits are recognised on the notification of death, disability or critical illness of an insured person; on the maturity or surrender of a policy; on the declaration of a policy bonus or dividend; or an annuity payment date. Future life insurance and annuity benefits are recognised in the financial statements on in-force long-term insurance contracts, based on reserving methodologies adopted by the Group in accordance with established Canadian accepted actuarial standards (recognising local conditions). Life and annuity benefits totalled US $363 million in 2014, of which US $322 million related to current benefits, and US $41 million related to future benefits. The corresponding amounts for 2013 were a total of US $415 million, of which US $305 million were for current benefits, and US $110 million were in respect of future benefits. The reduction in 2014 Annual Report 45 Sagicor Financial Corporationbenefits occurred as a result of lower new annuity business written in the USA, when compared to 2013. Expenses in 2014 includes restructuring and rebranding costs, together with 6 months of operating expenses relating to the acquired RBC Royal Bank’s Jamaica banking operations. The amount of future benefits recorded in the statement of income is a function of the policy contracts in-force, and of the appropriate actuarial assumptions which are made to value them. Health, property and casualty insurance benefits are recognised either on the notification or settlement (for short notification periods) of a claim from policyholders. In addition, incurred but not reported (IBNR) benefits are recognised in accordance with established or expected trends for claims incurred. Total health insurance benefits were US $108 million, representing an overall claims to premium ratio of 74%. The comparative 2013 amounts were US $114 million, and an overall claims to premium ratio of 80%. Property and casualty claims amounted to US $8 million in 2014, an increase of US $1 million from the 2013 comparative figure. The interest returns the Group has provided to investment contract- holders and financial institutions which have advanced funds are summarised in the following table. INTEREST YIELDS Investment contracts Other funding instruments Customer deposits Securities sold for repurchase Expenses and taxes 2014 5.4% 2.0% 2.6% 5.0% 2013 5.3% 2.2% 3.6% 4.8% Expenses and taxes totalled US $403 million for 2014, up from US $366 million for 2013. Expenses of administration represent the largest expense category and totalled US $234 million in 2014, compared to US $204 million in 2013. 46 2014 Annual Report Commissions represents compensation and benefits payable to insurance agents and brokers who generate new and renewal premium revenue for the Group. Commissions totalled US $98 million for 2014 compared to US $100 million for 2013. EXPENSES & TAXES - $ millions Administrative expenses Commissions Finance costs, depreciation and amortisation Premium, asset and income taxes 2014 234 98 43 28 403 2013 204 100 32 30 366 The Group is subject to a variety of direct taxes, with premium and income taxes comprising the main types of tax. Taxes are incurred in the jurisdiction in which the income is generated. Premium tax is customarily a percentage of gross premium revenue, while income tax is usually either a percentage of investment income or a percentage of profits. Comprehensive income Gains and losses recorded within other comprehensive income arise from fair value changes of certain classes of assets, and from the retranslation of foreign currency operations. For 2014, fair value changes in assets accounted for a net gain of US $16 million. There was also a gain of US $13 million relating to defined benefit plans. Retranslation of foreign currency operations accounted for a loss of US $22 million. The latter arose largely from the depreciation of the Jamaica dollar. The corresponding amounts for 2013 were a loss of US $32 million arising from fair value changes in assets, Sagicor Financial CorporationInvested assets and cash balances as of December 31 are summarised in the table below. INVESTMENTS & CASH - $ millions 2014 1 2013 1 and a loss of US $36 million from the retranslation of foreign currency operations. Assets Net income and other comprehensive income together result in total comprehensive income. Summarising the Group’s results from continuing operations, total comprehensive income was US $107 million for 2014, compared to US $6 million for 2013. GROUP FINANCIAL POSITION Sagicor’s activities of issuing insurance contracts; of accepting funds from depositors; of banking and securities dealing result in the Group receiving significant funds which are held as liabilities and are invested in a variety of assets. The Group’s sources of capital are equity contributions from shareholders, retained earnings and reserves, and borrowings. Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits Cash The table below summarises the consolidated financial position of Sagicor as of December 31, 2014 and 2013. Investment property and other items 3,448 3,192 294 133 411 32 127 403 347 258 134 165 41 161 226 382 5,195 4,559 STATEMENT OF FINANCIAL POSITION - $ millions 2014 2013 1 continuing operations Assets Liabilities arising from operations Borrowings Equity 6,180 5,107 299 774 5,298 4,283 290 725 Debt securities are the largest class of invested assets, and represented 66% of total investments and cash as of December 31, 2014 (70% as of December 31, 2013). These securities are very suitable instruments to back long-term insurance liabilities because of their medium to long- term duration, the regular interest payments received, and the relatively low credit risk. 6,180 5,298 Debt instruments are issued primarily by Governments, state-sponsored agencies and corporate entities. The Group acquires and holds these instruments usually in the country where the funding arose. The Group also invests in debt instruments of short duration as a way of earning investment returns with minimal risk, and of providing opportunities for investment contract-holders to earn safe returns. Other invested assets are spread across various asset classes such as mortgages, loans, deposits and property. 2014 Annual Report 47 Sagicor Financial CorporationThe increase in debt securities, finance loans and leases and cash, when compared to 2013, largely reflects the acquisition of the banking operation in Jamaica. Liabilities arising from operations The Group issues life insurance and annuity contracts either to individuals or to employers in respect of their employees. Insurance liabilities are summarised in the following table. FINANCIAL LIABILITIES - $ millions 2014 2013 Investment contracts Securities sold for re-purchase Customer deposits Other funding instruments and other items 361 665 571 369 367 524 237 344 1,966 1,472 INSURANCE LIABILITIES - $ millions 2014 1 2013 1 Future benefits - individual contracts 2,137 1,907 Future benefits - group contracts Current benefits and other payables 1 continuing operations 426 242 417 234 2,805 2,558 Investment contracts may be issued to pension funds to hold pension plan assets or to individual customers to provide savings vehicles. Securities sold for repurchase provide specific security to depositors who place funds with the Group for investment return. Deposits and other funding provide monies to the Group to invest in loans and related securities. Other liabilities include general provisions, accruals and payables which arise in the ordinary course of business. Future benefits represent amounts recognised at the date of the financial statements for liabilities not yet due. These liabilities may become due in the near, medium or long-term and are estimated using established actuarial techniques. The discontinued operation (Sagicor at Lloyds) was sold on December 23, 2013. There is a liability of US $46 million (2013, US $55 million) relating to future price adjustments on the run off of the 2011, 2012, and 2013, underwriting years of account. Current benefits and other payables represent amounts which are currently due and are in the course of settlement. These include benefits in respect of all classes of insurance written - life, annuity, health, property and casualty. The Group’s liabilities, which arise from issuing investment contracts, accepting deposits and funding, are as follows. Capital The Group has issued equity and debt instruments to provide capital for its operations. The amounts recognised in the statement of financial position in respect of these instruments are summarised below. 48 2014 Annual Report Sagicor Financial CorporationA measure used to determine the capital adequacy of a life insurance group, which is the predominant activity within Sagicor, is the Canadian Minimum Continuing Capital and Surplus Requirement (MCCSR). The consolidated MCCSR ratio for the Sagicor Group was 273% as of December 31, 2014, compared to 259% at December 31, 2013, both of which are significantly in excess of the minimum recommended ratio of 150%. These ratios include risk factors for the potential credit default of debt instruments of Caribbean Governments held by life insurance subsidiaries. EQUITY & BORROWINGS - $ millions 2014 2013 Common shareholders’ equity Preference shareholders’ balances Minority interest shareholders’ balances 7.5% senior notes due 2016 4.6% notes due 2015 Participating accounts & other Classified as: Equity Borrowings 522 118 242 147 43 1 495 117 219 145 43 (4) 1,073 1,015 774 299 725 290 1,073 1,015 303,917,020 common shares of Sagicor Financial Corporation are outstanding, and are tradable on the Barbados, Trinidad & Tobago and London stock exchanges. 120 million convertible redeemable 5-year 6.5% preference shares were issued by the Company in 2011, and these are also tradable on the Barbados and Trinidad & Tobago stock exchanges. Common shares of certain subsidiaries are held by minority interests, primarily in Jamaica, where those shares are tradable on the local stock exchange. In 2006, a subsidiary issued US $150 million 10-year 7.5% notes due 2016. On December 18, 2013 the Company issued 18-month US $43 million notes, which are repayable in 2015. Participating accounts were established by a subsidiary to provide additional policyholder protection on participating policies which pay policy bonuses and dividends. A measure of financial stability is the debt (borrowings) to equity ratio which, for the Sagicor Group, was 38.7% as of December 31, 2014, (December 31, 2013: 40%). 2014 Annual Report 49 Sagicor Financial CorporationSAGICOR GROUP SUMMARY ORGANISATIONAL CHART SAGICOR FINANCIAL CORPORATION - HOLDING COMPANY & GROUP FINANCING SAGICOR LIFE SAGICOR JAMAICA SAGICOR USA OTHER OPERATING COMPANIES SAGICOR EUROPE (Discontinued Operation) SAGICOR LIFE - LIFE & HEALTH INSURANCE SAGICOR LIFE JAMAICA - LIFE & HEALTH INSURANCE SAGICOR BANK JAMAICA - COMMERCIAL BANKING SAGICOR INVESTMENTS JAMAICA - INVESTMENTS SAGICOR LIFE INSURANCE COMPANY - LIFE INSURANCE SAGICOR GENERAL - P&C INSURANCE INVESTMENT, FINANCE & REAL ESTATE ENTITIES SAGICOR AT LLOYD’S - P&C INSURANCE OPERATING IN OPERATING IN OPERATING IN OPERATING IN OPERATING IN OPERATING IN BARBADOS, TRINIDAD & TOBAGO, EASTERN CARIBBEAN , ARUBA, CURAÇAO, BELIZE, PANAMA, ST. MAARTEN JAMAICA, CAYMAN ISLANDS JAMAICA JAMAICA USA & COSTA RICA BARBADOS, BARBADOS, TRINIDAD & TRINIDAD & TOBAGO, EASTERN TOBAGO, EASTERN CARIBBEAN CARIBBEAN U.K. & WORLDWIDE 50 2014 Annual Report Sagicor Financial CorporationOPERATING SEGMENTS SAGICOR LIFE INC The Group’s principal reportable operating segments, as defined by International Financial Reporting Standards, are Sagicor Life Inc, Sagicor Jamaica, Sagicor USA, and Sagicor Europe. The Sagicor Europe segment was disposed of on December 23, 2013. The performance of these segments in 2014 is discussed under the following sub-headings. 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, Bahamas and Panama. The main activities of this segment are the provision of life insurance, annuities, health insurance, pension investment and pension administration services. In 2014, this segment generated revenue of US $362 million. This was an increase of US $12 million over the previous year. The main revenue component was premium income, which totalled US $266 million. Investment income totalled US $71 million, while other items totalled US $25 million. Benefits totalled US $195 million, and closed at the same level as the prior year. Current insurance benefits were US $175 million, while amounts recognised for future insurance benefits were US $9 million. Total expenses and taxes in 2014 closed the year at US $116 million, compared to US $110 million in 2013. INCOME - $ millions Revenue Benefits Expenses and taxes Segment income Segment income attributable to shareholders FINANCIAL POSITION - $ millions Assets Liabilities Net assets 2014 362 (195) (116) 51 44 2014 1,773 2013 350 (195) (110) 45 40 2013 1,706 (1,309) (1,280) 464 426 Net segment income for the year was US $51 million, compared to US $45 million for the prior year. After accounting for income allocated to policyholders, the net income attributable to shareholders for the segment totalled US $44 million in 2014, compared to US $40 million in 2013. Financial investments comprised 71% of segment assets, and policy liabilities comprised 91% of segment liabilities at the end of 2014. Sagicor Jamaica Segment This segment comprises subsidiaries in Jamaica and Cayman Islands. The principle activities of the segment are the provision of life, critical illness and health insurance, annuities, pensions administration, investment management, securities dealing and commercial banking. This segment generated revenue of US $486 million in 2014, an increase of US $22 million over the 2013 total. The main revenue component was premium income, which totalled US $264 million, compared to US $293 million in 2013. Investment income totalled US $134 million 2014 Annual Report 51 Sagicor Financial Corporationcompared to US $118 million in the prior year. Revenue in 2014 also included negative goodwill of US $29 million on the acquisition of the RBC Royal Bank’s Jamaica banking operations in Jamaica. Financial investments comprised 81% of the segment’s assets at the end of 2014. The liabilities of this segment were distributed 30% to policy liabilities and 70% to deposit and security liabilities at the end 2014. Benefits totalled US $250 million, as compared to US $272 million in 2013. Sagicor USA Segment Expenses and taxes incurred totalled US $158 million in 2014, increasing by US $31 million over the prior year. The increase is attributed mainly to restructuring and rebranding costs, in addition to incurred administration costs on the RBC Royal Bank’s operations acquired on June 27, 2014. SAGICOR JAMAICA INCOME - $ millions Revenue Benefits Expenses and taxes Segment income Segment income attributable to shareholders FINANCIAL POSITION - $ millions Assets Liabilities Net assets 2014 486 (250) (158) 78 38 2014 2,495 2013 464 (272) (127) 65 32 2013 1,880 (2,083) (1,521) 412 359 Net segment income for the year was US $78 million, compared to a total of US $65 million recorded for 2013. As the Sagicor Jamaica segment is owned 49% by the Group (51% up to May 7, 2014), the resulting net income attributable to shareholders was US $38 million in 2014 (US $32 million in 2013). This segment consists of the USA operations of Sagicor, which market life insurance and annuity products to individuals. Segment revenue totalled US $153 million in 2014, decreasing by US $32 million over the 2013. Premium revenue recorded in 2014 was US $75 million, and was reduced from the 2013 total by US $13 million. The reduction in revenue occurred as a result of lower new annuity business written in the USA, when compared to 2013. Investment income for 2014 totalled US $50 million, and was in line with the prior year. SAGICOR USA INCOME - $ millions Revenue Benefits Expenses and taxes Segment income Segment income attributable to shareholders FINANCIAL POSITION - $ millions Assets Liabilities Net assets 2014 153 (83) (58) 12 12 2014 1,743 2013 185 (114) (63) 8 8 2013 1,484 (1,535) (1,296) 208 188 Commensurate with the lower new annuity business in the USA in 2014, total benefits decreased to US $83 million in 2014 from US $114 million in 2013. The expense for future insurance benefits in 2014 showed a 52 2014 Annual Report Sagicor Financial CorporationDISCONTINUED OPERATION DISCONTINUED OPERATION INCOME - $ millions 2014 Revenue Benefits Expenses Net operating loss Write down of carrying value of investment Currency translation Other expenses Movement in price adjustment Net loss - - - - - - - (26) (26) 2013 266 (181) (118) (33) (21) (18) (4) - (76) FINANCIAL POSITION - $ millions 2014 2013 Assets Liabilities Net assets - (46) (46) - (55) (55) reduction of US $43 million, decreasing from US $24 million in 2013. The 2014 expense for future insurance benefits reflects the lower annuity business written. Expenses and taxes totalled US $58 million in 2014, compared to US $63 million in 2013. Administrative and commissions expenses decreased in 2014, commensurate with the lower annuity premium income. Net income of the segment for 2014 was US $12 million, compared to the US $8 million recorded for 2013. As of December 31, 2014, financial investments comprised 72% of the segment assets, and policy liabilities comprised 81% of the segment liabilities. DISCONTINUED OPERATION The discontinued operation comprises the Sagicor at Lloyd’s business, and consists primarily of property and casualty insurance business written through Lloyd’s of London Syndicate 1206. The Lloyd’s of London franchise enables the syndicate to write international business outside of the United Kingdom. As stated in a foregoing section, the Group made a decision to dispose of these operations. The disposal of this segment occurred on December 23, 2013. In accordance with International Financial Reporting Standards, the Sagicor at Lloyd’s operation is defined as a discontinued operation The terms of the sale included: • Future price adjustments to the sale consideration represented adjusted syndicate profit in the run-off of the 2011, 2012 and 2013 underwriting years. During 2014, future price adjustments amounted to US $26 million. Sagicor Europe made a net loss of US $26 million in 2014, compared to a net loss of US $76 million in 2013. 2014 Annual Report 53 Sagicor Financial CorporationLOOKING FORWARD Growth in the global economy is expected to remain relatively stable for 2015. The IMF has forecasted global growth of 3.5% in 2015, following 3.3% in 2014. The net positive impact of the extended decline in global oil prices is expected to be outweighed by various downside risks, including a reduced level of investment and persistently modest economic recovery across the developed world. Additional effects are the decline in commodity prices and the associated downward trend in the level of growth in key emerging market countries. In 2015, advanced economies are projected to expand moderately by 2.4%, led by the USA, while emerging markets are expected to experience relatively flat growth of 4.3%. The economic recovery of the Caribbean economies remains fragile and heavily reliant upon the economic improvement of developed economies. Generally, the tourism sector is expected to show modest improvement. However, rising public debt levels, fiscal imbalances and high unemployment challenges will continue to impede the region’s competitiveness. The IMF has forecasted regional growth of 1.3% in 2015. During 2015, Sagicor will continue to focus on reducing operating costs, improving process efficiency and improving customer service through the rationalisation of its major operating centres. 54 2014 Annual Report Sagicor Financial Corporation175 years of vision Our loyal and experienced team makes us the trusted financial institution we are today. We have been there for you for 175 years, and we will continue to be there for the next 175. BOARD OF DIRECTORS STEPHEN MCNAMARA, 64, 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, Sagicor USA, and Sagicor Finance Inc. He serves as a Director of Sagicor Group Jamaica Limited and a number of other subsidiaries within the Group. ANDREW ALEONG, 54, 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 25 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 a number of other subsidiaries within the Group. PROFESSOR SIR HILARY BECKLES, K.A, 59, 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. He is a member of the Secretary General of the UN, Ban Ki Moon’s Advisory Board on Science and Sustainable Development; and Vice President of the Commonwealth Ministers’ Advisory Board on Sport. 58 2014 Annual Report Sagicor Financial CorporationPETER CLARKE, 60, 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. Mr Clarke is a Financial Consultant, who formerly practised as a Barrister-at-Law before embarking on a 22-year career in stockbroking. From 1984 to 2000, he was the Managing Director of Money Managers Limited, and Chief Executive of West Indies Stockbrokers Limited from 2001 until his retirement in 2005. DR JEANNINE COMMA, 64, has been an independent Director since June 2007, and is Chairman of the Human Resources Committee. She is a citizen of Trinidad and Tobago. She holds a PhD from George Washington University, Washington, DC, USA, and is also a graduate 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, Cave Hill Campus. 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. Mr Clarke, is a Director of a number of companies in Trinidad and Tobago, including 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. Mr Clarke also serves as a Director of Sagicor Life Inc, Sagicor Group Jamaica Limited and Sagicor Life Jamaica Limited. Dr Comma has extensive experience in Leadership Development, Organisational Strategic Planning, Transformation Management and Corporate Governance. 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), and serves on the boards of the Barbados Tourism Inc, the National Initiative for Service Excellence and the Barbados Entrepreneurship Foundation. Dr Comma was elected a Director of Sagicor Life Inc in 2006. MONISH DUTT, 56, has been an independent Director since 2012 and is a citizen of India and a permanent resident of the United States of America. He holds an MBA with a concentration in Finance from the London Business School, London University, and a BA in Economics from the University of Delhi. He is a Fellow of the Institute of Chartered Accountants, London, England. Currently a Consultant on Emerging Markets, Mr Dutt is a seasoned investment professional who, for the 25 years preceding 2011, was employed with International Finance Corporation (IFC), a member of the World Bank Group. While at IFC, he held various positions, the most recent of which was Chief Credit Officer for Global Financial Institutions & Private Equity Funds. He was formerly the Head of IFC’s Private Equity Advisory Group; the Head of the Baltics, Central Europe, Turkey and Balkans Group; Principal Investment Officer for Asia; Senior Investment Officer for Central & Eastern Europe, and an Investment Officer for Africa, Latin America and Asia. Mr Dutt has extensive experience evaluating investment proposals in financial institutions and private equity funds globally, structuring investments, tracking global investment portfolios, and providing quality control guidance to private equity fund investments. Mr Dutt has also represented IFC on boards of investee companies. Mr Dutt serves as a Director of Sagicor Bank Jamaica Limited. 2014 Annual Report 59 Sagicor Financial CorporationRICHARD KELLMAN, 63, 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 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 also held senior actuarial and management positions and served on several Boards. WILLIAM LUCIE-SMITH, 63, 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. He was elected a Director of Sagicor Life Inc in 2005, and is also a Director of Sagicor USA, and a number of other subsidiaries within the Group. MARJORIE FYFFE-CAMPBELL, 63, has been an independent Director since June 2005, and is a citizen of Jamaica. She is a Management Consultant and holds an MSc in Accounting from the University of the West Indies, is a Fellow of the Institute of Chartered Accountants of Jamaica and a member of the Hospitality, Financial and Technology Professionals. She is a former President and Chief Executive Officer of the Urban Development Corporation, Jamaica, a large development and 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 an Adjunct Lecturer in Financial and Management Accounting and Enterprise Risk Management Governance at the Mona School of Business and Management 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. 60 2014 Annual Report Sagicor Financial CorporationDODRIDGE MILLER, 57, 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 30 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 a Director of Sagicor Life Inc, Sagicor USA, Sagicor Group Jamaica Limited, Sagicor Life Jamaica, Sagicor Investments Jamaica Limited (formerly Pan Caribbean Financial Services) and a number of other subsidiaries within the Group. JOHN SHETTLE, JR, 60, 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 to 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. RICHARD P YOUNG, 64, a citizen of Trinidad and Tobago, was appointed an independent Director of the Company in January, 2014. He is a Chartered Accountant by profession, and has had a distinguished career in accounting, auditing, insurance and banking. He has over forty years’ experience in the regional financial services sector, the last seventeen of which he spent as the Managing Director of Scotiabank Trinidad & Tobago Limited and a Senior Vice President of The Bank of Nova Scotia, before retiring in 2012. Prior to joining Scotiabank, he was the Managing Director of NEM (West Indies) Insurance Ltd. (NEMWIL). Mr Young also served as Chairman and Deputy Chairman of other Scotia Group subsidiaries, as well as Deputy Chairman of the National Housing Authority. He is a former President of the Council of the Institute of Chartered Accountants of Trinidad and Tobago; President of the Bankers Association of Trinidad and Tobago; Chairman of the Trinidad & Tobago Stock Exchange and Committee Member of the Association of Insurance Companies of Trinidad & Tobago. In July 2013, Mr Young was appointed Chairman of the Economic Development Board of Trinidad and Tobago. He is also Chairman of Catholic Media Services Limited and Youth Business Trinidad and Tobago. 2014 Annual Report 61 Sagicor Financial Corporation175 years of responsibility Over the years we have grown strong. But if we are to truly fulfill our promise, we must resolve that with strength comes the greatest responsibility. CORPORATE GOVERNANCE Directors’ Interests Directors’ interests as at December 31, 2014 and as at the record date, March 19, 2015, are as follows: Shares as at 31-Dec-14 Shares as at 19-March-15 Common Shares Preference Shares Common Shares Preference Shares Stephen McNamara Andrew Aleong Professor Sir Hilary Beckles Peter Clarke Dr Jeannine Comma Monish Dutt Marjorie Fyffe-Campbell Richard Kellman William Lucie-Smith Dodridge Miller John Shettle, Jr Richard P. Young Beneficial 23,993 533,358 9,579 10,000 16,023 1,000 49,927 213,363 120,000 1,379,293 1,000 34,266 Non- Beneficial Beneficial Non- Beneficial 0 0 0 0 0 0 0 0 0 0 0 0 0 55,000 0 0 5,000 0 0 150,000 0 15,000 0 10,000 0 0 0 0 0 0 0 0 0 0 0 0 Beneficial 23,993 533,358 9,579 10,000 22,300 1,000 50,850 213,363 120,000 1,379,293 1,000 34,266 Non- Beneficial Beneficial Non- Beneficial 0 0 0 0 0 0 0 0 0 0 0 0 0 55,000 0 0 5,000 0 0 150,000 0 15,000 0 10,000 0 0 0 0 0 0 0 0 0 0 0 0 Restricted Stock Grants Stock options As at 31-Dec-14 As at 19-Mar-15 As at 31-Dec-14 As at 19-Mar-15 Vested Unvested Vested Unvested Vested Exercised Unvested Vested Exercised Unvested Richard Kellman 290,831 142,363 290,831 142,363 187,547 Dodridge Miller 910,789 1,254,771 910,789 1,254,771 1,760,495 0 0 372,765 187,547 1,479,562 1,760,495 0 0 372,765 1,479,562 64 2014 Annual Report Sagicor Financial Corporation1 Board Composition and Structure The maximum number of Directors permitted by the Restated 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 Group 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, 2014 and as at the record date, March 19, 2015, are set out earlier in this Report. The Board of Directors considers that the quality, skills and experience of Directors enhances the Board’s effectiveness and the collective Board is required to have the core set of skills identified in the Board Core Competency Matrix on the following page. 2014 Annual Report 65 Sagicor Financial Corporation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 e k r a l C r e t e P t t u D h s i n o M 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 g n u o Y d r a h c i R 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 Risk Management Information Technology Corporate Governance Other: Education 66 2014 Annual Report Sagicor Financial Corporation In addition, individual Directors must also possess specific knowledge and experience commensurate with the business requirements of the Company, and are also expected to have a style of operation which comprises: (a) high personal standards consistent with the Company’s Code of Business Conduct and Ethics commitment to business leadership (b) courage to express and defend a position (c) decisiveness and willingness to be held accountable (d) effective intervention and decision-making style (e) (f) willingness to contribute to team synergy (g) mature and thoughtful perspective on business. The Company is also mindful that the Board must reflect the business, social, economic and cultural jurisdictions from which the Company draws customer patronage, and that Directors must have sufficient time available to devote to performance of their Board duties. Finally, Directors are required to undergo annually a rigorous self-assessment. This assessament is designed to ensure that appropriate standards of independence and objectivity are maintained. All non-executive Directors have satisfied the 2014 independence self-assessment. 2 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. Stephen McNamara, Marjorie Fyffe-Campbell, Richard Kellman, William Lucie-Smith and Monish Dutt retire at the Twelfth Annual Meeting, and all being qualified, have offered themselves for re-election. Profiles of the nominees are contained in the Management Proxy Circular accompanying the Notice of the Meeting. The Board recommends that all the nominees be re-elected. In making this recommendation, the Board has been guided by the nomination process overseen by the Corporate Governance and Ethics Committee, which requires a review of 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 performance as Directors, including their willingness and ability to devote the time necessary to fulfil their role as Directors. It is intended that Directors who have served on the Board for 9 or more years will be subject to enhanced due diligence by the Corporate Governance and Ethics Committee, to ensure that their performance over the period of their tenure is such as to justify the Committee’s recommendation to the Board that they be nominated for re-election. 3 New Director Orientation The Company’s Corporate Governance Manual expressly recognises the importance of an efficient and effective new Director on-boarding process. To this end, the Manual establishes a New Director Orientation Programme whose objective it is to assist the new Director in developing a high level of institutional, boardroom and interpersonal comfort in order to expedite his/her effectiveness as a Director. The induction of a new Director consists of two levels, one involving Company documentary information, and the other interpersonal induction. In the first level, the new Director receives a package containing key documentation about the Sagicor Group, to assist the new Director in settling into his/her new role with the Company. These documents include the Corporate Governance Manual; current and previous two years’ Annual Reports; Group Strategic and Business Plans; Group Risk Profile; Group Organisational Chart and copies of the Minutes of at least the previous six Board and Committee Meetings. To complete the formal orientation process, in the second phase, a series of interviews with Board and Committee Chairmen, as well as key Management personnel, is set up for the new Director. The Company has established an online Board Portal for the distribution and housing of Board Meeting materials and other corporate information. All Directors therefore have immediate and constant access to all necessary company materials and documents. 4 On-going Director Education During the year, on-going Director education included sessions on changes in the regional and international regulatory environment; International Financial Reporting Standards (IFRS); proposed changes in Investment Accounting and Insurance Contracts; as well as Board Room dynamics. The Board is committed to continuing these sessions to ensure Director effectiveness is optimised by enhancing Director knowledge. 2014 Annual Report 67 Sagicor Financial Corporation5 Board Responsibilities 5.1 Board of Directors 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 respective roles of the Chairman of the Board, the Board, Committee Chairmen, Committees and Management are clearly defined. Position descriptions explaining the roles, responsibilities and desired competencies have been developed for the Chairman of the Board, the Chairmen of each Board Committee, as well as the President & CEO. 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. 5.2 Board Committees The four Standing Committees of the Board - Audit; Corporate Governance and Ethics; Human Resources 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 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. 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, regulatory and other requirements, and management of risk. The Committee’s composition meets the independence and skill requirements of the Group’s Corporate Governance Policy. The Members are financially literate, and in 2014, three Members, William Lucie-Smith, Monish Dutt and Marjorie Fyffe- Campbell, all Chartered Accountants, had 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), Peter Clarke (appointed a Member on March 21, 2014), Marjorie Fyffe- Campbell (appointed a Member on September 11, 2008), Dr Jeannine Comma (appointed a Member on September 11, 2008) and Monish Dutt (appointed a Member on March 18, 2014. 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’s composition 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), John Shettle, Jr (appointed a Member on August 18, 2010) and Richard P. Young (appointed a Member on March 18, 2014). The mandate of the Human Resources Committee is to advise the Board with respect to compensation policies, programmes 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’s composition meets 68 2014 Annual Report Sagicor Financial Corporation7 Interlocking Directorships The Corporate Governance Recommendations of the Barbados Stock Exchange require that the Company make certain disclosures relating to Director Interlocks. In addition to their service on the Board of the Company and the Boards of various Group subsidiaries, the following Company Directors also serve together on the Boards of the publicly- listed companies appearing next to their names: Directors Company Dodridge D Miller Professor Sir Hilary Beckles Richard P Young William Lucie-Smith 8 Board Operations Cable & Wireless Barbados Ltd Massy Holdings Ltd During 2014, Management engaged the Board of Directors (BOD) 19 times, either in formal meetings or by requests for round-robin decisions in between meetings. In relation to the engagement of the Standing Committees of the Board, the Audit Committee (AC) met 5 times; the Corporate Governance and Ethics Committee (CGC) met 6 times; the Human Resources Committee (HRC) met 4 times; and the Investment and Risk Committee (IRC) met 2 times. Directors’ record of attendance was as follows: the independence requirements of the Group’s Corporate Governance Policy. The current Members are Dr Jeannine Comma (appointed a Member on September 18, 2007, and Chairman on August 24, 2011), Stephen McNamara (appointed a Member on August 18, 2010), Andrew Aleong (appointed a Member on March 23, 2012) and Monish Dutt (appointed a Member on March 18, 2014). 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 certain 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’s composition 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), John Shettle, Jr (appointed a Member on March 18, 2009), Peter Clarke (appointed a Member on August 18, 2010), Richard P. Young (appointed a Member on March 18, 2014), and William Lucie-Smith (appointed a Member on March 21, 2014). 6 Board Evaluation In 2014, the Board undertook its annual performance evaluation to assess the effectiveness of the Board’s performance as a whole. The evaluation took the form of a self-assessment and peer-review questionnaire, and an evaluation of the Corporate Governance system as a whole. Findings continue to reveal ongoing opportunities for the enhancement of our Corporate Governance practices. The Corporate Governance and Ethics Committee continued to manage Director independence and potential conflicts of interest, and the Committee concluded that Directors continued to meet the independence requirements under our Corporate Governance Policy. 2014 Annual Report 69 Sagicor Financial CorporationHRC 4 of 4 4 of 4 4 of 4 4 of 4 IRC 2 of 2 2 of 2 2 of 2 1 of 2 2 of 2 Total 31 of 31 30 of 30 23 of 25 21 of 21 25 of 28 26 of 26 30 of 30 19 of 19 24 of 24 19 of 19 21 of 27 23 of 24 % 100% 100% 92% 100% 89% 100% 100% 100% 100% 100% 77% 95% Stephen McNamara Andrew Aleong Prof Sir Hilary Beckles Peter Clarke Dr Jeannine Comma Monish Dutt Marjorie Fyffe- Campbell Richard Kellman William Lucie-Smith Dodridge Miller John Shettle, Jr Richard Young BOD 19 of 19 19 of 19 18 of 19 19 of 19 17 of 19 19 of 19 19 of 19 19 of 19 19 of 19 19 of 19 17 of 19 17 of 18 AC 5 of 5 4 of 5 3 of 3 5 of 5 5 of 5 CGC 6 of 6 5 of 6 6 of 6 3 of 6 4 of 4 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 2014 was to: • consider and approve the Group strategic plan, capital plan and projections for the period 2015 to 2017; • review periodically the Group capital and liquidity plan, strategic and business development initiatives forming part of the Strategic Plan, and other key initiatives; • 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; • review and approve unaudited interim and audited annual consolidated financial statements; • approve interim and final dividends; • review and approve actuarial reports of the Appointed Actuary; and • receive reports on work being carried out by Board Committees, and consider and approve their recommendations as required. 70 2014 Annual Report Sagicor Financial Corporation9 Committee Operations • overseeing the management of independence requirements and Audit Committee Report: The 2014 activities of the Audit Committee included: • reviewing and approving the external audit plan and timetable; • evaluating the performance of the External Auditors for Group entities and approving their audit fees; • reviewing the External Auditors’ 2013 Management Letter and Report on the 2013 audit; • approving the 2014 Audit Engagement Letter; • commencing audit tender process; • generally reviewing the circumstances and conditions under which a conflicts of interest; • reviewing the adequacy of Director and Officer liability insurance cover; • overseeing the Director self and peer performance evaluation process; • monitoring Director attendance; • reviewing investor relations plans and programs; • conducting its annual review of the adequacy of the Code of Business Conduct and Ethics; • generally monitoring the operation of Corporate Governance policies and practices; and • assessing the adequacy of the Committee’s mandate, and evaluating rotation of External Auditors should be considered; its effectiveness in fulfilling the same. • reviewing and recommending for approval by the Board interim and annual audited financial statements; • making dividend recommendations to the Board; • reviewing actuarial reports of the Appointed Actuary; • reviewing reports of the External Auditors on key audit issues; • reviewing the financial performance of the Group and key Human Resources Committee Report: During 2014, the Human Resources Committee: • reviewed executive performance, compensation and terms of engagement; subsidiaries; • monitored succession planning and leadership and development • examining the implications of changes to International Financial plans at the executive level; Reporting Standards; • approving the 2014 Internal Audit Plan, reviewing Internal Audit reports and monitoring Management action on open Internal Audit items; • reviewing compliance with various financial covenants; • reviewing reports on pending material litigation and claims, and pending regulatory issues; • reviewing regulatory compliance and other compliance reports; • assessing the adequacy of the Committee’s mandate, and evaluating • granted awards to qualified participants under the annual cash incentive, long-term incentive plan (LTI) and employee share ownership plan (ESOP), based on performance against established benchmarks; • reviewed aspects of the rules of the Company’s annual long-term incentive plans; • reviewed ESOP financial statements; • reviewed plans for corporate re-structuring and re-organisation; and • assessed the adequacy of the Committee’s mandate, and evaluated its effectiveness in fulfilling the same. its effectiveness in fulfilling the same. Corporate Governance and Ethics Committee Report: The Committee’s principal business during 2014 included: • reviewing Board and Director core competencies and identifying gaps to inform the nomination process; • overseeing Director nominations, Board Committee, subsidiary and outside Board appointments; Investment and Risk Committee Report: In 2014, the Investment and Risk Committee’s work included monitoring key risks to which the Group is exposed: • reviewing in detail interest rate, credit, liquidity and foreign exchange risk dashboards for the Company as a whole, and for its major subsidiaries; 2014 Annual Report 71 Sagicor Financial Corporationbreakdown of the non-cash component of the compensation of the top 5 members of the Executive Management team. • monitoring of risk exposures and reviewing mitigation strategies designed to manage risk, and generally overseeing the enterprise risk management process; • reviewing investment performance as required; and • assessment of the adequacy of the Committee’s mandate, and an evaluation of its effectiveness in fulfilling the same. 10 Sagicor’s Compensation Philosophy Employees The Sagicor Group’s compensation strategy for all employees including Executive Management, aims to achieve an efficient and competitive position for the Company as an Employer of Choice in the markets we serve; while supporting our efforts to attract, motivate and retain the best candidates for all positions across the Group. The compensation strategy seeks to strike a balance between the needs of the employee and the strategic objectives of the Company, while ensuring that all employees are treated fairly, recognised and rewarded for team as well as individual performance. Factors such as market competition; supply and demand of critical skills and competencies; and strategic issues are all considered in determining a position’s competitive market value. Base salaries are reviewed annually for all staff and, in determining whether to approve salary increases, the Board of Directors considers various factors, including: the ability to pay; local labour market statistics e.g. cost of living and compensation trend data; merit budget; and the performance of the Company and business units. All employees must meet a minimum performance standard each year to be considered for a salary increase. The quantum of annual incentive compensation, once earned, is calculated using a methodology called the Balance Score Card. This methodology takes into account financial as well as non-financial measures, including revenue, profitability, efficiency and customer satisfaction. For the financial year under review, salaries paid in cash to the top 5 members of the Executive Management team of the Company, including the President & CEO and Chief Operating Officer, amounted in aggregate to US $4,433,749. The table immediately below shows a 72 2014 Annual Report Sagicor Financial CorporationRestricted Stock Grants Stock options As at 31-Dec-14 As at 19-Mar-15 As at 31-Dec-14 As at 19-Mar-15 Vested Unvested vested Unvested Vested Exercised Unvested Vested Exercised Unvested 2,020,876 1,830,024 2,020,876 1,830,024 3,192,594 0 2,505,518 3,192,594 0 2,505,518 Top 5 Members of the Group Executive Management Team Board of Directors The Company’s compensation philosophy for the Board of Directors has objectives akin to that for employees. It is designed to attract, retain and motivate Directors of the quality required to ensure the efficient oversight of the Company’s business. In 2006, the Board commissioned the independent firm of Ernst & Young of Atlanta, to review Directors’ compensation and make compensation recommendations. After examination of international best practice in the area, and consideration of various factors, including the level of responsibility, potential liability, and the time and commitment required for the role, Ernst & Young made certain recommendations to the Board regarding the levels and structure of compensation for Directors. These recommendations were approved by shareholders at the 2007 Annual Meeting, and remain unaltered to-date. Non-Executive Directors do not participate in any performance-based 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. Non-Executive Directors’ fees for the financial year under review amounted in aggregate to US $562,000. Directors receive no additional benefits, but are reimbursed reasonable and customary out-of-pocket expenses associated with their attendance at Meetings, and the performance of their role as Directors. Executives who are Directors are not paid fees. 2014 Annual Report 73 Sagicor Financial Corporation11 Fees Paid to External Auditors PricewaterhouseCoopers SRL are the Company’s external auditors. Following is a statement of the fees paid to the external auditors for audit and non-audit services during 2013 and 2014: Services Fees Paid US$ ‘000 Audit Non-Audit Statutory Returns Other Total 2013 3,450 188 588 88 4,314 2014 3,398 179 580 383 4,540 12 Enterprise Risk Management The Group’s 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 and sensitivity to financial and insurance risks are disclosed in [Notes 41 and 42] respectively to the 2014 audited financial statements contained in this Annual Report. 13 Internal Audit 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, controls, and governance processes, as designed and represented by Management, is adequate and functioning in a manner to ensure, among other things, that risks are appropriately identified and managed, and that employees’ actions are in compliance with policies, standards, procedures, applicable laws and regulations. The work of Internal Audit also seeks to give assurance that resources are acquired economically, used efficiently, and adequately protected, and that quality and continuous improvement are fostered in the organisation’s control process, and significant legislative or regulatory issues impacting the organisation are recognised and addressed appropriately. 14 Compliance Sagicor continues to strengthen and streamline its compliance function, in response to the increasing complexity of regulatory and other risks, with the Audit Committee continuing to exercise oversight of all aspects of compliance. The Group Compliance Committee’s mandate is to ensure that compliance is managed on a formal and proactive basis, as opposed to an ad hoc and reactive basis; is governed by appropriate policy, and is implemented and administered in accordance with policy. The Committee is also charged with ensuring that risk management practices are developed, implemented and administered for identifying, assessing, managing, reporting and monitoring compliance risk, and with lending value-added support for the administration of and compliance with Sagicor’s Code of Business Conduct and Ethics. The Committee, whose membership includes the Group Chief Compliance Officer as Chair, and the Chief Compliance Officer of each major operating subsidiary, the Group Chief Risk Officer and Group General Counsel, continued to be active in 2014. 15 Code of Business Conduct and Ethics 74 2014 Annual Report 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- Sagicor’s Code of Business Conduct and Ethics (which codifies our corporate value system embracing legal, moral and ethical conduct, Sagicor Financial Corporation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 to indicate whether or not they are in compliance. Mechanisms through which code violations can be reported and channelled to the appropriate parties operated satisfactorily, including widely available anonymous whistle-blowing facilities. These enabled Management to take timely corrective action. The Corporate Governance and Ethics Committee carried out its annual review of the Code to ensure its adequacy. 16 Investor Relations and Communications During 2014, the Company continued to execute its investor relations communications program with periodic briefings to the Media, Analysts and Brokers. The Company continues to ensure that price-sensitive information is released across markets at the same time, and to manage its Insider Trading Policy as an integral part of the Code of Business Conduct and Ethics. The annual Shareholders’ briefing was held in Trinidad, where the majority of Shareholders reside, for the benefit of Shareholders who were unable to travel to Barbados for the Annual Meeting of Shareholders. By Order of the Board of Directors. Althea C Hazzard Corporate Secretary March 31, 2015 2014 Annual Report 75 Sagicor Financial Corporation175 years of leadership Each of us has the skill, the wisdom, and the dedication to be great today, but we look to our leaders to ensure that we’ll be great tomorrow. EXECUTIVE MANAGEMENT DODRIDGE D MILLER FCCA, MBA, LLM, LLD (Hon) Group President and Chief Executive Officer Dodridge Miller 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 30 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 a Director of Sagicor Life Inc, Sagicor USA, Sagicor Group Jamaica Limited, Sagicor Life Jamaica Limited, Sagicor Investments Jamaica Limited and a number of other subsidiaries within the Group. RICHARD M KELLMAN BSc, FIA, ASA Group Chief Operating Officer Richard Kellman 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, 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 also held senior actuarial and management positions, and served on several Boards. RONALD B BLITSTEIN BA, MBA Group Chief Information Officer Ronald Blitstein joined Sagicor Financial Corporation in September 2013. He holds a BA in Political Science and a MBA in Finance from Syracuse University. He has attended various training programmes at Harvard Business School and Massachusetts Institute of Technology. Mr Blitstein is an IT professional, with broad and deep knowledge in all areas of information technology and its application to driving improved business outcomes. He has previously served as Director, Business Technology and Strategies Practice for the global advisory firm, Cutter Consortium, supporting Fortune 500 clients, as well as national governments and various United Nations agencies. Mr Blitstein has also held CIO or other key executive leadership positions at Revlon, Pitney Bowes, BOC Group, and Xerox Corporation. He has served as a Six Sigma Champion for firms pursuing enterprise operational excellence. 78 2014 Annual Report Sagicor Financial CorporationRICHARD BYLES BSc, MSc President and Chief Executive Officer, Sagicor Group Jamaica Limited Richard Byles was appointed President and CEO of Sagicor Life Jamaica Limited in March 2004. He is Chairman of the Board of Sagicor Bank Jamaica Limited, Sagicor Property Services Limited, Sagicor Reinsurance Limited (Cayman), Sagicor Insurance Managers (Cayman) and Desnoes and Geddes Limited. He also serves on the Boards of several subsidiary and associated companies, and is a Director of Pan-Jamaican Investment Trust Ltd. Mr Byles is the Co-chair of the Economic Programme Oversight Committeee (EPOC), a private/public sector committee established to oversee the Implementation of the IMF Programme in Jamaica. He has earned valuable experience within the financial sector, spanning the areas of Life, Health and General Insurance, Asset and Investment Management, Banking, Pension Administration, Property Development and Reinsurance Management. Mr Byles holds a BSc in Economics from the University of the West Indies and an MSc in National Development from the University of Bradford, England. BART F CATMULL BSc, CPA President and Chief Operating Officer, Sagicor USA, Inc Bart Catmull was appointed President and Chief Operating Officer in April 2013. A citizen of the United States of America, Mr Catmull is a Certified Public Accountant (CPA), and obtained his Bachelor of Science degree in Accounting from Brigham Young University in 1992. He has more than 20 years’ experience in the insurance industry. Prior to his appointment as President, he held the positions of Chief Operating Officer, Chief Financial Officer, Treasurer and Chief Accounting Officer. Mr Catmull joined the Group in 2005, when the predecessor of Sagicor Life Insurance Company (the US operating company) was acquired by the Group. He has been with the Company since 1999. ANTHONY CHANDLER CGA, MBA Group Chief Financial Controller Anthony Chandler was appointed Group Chief Financial Controller on July 1, 2013. Prior to this, he served as Executive Vice President and Chief Financial Officer of Sagicor Life Inc from 2011. He joined Sagicor in 1995 as Financial Accountant, and was transferred to the Group subsidiary, Island Life Insurance Company Ltd, in 2000. In 2003 he joined the management of Life of Jamaica as Head of its Internal Audit function, before returning to Barbados in the position of Vice President, Finance, of Sagicor Life Inc later in the same year. In 2006, he was promoted to Vice President and Chief Financial Officer. Mr Chandler is a member of the Certified General Accountants Association of Canada, and holds an MBA from the University of Manchester. 2014 Annual Report 79 Sagicor Financial CorporationDR M PATRICIA DOWNES-GRANT CBE, MA, MBA, DBA, LLD (Hon) Chief Executive Officer and President, Sagicor Life Inc Dr Patricia Downes-Grant was appointed Chief Executive Officer and President 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 Treasury and Executive Vice President (Finance and Investments) before being appointed Chief Executive Officer. She holds an MBA in Finance, an MA in Economics, a Doctorate in Business Administration (Finance) and an Honourary Doctor of Laws from the University of the West Indies. Prior to joining Sagicor, Dr Downes-Grant was a Senior Manager in the Management, Consulting and Insolvency Division of Coopers & Lybrand (now PricewaterhouseCoopers). Dr Downes-Grant has also had significant work experience in development banking. She is a former Chairman of the Barbados Stock Exchange and Barbados Central Securities Depository, and a Director of several companies within the Sagicor Group and within the private sector of Barbados. J ANDREW GALLAGHER FSA, FCIA, CERA Chief Risk 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, is both a Fellow of the Canadian Institute of Actuaries and a Fellow of the Society of Actuaries, and is a Chartered Enterprise Risk Analyst. Prior to joining Sagicor, Mr Gallagher worked with Eckler Partners in Toronto in their financial institutions practice. He has over 25 years of experience in the industry. ALTHEA HAZZARD LLM (Cantab), FCIS, MICA Executive Vice President, General Counsel and Corporate Secretary Althea Hazzard was appointed Executive Vice President, General Counsel and Corporate Secretary of Sagicor Financial Corporation on January 1, 2014, having previously served in the positions of Vice President, Legal and Compliance of Sagicor Life Inc and Corporate Secretary of Life of Barbados Limited. An Attorney-at-Law, Chartered Secretary and Compliance Professional, Mrs Hazzard joined the Group in 1997 after an eight-year attachment to a leading corporate law firm in Barbados, specialising in international business. Mrs Hazzard holds a Bachelor of Laws Honors Degree from the University of the West Indies and a Certificate in Legal Education from the Hugh Wooding Law School in Trinidad, and was called to the Bar in Barbados and Trinidad and Tobago in 1989. She obtained her Master of Laws degree from the University of Cambridge, United Kingdom, and also holds International Diplomas in Compliance and Anti-money Laundering from the International Compliance Association in the United Kingdom and the Executive Diploma in Management from the UWI Centre for Management Development (now the Cave Hill School of Business). Mrs Hazzard is a professional member of the International Compliance Association and a Fellow of the Institute of Chartered Secretaries and Administrators in Canada. 80 2014 Annual Report Sagicor Financial CorporationMAXINE MACLURE* BSc, MEd, MBA Executive Vice President, Corporate Services and Chief Compliance Officer Maxine MacLure was appointed Executive Vice President, Corporate Services, Sagicor Financial Corporation in February 2007. Prior to this, she served as President and CEO, Sagicor USA, from March 2004. Ms MacLure joined Sagicor in December 2001 as President and CEO of Life of Jamaica (LOJ). Before joining Sagicor, Ms MacLure was General Manager of Insurance for FINSAC in Jamaica, where she ran a 2-year insurance reform project sponsored by the Inter-American Development Bank and the Jamaican Government. She also spent 7 years as a senior Financial Sector Regulator in Canada, and 11 years in banking in Canada and the UK. 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. RAVI RAMBARRAN BSc, MSc, FIA President and Chief Executive Officer, Sagicor International Ravi Rambarran has 25 years of experience, both regionally and internationally, in the pension, insurance and asset management industries. He was awarded an Open Mathematics Scholarship by the Government of Trinidad and Tobago, has a BSc (Hons) in Actuarial Science from City University, London, an MSc in Finance from the University of London, and is a Fellow of the Institute of Actuaries. He is a member of the Executive of the Caribbean Actuarial Association and represents the Caribbean on the International Actuarial Association Insurance Committee. * Ms MacLure retired on December 31, 2014 2014 Annual Report 81 Sagicor Financial Corporation175 years of wisdom When we act wisely, we act best. Our guiding principle is, and always has been, to do what is wise. For 175 years, we have seen the rewards. INDEX TO THE FINANCIAL STATEMENTS AND NOTES Page Page Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 9 Financial Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Appointed Actuary’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 10 Reinsurance Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Consolidated Financial Statements: 11 Income Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 12 Miscellaneous Assets and Receivables. . . . . . . . . . . . . . . . . . . . . . . . . 132 Statement of Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 13 Actuarial Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 14 Other Insurance Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 15 Investment Contract Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 16 Notes and Loans Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 Notes to the Financial Statements: 17 Deposit and Security Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 1 Incorporation and Principal Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 93 18 Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 2 Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 19 Income Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 3 Critical Accounting Estimates and Judgements. . . . . . . . . . . . . . . . . . 112 20 Accounts Payable and Accrued Liabilities . . . . . . . . . . . . . . . . . . . . . . 138 4 5 Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 21 Common and Preference Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 Investment Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 22 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 6 Associates and Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 23 Participating Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 7 8 Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 24 Premium Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 25 Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 84 2014 Annual Report Sagicor Financial Corporation Page Page 26 Fees and Other Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 43 Insurance Risk - Life, Annuity & Health Contracts . . . . . . . . . . . . . . . 186 27 Policy Benefits & Change in Actuarial Liabilities . . . . . . . . . . . . . . . . . 144 44 Fiduciary Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 28 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 45 Statutory Restrictions on Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 29 Employee Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 46 Capital Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 30 Equity Compensation Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 47 Relative Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 31 Employee Retirement Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 48 Events after December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 32 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 33 Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 34 Earnings Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 35 Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 36 Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 37 Subsidiary Acquisition and Ownership Changes . . . . . . . . . . . . . . . . . 157 38 Discontinued Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 39 Contingent Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 40 Fair Value of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 41 Financial Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 42 Insurance Risk - Property & Casualty Contracts . . . . . . . . . . . . . . . . . 184 2014 Annual Report 85 Sagicor Financial Corporation AUDITOR’S REPORT 86 2014 Annual Report Sagicor Financial CorporationACTUARY’S REPORT 2014 Annual Report 87 Sagicor Financial CorporationDRAFT - CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2014 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2014 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 Amounts expressed in US$000 Note 2014 2013 Note 2014 2013 ASSETS Investment property Property, plant and equipment Associates and joint ventures Intangible assets Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Total assets 5 7 6 8 9 10 11 12 88,766 169,469 40,806 76,056 98,369 151,539 44,202 71,893 LIABILITIES Actuarial liabilities Other insurance liabilities Investment contract liabilities Total policy liabilities 4,661,494 4,191,766 Notes and loans payable 527,171 57,503 156,630 402,525 336,427 29,035 148,151 226,370 Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities 6,180,420 5,297,752 Liabilities of discontinued operation These financial statements have been approved for issue by the Board of Directors on March 27, 2015. Director Director Total liabilities EQUITY Share capital Reserves Retained earnings Total shareholders’ equity Participating accounts Non-controlling interest in subsidiaries Total equity 13 14 15 16 17 18 19 20 38 21 22 23 2,562,221 2,324,319 197,420 360,961 194,434 367,001 3,120,602 2,885,754 298,942 290,160 1,623,971 1,106,083 78,356 41,767 197,444 45,796 75,083 29,225 131,237 55,024 5,406,878 4,572,566 295,989 (8,765) 244,474 531,698 364 241,480 773,542 295,450 (4,825) 221,472 512,097 (5,662) 218,751 725,186 Total liabilities and equity 6,180,420 5,297,752 88 Sagicor Financial Corporation 2014 Annual Report 2  DRAFT - CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF INCOME Year ended December 31, 2014 Year ended December 31, 2014 Note 2014 2013 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 Amounts expressed in US$000 Note 2014 2013 Net income from continuing operations Net loss from discontinued operation 38 NET INCOME FOR THE YEAR 100,305 (26,367) 73,938 79,628 (75,508) 4,120 REVENUE Premium revenue Reinsurance premium expense Net premium revenue Net investment income Fees and other revenue Gain arising on acquisition 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 and asset taxes Finance costs Depreciation and amortisation Total expenses INCOME BEFORE TAXES Income taxes NET INCOME FROM CONTINUING OPERATIONS 3    24 24 25 26 37 27 27 28 32 889,121 (263,564) 625,557 307,215 83,344 29,051 1,016,538 (359,510) 657,028 279,350 103,105 - 1,045,167 1,039,483 714,770 (236,292) 478,478 63,739 542,217 797,743 (262,564) 535,179 57,611 592,790 Net income/(loss) is attributable to: Common shareholders: From continuing operations From discontinued operation Participating policyholders Non-controlling interests Basic earnings /(loss) per common share: 34 From continuing operations From discontinued operation 233,742 203,959 Fully diluted earnings /(loss) per common share: 34 From continuing operations From discontinued operation 97,965 11,474 22,544 20,220 385,945 117,005 (16,700) 100,305 99,821 11,988 17,143 15,230 348,141 98,552 (18,924) 79,628 53,737 (26,367) 27,370 6,200 40,368 73,938 39,138 (75,508) (36,370) 5,005 35,485 4,120 17.3 cents 12.5 cents (8.7) cents (25.1) cents 8.6 cents (12.6) cents 16.6 cents 12.2 cents (8.2) cents (24.8) cents 8.4 cents (12.6) cents 2014 Annual Report 2014 Annual Report   Sagicor Financial Corporation  89 89 DRAFT - CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended December 31, 2014 Year ended December 31, 2014 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 Amounts expressed in US$000 OTHER COMPREHENSIVE INCOME Note 2014 2013 TOTAL COMPREHENSIVE INCOME 2014 2013 Items net of tax that may be reclassified subsequently to income: 35 Available for sale assets: Gains / (losses) on revaluation Gains transferred to income Net change in actuarial liabilities Retranslation of foreign currency operations Items net of tax that will not be reclassified subsequently to income: Gains on revaluation of owner-occupied property Gains / (losses) on defined benefit plans Other items 35 38,386 (2,830) (19,970) (22,036) (6,450) 27 13,212 (108) 13,131 (47,442) (14,769) 30,445 (36,441) (68,207) 3,813 (9,475) - (5,662) OTHER COMPREHENSIVE INCOME / (LOSS) FROM CONTINUING OPERATIONS 6,681 (73,869) Other comprehensive income from discontinued operation 38 - OTHER COMPREHENSIVE INCOME / (LOSS) FOR THE YEAR 6,681 19,272 (54,597) Net income Other comprehensive income TOTAL COMPREHENSIVE INCOME / (LOSS) FOR THE YEAR 73,938 6,681 4,120 (54,597) 80,619 (50,477) Total comprehensive income / (loss) is attributable to: Common shareholders: From continuing operations From discontinued operation Participating policyholders Non-controlling interests 64,156 (26,367) 37,789 6,262 36,568 80,619 (515) (56,236) (56,751) 4,913 1,361 (50,477) 90 2014 Annual Report Sagicor Financial Corporation 4  DRAFT - CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2014 Year ended December 31, 2014 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 Amounts expressed in US$000 Share Capital (note 21) Reserves (note 22) Retained Earnings Total Shareholders’ Equity Participating Accounts (note 23) Non-controlling Interests Total Equity 2014 Balance, beginning of year 295,450 Total comprehensive income from continuing operations Total comprehensive income from discontinued operation Transactions with holders of equity instruments: Movements in treasury shares Changes in reserve for equity compensation benefits Dividends declared (note 21.3) Changes in ownership interest in subsidiaries Transfers and other movements Balance, end of year 2013 (4,825) 2,556 - - (463) - - (6,033) 221,472 61,600 (26,367) - - 512,097 64,156 (26,367) 539 (463) (19,835) (19,835) 1,499 6,105 1,499 72 - - 539 - - - - Balance, beginning of year 296,058 Total comprehensive income from continuing operations Total comprehensive income from discontinued operation Transactions with holders of equity instruments: Movements in treasury shares Changes in reserve for equity compensation benefits Dividends declared (note 21.3) Transfers and other movements Balance, end of year - - (608) - - - 295,450 16,411 (36,413) 19,272 - 2,123 - (6,218) (4,825) 274,565 35,898 (75,508) - - (19,835) 6,352 221,472 587,034 (515) (56,236) (608) 2,123 (19,835) 134 512,097 5    (5,662) 6,262 218,751 36,568 725,186 106,986 (26,367) 539 (384) (32,138) (280) - 803,134 5,759 (56,236) (608) 2,178 - - 79 (12,303) (1,779) 164 - - 55 (10,333) 4,913 226,433 1,361 - - - - - (236) 364 - - - - (242) (5,662) (9,182) (29,017) 84 (24) 218,751 725,186 2014 Annual Report 2014 Annual Report   Sagicor Financial Corporation  91 91 295,989 (8,765) 244,474 531,698 241,480 773,542 DRAFT - CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 2014 Year ended December 31, 2014 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US $000 Amounts expressed in US$000 Note 2014 2013 Note 2014 2013 OPERATING ACTIVITIES Income before taxes 117,005 Adjustments for non-cash items, interest and dividends 36.1 (185,855) 98,552 (75,741) FINANCING ACTIVITIES Movement in treasury shares Shares issued to non-controlling interests (1,114) - Interest and dividends received Interest paid Income taxes paid Net increase in investments and operating assets Net increase in operating liabilities Acquisition of insurance portfolio, net of cash and cash equivalents 36.1 36.1 13.2 275,582 258,552 (81,518) (19,402) (73,683) (28,063) (245,772) (351,404) 305,976 183,379 - 30,699 Other notes and loans payable, net 36.3 (683) Dividends paid to common shareholders Dividends paid to preference shareholders Dividends paid to non-controlling interests Net cash flows - financing activities (11,819) (7,800) (11,498) (32,914) (622) (18) 42,432 (11,849) (7,810) (9,007) 13,126 Net cash flows - operating activities 166,016 42,291 Effects of exchange rate changes 7,925 21 INVESTING ACTIVITIES Property, plant and equipment, net 36.2 (20,916) (18,284) Associates and joint ventures, net Intangible assets, net 7,320 (2,469) Acquisition of subsidiary, net of cash and cash equivalents 37 93,227 Sale of subsidiaries, net of disposal costs Net cash flows - investing activities - 77,162 1,082 (1,015) - 86,697 68,480 NET CHANGE IN CASH AND CASH EQUIVALENTS - CONTINUING OPERATIONS Net change in cash and cash equivalents - discontinued operation 218,189 123,918 (35,595) (78,882) Cash and cash equivalents, beginning of year 258,600 CASH AND CASH EQUIVALENTS, END OF YEAR 36.4 441,194 213,564 258,600 92 2014 Annual Report Sagicor Financial Corporation 6  DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 93 Amounts expressed in US$000 1 INCORPORATION AND PRINCIPAL ACTIVITIES 2 ACCOUNTING POLICIES Sagicor Financial Corporation was incorporated on December 6, 2002 under the Companies Act of Barbados as a public limited liability holding company. On December 6, 2002, Sagicor Life Inc was formed following its conversion from The Barbados Mutual Life Assurance Society (The Society). On December 30, 2002, Sagicor Financial Corporation allotted common shares to the eligible policyholders of The Society and became the holding company of Sagicor Life Inc. The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. 2.1 Basis of preparation 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 notes 4 and 38. These consolidated financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The principal activities of the Sagicor Group are as follows:     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 activities. The Group has adopted accounting policies for the computation of actuarial liabilities of life insurance and annuity contracts which comply with the Canadian accepted actuarial standards. As no specific guidance is provided by IFRS for computing actuarial liabilities, management has judged that Canadian accepted actuarial standards 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.   7    2014 Annual Report   Sagicor Financial Corporation  93 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 94DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 2.1 Basis of preparation (continued) 2.2 Basis of consolidation (continued) (a) Amendments to IFRS A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2014, and have not been applied in preparing these consolidated financial statements (see note 2.25). 2.2 Basis of consolidation (a) Subsidiaries Subsidiaries are entities over which the Group has control. The Group has control over an entity when the Group is exposed to the variable returns from its ownership interest in the entity and when the Group has the ability to affect those returns through its power over the entity. 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. 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 non-controlling interest. Acquisition-related costs are expensed as incurred. The excess of the cost of the acquisition, the non-controlling 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. Non-controlling interest balances represent the equity in a subsidiary not attributable to Sagicor’s interests. On an acquisition by acquisition basis, the Group recognises at the date of acquisition the components of any non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s net identifiable assets. The latter option is only available if the non-controlling interest component is entitled to a proportionate share of net identifiable assets of the acquiree in the event of liquidation. For certain components of non-controlling interests, other IFRS may override the fair value option. Non-controlling interest balances are subsequently re-measured by the non-controlling’s proportionate share of changes in equity after the date of acquisition. 94 2014 Annual Report Sagicor Financial Corporation 8  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.2 Basis of consolidation (continued) (b) Discontinued operation In December 2012, the Group agreed to sell Sagicor Europe Limited, its subsidiary Sagicor at Lloyd's Limited and its interest in Lloyd's of London syndicate 1206. The decision to sell resulted in the closure of the Sagicor Europe operating segment and therefore met the criteria of a discontinued operation. The sale was concluded in December 2013. Consequently, the balances and results associated with the discontinued operation have been classified separately in these financial statements. As of December 31, 2014, the future price adjustments relating to the discontinued operation are disclosed in the statement of financial position at their estimated undiscounted value. Prior to the sale (as of December 31, 2012 and during interim financial periods in 2013), the net assets of the discontinued operation were carried in the statement of financial position at their estimated fair value less costs to sell. As this amount was less than the previous carrying value, impairments were recorded and applied to the goodwill and intangible assets component of the discontinued operation's assets. (c) Sale of subsidiaries On the sale of or loss of control of a subsidiary, the Group de-recognises the related assets, liabilities, non-controlling 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 sale recorded in income is the excess (or shortfall) of the fair value of the consideration received over the de-recognised and reclassified balances. (d) Associates and joint venture 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. Sagicor Financial Corporation 95 Amounts expressed in US$000 2.2 Basis of consolidation (continued) Investments in associate and joint venture companies are originally recorded at cost and include intangible assets identified on acquisition. Accounting policies have been changed where necessary to ensure consistency with the accounting policies adopted by the Group. The Group recognises in income its share of associates and joint venture 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 and joint ventures are eliminated to the extent of the Group’s interest. The Group recognises in other comprehensive income, its share of post acquisition other comprehensive income. (e) Pension and investment funds Insurers have issued deposit administration and unit linked contracts in which the full return of the assets supporting these contracts accrue directly to the contract-holders. As these contracts are not operated under separate legal trusts, they have been consolidated in these financial statements. The Group manages a number of segregated pension funds, 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 Trust are applied towards the future purchase of Company shares. 9    2014 Annual Report   Sagicor Financial Corporation  95 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 96 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.3 Foreign currency translation (a) Functional and presentational currency 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. Sagicor Financial Corporation Amounts expressed in US$000 2.3 Foreign currency translation (continued) 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. The consolidated financial statements are presented in thousands of United States dollars, which is the Group’s presentational currency. (c) Transactions and balances (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. (ii) Assets and liabilities are translated at the exchange rates ruling on December 31. (iii) Resulting exchange differences are recognised in other comprehensive income. 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: 2014 closing 2014 average 2013 closing 2013 average Barbados dollar 2.0000 Eastern Caribbean dollar 2.7000 2.0000 2.7000 2.0000 2.7000 Jamaica dollar 114.3232 110.5386 105.9952 Trinidad & Tobago dollar 6.3586 Pound sterling 0.64070 6.3920 0.60482 6.4386 0.60500 2.0000 2.7000 99.7566 6.4064 0.64036 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 policy 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. 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. 2.4 Segments Reportable operating segments have been defined on the basis of performance and resource allocation decisions of the Group’s Chief Executive Officer. 96 2014 Annual Report Sagicor Financial Corporation 10  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 97 Amounts expressed in US$000 2.5 Investment property 2.6 Property, plant and equipment (continued) 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 as determined by independent valuation, with the appreciation or depreciation in value being taken to investment income. Fair value represents the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at valuation date. Investment property includes property partially owned by the Group and held under joint operations with third parties for which the Group recognises its share of the joint operation's assets, liabilities, revenues, expenses and cash flows. 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 property. Rental income is recognised on an accrual basis. 2.6 Property, plant and equipment Property, plant and equipment are recorded initially at cost. Subsequent expenditure is capitalised when it will result in future economic benefits to the Group. Owner-occupied property is re-valued at least every three years to its fair value as determined by independent valuation. Fair value represents the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at valuation date. 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. Owner-occupied property includes property held under joint operations with third parties for which the Group recognises its share of the joint operation's assets, liabilities, revenues, expenses and cash flows. On the disposal of owner-occupied property, the amount included in the fair value reserve is transferred to retained earnings. 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 11    Lands are not depreciated. 2014 Annual Report   Sagicor Financial Corporation  97 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 98 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.6 Property, plant and equipment (continued) An impairment loss is recognised for the amount by which an 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. 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. 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. Sagicor Financial Corporation Amounts expressed in US$000 2.7 Intangible assets (continued) (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. 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 estimated useful lives of recognised intangible assets are as follows: Class of intangible asset Asset Estimated useful life Goodwill arising from an investment in an associate is included in the carrying value of the investment. Customer related Goodwill is tested annually for impairment and whenever there is an indication of impairment. Goodwill is carried at cost less accumulated impairment. An impairment loss is recognised for the amount by which the carrying amount of goodwill exceeds its recoverable amount. The recoverable amount is the higher of an operating segment's (or operation's) fair value less costs to sell and its value in use. On the 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. Contract based Technology based Licences Software Customer relationships 4 - 20 years Broker relationships 10 years 15 years 2 – 10 years 98 2014 Annual Report Sagicor Financial Corporation 12  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.8 Financial assets (a) Classification The Group classifies its financial assets into four categories:     held to maturity financial assets; available for sale financial assets; financial assets at fair value through income; loans and receivables. Management determines the appropriate classification of these assets on initial recognition. 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. 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 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. Sagicor Financial Corporation 99 Amounts expressed in US$000 2.8 Financial assets (continued) (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. 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. 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  Held for trading securities are acquired principally for the purpose of selling in the 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. Fair value amounts represent the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at valuation date. 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. 13    2014 Annual Report   Sagicor Financial Corporation  99 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 100 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.8 Financial assets (continued) (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. For an available for sale equity security or investment in an associated company, 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 and a decline that has persisted for more than twelve months to be prolonged. Any subsequent increase in fair value occurring after the recognition of an impairment loss is reported in other comprehensive income. 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. Sagicor Financial Corporation Amounts expressed in US$000 2.8 Financial assets (continued) (e) Securities purchased for resale Securities purchased under agreements to resell are recognised initially at fair value and are subsequently stated at amortised cost. Securities purchased for resale 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. (g) 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. 100 2014 Annual Report Sagicor Financial Corporation 14  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.9 Real estate developed or held for resale Lands being made ready for resale along with the cost of infrastructural works are classified as real estate held for resale and are stated at the lower of carrying value and fair value less costs to sell. 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. Gains and losses realised on the sale of real estate are included in revenue at the time of sale. 2.10 Policy contracts (a) Classification The Group issues policy contracts that transfer insurance risk and / or financial risk from the policyholder. The Group defines insurance risk as an insured event that could cause an insurer to pay significant additional benefits in a scenario that has a discernible 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. Sagicor Financial Corporation 101 Amounts expressed in US$000 2.10 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:     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 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. o o o 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 (i) Property and casualty insurance contracts Property and casualty insurance contracts are generally one year renewable contracts issued by the insurer covering insurance risks over property, motor, accident and liability. 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 commercial policyholders insurance may include coverage for loss of earnings arising from the inability to use property which has been damaged or lost. Casualty insurance contracts provide coverage for the risk of causing physical harm or financial loss to third parties. Personal accident, employers’ liability, public liability, product liability and professional indemnity are common types of casualty insurance. 15    2014 Annual Report   Sagicor Financial Corporation  101 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 102DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.10 Policy contracts (continued) 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. 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. 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. the financial statements, commissions, premium Commissions and premium taxes payable are recognised on the same basis as premiums earned. At the date of taxes and acquisition-related administrative expenses attributable to 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. Sagicor Financial Corporation Amounts expressed in US$000 2.10 Policy contracts (continued) (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 accrued 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 2.11. 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. (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 automatic premium loan may settle the premium, or the contract may continue at a reduced value. 102 2014 Annual Report Sagicor Financial Corporation 16  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 103 Amounts expressed in US$000 2.10 Policy contracts (continued) 2.10 Policy contracts (continued) 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 2.11. 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. 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 or maturity date of the contract, or on the annuity payment date. Reserves for future policy liabilities are recorded as described in note 2.11. An insurer may obtain reinsurance coverage for death benefit insurance risks. Typically, coverage is obtained for individual coverage exceeding prescribed limits. The reinsurance premium is expensed when due, which generally coincides with when the policy premium is due. Reinsurance claims recoveries are established at the time of claim notification. Commissions and premium taxes payable are recognised on the same basis as earned premiums. Commissions and premium taxes payable are generally recognised only on settlement of premiums. (iv) Long-term universal life and unit linked insurance contracts (v) Reinsurance contracts assumed 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. 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. 17    2014 Annual Report   Sagicor Financial Corporation  103 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 104DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 2.10 Policy contracts (continued) 2.10 Policy contracts (continued) 2.11 Actuarial liabilities (continued) 2.12 Financial liabilities 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 under reinsurance contracts held are included in accounts payable and accrued liabilities and in actuarial liabilities. Reinsurance balances are measured consistently with the insurance liabilities to which they relate. 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 these cases, the entire contract liability is measured as set out in note 2.11. (vii) Deposit administration and other investment contracts (d) Liability adequacy tests Deposit administration contracts are issued by an insurer to registered pension schemes for the deposit of pension plan assets with the insurer. Deposit administration liabilities are recognised initially at fair value and are subsequently stated at: amortised cost where the insurer is obligated to provide investment returns to the pension scheme in the form of interest; • • fair value through income where the insurer is obligated to provide investment returns to 2.11 Actuarial liabilities the pension scheme in direct proportion to the investment returns on specified blocks of assets. (a) Life insurance and annuity contracts 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. 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. The determination of actuarial liabilities of long-term insurance contracts has been done using Canadian accepted actuarial standards. These liabilities consist of the 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. Canadian standards may change from time to time, but infrequently. included in actuarial liabilities. (b) Health insurance contracts 104 2014 Annual Report Sagicor Financial Corporation 18  19      Sagicor Financial Corporation  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 resulting provisions for adverse deviations will be included in future income to the extent they are released when they are no longer required to cover adverse experience. Assumptions used to project benefits, expenses and taxes are based on insurer and industry experience and are updated annually. The Canadian accepted actuarial standards for the valuation of policy liabilities are 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. 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 2.10(b) (vii) and in the following paragraphs. (a) Securities sold for re-purchase Securities sold under agreements to repurchase are recognised initially at fair value and are subsequently stated at amortised cost. Securities sold for re-purchase are treated as collateralised financing transactions. The difference between the sale and re-purchase price is treated as interest and is accrued over the life of the agreements using the effective yield method. Under this methodology, assets of each insurer are selected to back its actuarial liabilities. 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 unrealised effective yield method. gains or losses in fair value are recorded in other comprehensive income. The fair value reserve for actuarial liabilities has been established in the statement of equity for the accumulation of changes in (c) Loans and other debt obligations actuarial liabilities which are recorded in other comprehensive income and which arise from recognised unrealised gains or losses in fair value of available for sale securities. (b) Deposit liabilities 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 Deposits are recognised initially at fair value and are subsequently stated at amortised cost using the Loans and other debt obligations are recognised initially at fair value, being their issue proceeds, net of transaction costs incurred. Subsequently, 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. 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, leasing or portfolio investments are classified as deposit and security liabilities and the associated cost is included in interest expense. The actuarial liabilities of health insurance policies are estimated in respect of claims that have been incurred but not yet reported or settled. (d) Fair value Fair value amounts represent the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at valuation date. Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.11 Actuarial liabilities (continued) 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 resulting provisions for adverse deviations will be included in future income to the extent they are released when they are no longer required to cover adverse experience. Assumptions used to project benefits, expenses and taxes are based on insurer and industry experience and are updated annually. The Canadian accepted actuarial standards for the valuation of policy liabilities are 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 this methodology, assets of each insurer are selected to back its actuarial liabilities. 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 unrealised gains or losses in fair value are recorded in other comprehensive income. The fair value reserve for actuarial liabilities has been established in the statement of equity for the accumulation of changes in actuarial liabilities which are recorded in other comprehensive income and which arise from recognised unrealised gains or losses in fair value of available for sale securities. 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. (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. Sagicor Financial Corporation 105 Amounts expressed in US$000 2.12 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 2.10(b) (vii) and in the following paragraphs. (a) Securities sold for re-purchase Securities sold under agreements to repurchase are recognised initially at fair value and are subsequently stated at amortised cost. Securities sold for re-purchase are treated as collateralised financing transactions. The difference between the sale and re-purchase 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) Loans and other debt obligations Loans and other debt obligations are recognised initially at fair value, being their issue proceeds, net of transaction costs incurred. Subsequently, 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. 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, leasing or portfolio investments are classified as deposit and security liabilities and the associated cost is included in interest expense. (d) Fair value Fair value amounts represent the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at valuation date. 19    2014 Annual Report   Sagicor Financial Corporation  105 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 106 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.13 Provisions Sagicor Financial Corporation Amounts expressed in US$000 2.15 Offsetting financial instruments 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. Financial assets and liabilities are offset and the net amount is reported in the statement of financial position when there is a legally enforceable right to offset and there is an intention to settle on a net basis or to realise the asset and settle the liability simultaneously. 2.14 Derivative financial instruments and hedging activities 2.16 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. 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. 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. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate. 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. 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 net investment income or interest expense. 106 2014 Annual Report Sagicor Financial Corporation 20  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.17 Employee benefits (a ) Pension benefits Group companies have various pension schemes in place for their employees. Some schemes are defined benefit plans and others are defined contribution plans. The liability in respect of defined benefit plans is the present value of the defined benefit obligation at December 31 less the fair value of plan assets. 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 on government bonds for the maturity dates and currency of the related liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the other comprehensive income and retained earnings or non-controlling interest in the period in which they arise. Past service costs are charged to income in the period in which they arise. 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. Contributions are recognised in income in the period in which they are due. (b) Other retirement benefits Certain Group subsidiaries provide supplementary health 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. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to the other comprehensive income and retained earnings or non-controlling interest in the period in which they arise. Sagicor Financial Corporation 107 Amounts expressed in US$000 2.17 Employee benefits (continued) (c) Profit sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit sharing, based on various profit and other objectives of the Group as a whole or of individual subsidiaries. An accrual is recognised where there are contractual obligations or where past practice has created a constructive obligation. (d) Equity compensation benefits The Group has a number of share-based compensation plans in place for administrative, sales and managerial staff. (i) Equity-settled share-based transactions with staff The services received in an equity-settled transaction with staff are measured at the fair value of the equity instruments granted. The fair value of those equity instruments is measured at grant date. If the equity instruments granted vest immediately and the individual is not required to complete a further period of service before becoming entitled to those instruments, the services received are recognised in full on grant date in the income statement for the period, with a corresponding increase in equity. Where the equity instruments do not vest until the individual has completed a further period of service, the services received are expensed in the income statement during the vesting period, with a corresponding increase in the reserve for equity compensation benefits or in non-controlling 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 reserve for equity compensation benefits are transferred to share capital or non- controlling interest either on the distribution of share grants or on the exercise of share options. 21    2014 Annual Report   Sagicor Financial Corporation  107 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 108 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.17 Employee benefits (continued) 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 Sagicor Financial Corporation Amounts expressed in US$000 2.18 Taxes (a) Premium taxes Insurers are subject to tax on premium revenues generated in certain jurisdictions. The principal rates of tax are summarised in the following table. 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 value recognised in income during that period. (iii) Measurement of the fair value of equity instruments granted Premium tax rates Barbados Jamaica Trinidad and Tobago 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. Life insurance and non-registered annuities Health insurance 3% - 6% 3% 15% 4% Nil Nil Nil Property and casualty insurance 3% - 5% Nil Nil Nil United States of America 0.75% - 3.5% (b) Asset tax The Group is subject to an asset tax in Jamaica and Barbados. In Jamaica, the asset tax is levied on insurance, securities dealers and deposit taking institutions, and is 0.14% of adjusted assets held at the end of the year. In Barbados, the asset tax is levied on insurance, deposit taking institutions and credit unions and is 0.20% of adjusted assets held at the end of a period. (c) Income taxes The Group is subject to taxes on income in the jurisdictions in which business operations are conducted. Rates of taxation in the principal jurisdictions for the current year are set out in the next table. 108 2014 Annual Report Sagicor Financial Corporation 22  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 109 Amounts expressed in US$000 2.18 Taxes (continued) Income tax rates Barbados Jamaica Trinidad and Tobago United States of America (i) Current income taxes Life insurance and non-registered annuities 5% of gross investment income 15% of investment income 15% - 25% of investment income 35% of net income Registered annuities Other lines of business Nil Nil Nil Nil 25% of net income 15% - 33.33% of net income 25% of net income 35% of net income 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 enacted or substantially enacted by the end of the reporting period. 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 and once they relate to the same entity. 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. 2.19 Common and preference shares (a) Common shares 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. (b) Preference shares On July 18, 2011, the Company issued convertible redeemable preference shares that are accounted for as a compound financial instrument. The shares are contractually redeemable on July 18, 2016 if the shareholder has not opted to convert the shares prior to this date. Dividends may be declared semi-annually by the Company’s directors. The redemption value is recognised as a contractual liability, and is measured initially at its discounted fair value. The discount rate reflects as of July 18, 2011: (i) the rate of interest applicable to a similar liability with a contractual dividend rate, and (ii) the interest premium required by the shareholder for an instrument with a non-contractual dividend. The liability component is disclosed in note 16. The preference shareholders’ rights to receive dividends is recognised within shareholders’ equity, and is measured initially as the residual fair value of the preference shares in their totality after deducting the liability for the redemptive value. The equity component is initially recorded as a preference share reserve in note 22. Incremental costs directly attributable to the issue of the preference shares are allocated between the liability for the redemption value and the equity reserve in proportion to their initial carrying amounts. After initial recognition, the liability component is accreted to its ultimate redemption value using the effective interest yield method, with the accretion being recorded as a finance cost in the statement of income. After initial recognition, the preference share reserve is transferred to retained earnings pro- rata to the dividends declared over the period to redemption. 23    2014 Annual Report 109   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 110 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 2.19 Common and preference shares (continued) 2.20 Participating accounts (continued) On the initial recognition of the preference shares, the conversion feature of the instrument was deemed to have no value. Subsequently, when a number of preference shares are converted to common shares, the associated liability for redemption will be extinguished and consequently will be transferred to the share capital account for common shares. Additionally at conversion, the proportion of the preference share reserve attributable to the converted number of preference shares will also be transferred to the share capital account for common shares. In summary, the total transfer to the share capital account for common shares will approximate the original consideration for the converted number of preference shares less attributable issue costs. (c) Dividends On the declaration by the Company’s directors of common or preference share dividends payable, the total value of the dividend is recorded as an appropriation of retained earnings. 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. 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 are included in the allocation of Group net income to shareholders. Undistributed profits / (losses) remain in the participating account in equity.  110 2014 Annual Report Sagicor Financial Corporation 24  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 2.20 Participating accounts (continued) (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. Sagicor Financial Corporation 111 Amounts expressed in US$000 2.23 Fees and other revenue 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. 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. 2.24 Cash flows 2.21 Statutory reserves Statutory reserves are established when regulatory accounting requirements result in lower distributable profits or when an appropriation of retained earnings is required or permitted by law to protect policyholders, insurance beneficiaries or depositors. 2.22 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.  The following classifications apply to the cash flow statement. Cash flows from operating activities consist of cash flows arising from revenues, benefits, expenses, taxes, operating assets and operating liabilities. Cash flows from investing activities consist of cash flows arising from long-term tangible and intangible assets to be utilised in the business and in respect of changes in subsidiary holdings, insurance businesses, and associated company and joint venture investments. Cash flows from financing activities consist of cash flows arising from the issue, redemption and exchange of equity instruments and notes and loans payable and from equity dividends payable to holders of such instruments. Cash and cash equivalents comprise:      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 commitments and which have maturities of three months or less from origination. Cash equivalents are subject to an insignificant risk of change in value. 25    2014 Annual Report 111   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 112 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 2.25 Future accounting developments and reporting changes IFRS (Effective Date) Subject / Comments Certain new standards and amendments to existing standards have been issued but are not effective for the periods covered by these financial statements. The changes in standards and interpretations which may have a significant effect on future presentation, measurement or disclosure of the Group’s financial statements are summarised in the following tables. IFRS 15 – Revenue from contracts with customers (January 1, 2017) IFRS (Effective Date) Subject / Comments IFRS 9 – Financial Instruments (January 1, 2018) Classification and measurement of financial instruments IFRS 9, addresses the classification, measurement and recognition of financial assets and financial liabilities. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through OCI and fair value through P&L. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one management actually use for risk management purposes. The group is yet to assess IFRS 9’s full impact. from an entity’s contracts with customers. Revenue IFRS 15 deals with revenue recognition and establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising is recognised when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the benefits from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The group is assessing the impact of IFRS 15. There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group. 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. 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. 112 2014 Annual Report Sagicor Financial Corporation 26  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 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 after tax of these business units and the expected returns to providers of capital to the business units and / or to the Group as a whole. For the Sagicor Life reporting segment, the Group uses an actuarial appraisal value technique for testing goodwill impairment. 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. The assessment of whether goodwill is impaired can be highly sensitive to the inputs of cash flows, income after tax, discount rate, growth rate or capital multiple, which are used in the computation. Further details of the inputs used are set out in note 8.2. (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. Sagicor Financial Corporation 113 Amounts expressed in US$000 3.4 Valuation of actuarial liabilities (a) Canadian Actuarial Standards 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 as the present value of liability cash flows discounted at effective interest rates resulting in a value equivalent to the market value of assets supporting these policy liabilities under an adverse economic scenario. The AA identifies a conservative economic scenario forecast, and together with the existing investment portfolio as at the date of the actuarial valuation and assumed reinvestment of net asset and policy liability cash flows, calculates the actuarial liabilities required at the date of valuation to ensure that sufficient monies are available to meet the liabilities as they become due in future years. The methodology produces the total reserve requirement for each policy group fund. In general, the methodology is used to determine the net overall actuarial liabilities required by the insurer. Actuarial liabilities are computed by major group of policies and 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, and other individual 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. 27    2014 Annual Report   Sagicor Financial Corporation  113 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 114 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 3.4 Valuation of actuarial liabilities (continued) 3.5 Property and casualty 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 The property and casualty insurance contracts issued by Sagicor at Lloyd's insurance syndicate 1206 (the principal business of the discontinued operation) up to and including the 2013 underwriting year of account contain material accounting judgements which may affect the Group's results until the close of the run-off period contracted with the purchaser of the discontinued operation. The significant judgements are summarised in the following sections. (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. Reserving for claims payable, involves 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. 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. Sig nificant 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. A variety of standard actuarial reserving methods are utilised to estimate claim liabilities, including frequency-severity claims development, expected claims methodologies. An independent actuary is engaged to confirm the claim liabilities recognised by the syndicate as of the date of the financial statements. The ultimate liability arising from claims incurred under property and casualty insurance contracts may be mitigated by recovery arising from reinsurance contracts held. ratio, Bornhuetter-Ferguson and (b) Carrying value of the assets and liabilities of the discontinued operation As of December 31, 2014, the liability of the discontinued operation is the estimated residual liability due to the purchaser arising from the estimated results of the syndicate for the underwriting years of account up to and including 2013 until the end of the run-off period. The reported liability is also impacted by movements in various foreign exchange rates as the insured risks are denominated in a number of different currencies. 114 2014 Annual Report Sagicor Financial Corporation 28  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 115 Amounts expressed in US$000 4 SEGMENTS 4 SEGMENTS (continued) 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. 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. In accordance with the relevant financial reporting standard, the Group has determined that there are three principal subsidiary Groups within continuing operations which represent the reportable operating segments of Sagicor. These segments and other Group companies are set out in the following sections. Details of the discontinued operating segment are set out in note 38. (a) Sagicor Life These comprise Group subsidiaries conducting life, health and annuity insurance business, and pension administration services in (i) Barbados, Eastern Caribbean, Dutch Caribbean, Bahamas and Central America and (ii) Trinidad and Tobago. As these two segments are broadly similar in products, services, distribution, administrative and regulatory environment, they are presented on an aggregated basis in these financial statements. The companies are set out in the following two tables.  Sagicor Life Segment Companies Principal Activities Sagicor Life Inc(1) Sagicor Life Aruba NV Life and health insurance, annuities and pension administration services Life and health insurance, annuities and pension administration services Country of Incorporation Effective Shareholders’ Interest Barbados 100% Aruba 100% Capital Life Insurance Company Bahamas Limited Life insurance The Bahamas 100% Sagicor Panamá, SA Life and health insurance Nationwide Insurance Company Limited Life insurance Panamá Trinidad & Tobago Associates RGM Limited Property ownership and management Trinidad & Tobago FamGuard Corporation Limited Investment holding company Bahamas 100% 100% 33% 20% Principal operating company: Family Guardian Insurance Company Limited Life and health insurance and annuities Bahamas 20% Primo Holding Limited Property investment Barbados 38% (1) On December 31, 2014, Sagicor Life Inc and its wholly-owned subsidiary Sagicor Capital Life Insurance Company Limited were amalgamated under the laws of Barbados. Under the terms of the amalgamation, the two companies continue as one corporate entity under the name of Sagicor Life Inc. 29    2014 Annual Report   Sagicor Financial Corporation  115 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 116 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4 SEGMENTS (continued) (b) Sagicor Jamaica This segment comprises Group subsidiaries conducting life, health, annuity, property and casualty insurance business, and pension administration services and financial services in Jamaica, Cayman Islands and Costa Rica. Effective May 2014, Sagicor Investment Jamaica Limited (SIJL) became a wholly owned subsidiary of Sagicor Group Jamaica Limited (SGJ). Previously, Sagicor Investment Jamaica Limited was owned 85.45% (2013 – 85.45%) by Sagicor Life Jamaica Limited. The existing minority shareholders of Sagicor Investment Jamaica Limited exchanged their shares for Sagicor Group Jamaica Limited (SGJ) shares. The existing parent company, Sagicor Life Jamaica Limited exchanged their shares in SIJL for unsecured debenture bonds from SGJ. SIJL was subsequently delisted from the Jamaica Stock Exchange. The exchange of SIJL shares to SGJ shares took effect on 7 May, 2014. This transaction resulted in a reduction of the Sagicor Financial Corporation's effective shareholder's interest from 51% to 49.11%. On June 27, 2014, the Group acquired 100% of the share capital of RBC Royal Bank (Jamaica) Limited and its subsidiary, RBC Securities (Jamaica) Limited and rebranded that business to Sagicor Bank. All Jamaican subsidiaries are now wholly owned by Sagicor Group Jamaica Limited. The companies comprising this segment are as follows. Sagicor Jamaica Segment Companies Sagicor Group Jamaica Limited Principal Activities Country of Incorporation Effective Shareholders’ Interest Group holding company Jamaica 49.11%(1) Sagicor Life Jamaica Limited Life and health insurance and annuities Jamaica 49.11%(1) Sagicor Life of the Cayman Islands Limited Sagicor Pooled Investment Funds Limited Life insurance The Cayman Islands Pension fund management Jamaica 49.11% (1)  49.11% (1)  4 SEGMENTS (continued) Sagicor Jamaica Segment Companies (continued) Employee Benefits Administrator Limited Sagicor Re Insurance Limited Sagicor Insurance Brokers Limited Principal Activities Pension administration services Property and casualty insurance Sagicor Financial Corporation Amounts expressed in US$000 Country of Incorporation Effective Shareholders’ Interest Jamaica 49.11% (1)  The Cayman Islands 49.11% (1)  49.11% (1)  Insurance brokerage Jamaica Sagicor International Administrators Limited Group insurance administration Jamaica 49.11% (1)  Sagicor Insurance Managers Limited Captive insurance management services The Cayman Islands 49.11% (1)  Sagicor Property Services Limited Sagicor Investments Jamaica Limited Sagicor Bank Jamaica Limited Sagicor Costa Rica SCR, S.A. Property management Jamaica 49.11%(1) Investment banking Jamaica 49.11%(2) Commercial banking Jamaica 49.11%(2) Life insurance Costa Rica 24.56% LOJ Holdings Limited Insurance holding company Jamaica 100% Sagicor St Lucia Limited Financial services holding company (1) 51% prior to May 7, 2014. (2) 44% prior to May 7, 2014 Control of the company is established through the following: St Lucia 49.11%(1) • • • The power of the group to appoint a majority of the directors of the company and thereby direct relevant activities. The Group is exposed to the variable returns from its effective shareholder's interest. Group has the ability to use the power to affect the amount of investor's returns. The 116 2014 Annual Report Sagicor Financial Corporation 30  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4 SEGMENTS (continued) (c) Sagicor Life USA Sagicor Financial Corporation 117 Amounts expressed in US$000 4 SEGMENTS (continued) (d) Head office function and other operating companies This segment comprises Sagicor’s life insurance operations in the USA and comprises the following. These comprise the following: Sagicor Life USA Segment Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor Life Insurance Company Sagicor USA Inc Life insurance and annuities USA - Texas 100% Insurance holding company USA - Delaware 100% Other Group Companies Principal Activities Country of Incorporation Effective Interest Sagicor Financial Corporation Sagicor General Insurance Inc Sagicor Finance Inc Sagicor Asset Management (T&T) Limited Sagicor Asset Management Inc 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% Barbados Farms Limited Farming and real estate development Barbados 77% Mutual fund holding company Barbados 100% Sagicor Funds Incorporated Globe Finance Inc Loan and lease financing, and deposit taking The Mutual Financial Services Inc Financial services holding company Sagicor Finance Limited Group financing vehicle Barbados Barbados The Cayman Islands 51% 73% 100% 31    2014 Annual Report   Sagicor Financial Corporation  117 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 118 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4.1 Statement of income by segment 2014 Net premium revenue Interest income Other investment income Fees and other revenues Gain arising on acquisition Inter-segment revenues Net policy benefits Net change in actuarial liabilities Interest expense Administrative expenses Commissions and premium and asset taxes Finance costs Depreciation and amortisation Inter-segment expenses Segment income / (loss) before taxes Income taxes Net income / (loss) from continuing operations Net income/(loss) attributable to shareholders from continuing operations Total comprehensive income/(loss) attributable to shareholders from continuing operations Sagicor Financial Corporation Amounts expressed in US$000 Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other Adjustments Total 266,017 70,728 6,689 10,419 - 7,911 361,764 174,595 9,247 11,566 64,638 37,798 - 5,026 354 263,880 133,818 23,790 35,365 29,051 - 485,904 156,024 49,967 44,098 104,386 40,847 - 9,177 1,336 74,538 49,671 14,045 15,230 - - 153,484 97,697 (18,217) 3,642 30,548 20,618 41 1,437 926 303,224 405,835 136,692 58,540 (8,297) 50,243 44,043 80,069 (2,700) 77,369 38,055 16,792 (4,878) 11,914 11,914 21,122 10,144 (1,670) 22,306 - 33,763 85,665 9,165 - 4,433 32,827 10,176 (243) 4,580 8,065 69,003 16,662 (825) 15,837 - - - 24 - (41,674) (41,650) - - - 1,343 - 22,746 - (10,681) 13,408 (55,058) - (55,058) 625,557 264,361 42,854 83,344 29,051 - 1,045,167 437,481 40,997 63,739 233,742 109,439 22,544 20,220 - 928,162 117,005 (16,700) 100,305 (7,963) (32,312) 53,737 50,330 34,004 19,478 (7,428) (32,228) 64,156 118 2014 Annual Report Sagicor Financial Corporation 32  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 119 Amounts expressed in US$000 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. Sagicor Life Sagicor Jamaica Summary statement of income by segment Sagicor Life USA Head office and other Adjustments Total Sagicor Life Inc Sagicor Life Jamaica Sagicor Europe 257,892 Sagicor USA 292,959 Head office & other 87,650 Adjustments 18,527 70,612 118,386 49,609 10,204 Total - - 657,028 248,811 2013 Net premium revenue 2009 Interest income Net premium revenue Other investment income Interest income Fees and other revenues Gain arising on acquisition 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 Net change in actuarial liabilities Administrative expenses Interest expense Commissions and premium and asset taxes Administrative expenses Finance costs Commissions and premium taxes Depreciation and amortisation Finance costs Depreciation & amortisation Inter-segment expenses Inter-segment expenses Segment income / (loss) before taxes Segment income / (loss) before taxes Income taxes Income taxes Net income / (loss) from continuing operations Segment income before undernoted items Net income/(loss) attributable to shareholders from continuing operations Group finance costs (2) Foreign exchange unwinding (1) Total comprehensive income/(loss) attributable to shareholders from continuing operations 208,588 65,788 11,062 - 3,344 300,407 136,096 24,550 16,224 48,539 31,490 - 5,477 364 231,516 2,532 248,776 7,705 152,848 20,661 14,299 (187) (13,085) (172) 842,942 30,539 149,535 17,353 32,345 - 714 431,463 131,657 46,901 73,375 68,705 35,737 7,714 119 11,960 350,829 171,950 10,452 12,574 61,999 36,075 2,230 43,575 29,859 27,178 10,854 24,556 (401) 2,801 - - 253,406 129,583 (2,895) - 1,416 464,041 157,930 74,951 39,599 4,765 2,224 - - - 185,098 - 88,486 24,361 1,541 189,696 39,344 119,679 2,608 (119) 29,121 11,831 (9,493) 64,812 33,055 80,444 5,881 (200) 7,049 - 3,897 73,017 - 6,309 31,163 36,702 5,991 - - 82 - (9,377) (25,207) 9,493 (25,297) (37,113) (50,082) - - - - - - 1,078 26,665 42,630 20,312 24,865 31,640 8,239 2,501 - 258,266 103,105 35,950 68,176 - - - 1,039,483 - 425,415 1,205,334 109,764 442,561 57,611 188,035 101,899 203,959 198,362 111,809 - 73,845 - 13,616 58 6,659 (243) (3,539) 17,328 157,808 17,143 2,209 5,388 13 4,654 - 1,266 13,153 3,922 6,087 2,022 349 298,787 1,055 1,632 865 393,836 824 172,605 1,386 5,015 233,612 19,794 (3,430) 16,364 70,205 (5,631) 64,574 201,716 (12,020) 4,207 (7,813) 12,493 (4,372) 8,121 8,121 - 4,077 13,472 4,630 73,038 71,831 8,613 (8,226) (1,872) (1,974) (10,098) 6,639 - - - (15,741) (12,855) 2,665 15,375 15,230 18,659 - - 940,931 (13,893) (27,962) 1,122,699 98,552 (36,189) - 3,608 (27,962) (32,581) 82,635 (18,924) (12,184) 79,628 70,451 - 39,988 - (9,280) 32,143 (30,479) - (10,635) 9,280 39,138 - 262,740 366,693 37,667 (5,413) 32,254 64,770 (9,182) 55,588 52,042 (7,049) 44,993 40,251 (1,130) (377) (28,620) (10,639) (515) 33    2014 Annual Report   Sagicor Financial Corporation  119 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 120 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 4.1 Statement of income by segme nt (continued) 4.2 Variations in segment income (continued) The principal non-controlling interests in the Group are in respect of Sagicor Group Jamaica Limited (Sagicor Jamaica). (iv) Foreign exchange gains and losses Out of the total net income attributable to non-controlling interests of $40,368 (2013 - $35,485), Sagicor Jamaica contributed $39,314 (2013 - $32,431). 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. 4.2 Variations in segment income (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, asset default 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. 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. (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 for sale or loans and receivables. Therefore, significant gains and losses may be triggered by changes in market prices and / or by decisions to dispose of investments. (ii) Allowances for impairment of financial investments Significant impairment losses may be triggered by changes in market prices and economic conditions. (iii) Gains on acquisitions/divestitures On acquisition of a business or portfolio, if the fair value of the net assets acquired exceeds the total consideration transferred, the difference is recognised directly in the statement of income. 120 2014 Annual Report Sagicor Financial Corporation 34  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4.2 Variations in segment income (continued) Sagicor Financial Corporation 121 Amounts expressed in US$000 The table below summarises by segment the individual line items within income from continuing operations which are impacted by the foregoing factors. Variations in income by segment Sagicor Life Sagicor Jamaica Sagicor Life USA Head Office and Other Total Sagicor Life Sagicor Jamaica Sagicor Life USA Head Office and Other Total 2014 2013 Investment gains / (losses) Impairment of financial investments Foreign exchange gains / (losses) Gains on acquisitions/divestitures Decrease / (increase) in actuarial liabilities from changes in assumptions 3,306 (3,409) (1,376) - 30,616 (7,030) 4,421 29,051 13,371 375 47,668 7,559 (13) (2,186) (12,638) (11,276) - - 180 - - 3,225 29,051 1,286 119 8,249 (450) 10,376 - 20,649 (246) - - 87 (590) (280) (119) 36,544 (12,562) 11,382 - 5,622 17,472 (25,443) (2,349) 14,009 15,080 39,365 - 68,454 35    2014 Annual Report   Sagicor Financial Corporation  121 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 122 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4.3 Other comprehensive income (iv) Defined benefit plans gains and losses Sagicor Financial Corporation Amounts expressed in US$000 Variations in other comprehensive income may arise also from non-recurring or other significant factors. The most common are as follows. (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. (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. (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. (iv) Defined benefit plans gains and losses Experience adjustments and changes in actuarial assumptions gives rise to gains or losses on defined benefit plans. The table below summarises by segment the individual line items within other comprehensive income from continuing operations which are impacted by the foregoing factors. Variations in other comprehensive income by segment Sagicor Life Sagicor Jamaica Sagicor Life USA Head Office and other Adjustments Total 6,207 (4,178) 1,339 2,763 (8,273) 5,567 (819) 1,191 6,602 - (23,528) 9,086 (8,712) - (35,606) (12,901) 25,371 (15,792) - - (30,155) 24,878 - - 206 - 69 1,363 (302) - (12) 2,235 - - 84 - - - (4) - 38,386 (19,970) (22,036) 13,212 (47,442) 30,445 (36,441) (9,475) 2014 Unrealised investment (losses) Changes in actuarial liabilities Retranslation of foreign currency operations Gains/(losses) on defined benefit plans 2013 Unrealised investment (losses) Changes in actuarial liabilities Retranslation of foreign currency operations Gains/(losses) on defined benefit plans 122 2014 Annual Report Sagicor Financial Corporation 36  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 4.4 Statement of financial position by segment 2014 Financial investments Other external assets Inter-segment assets Total assets Policy liabilities Other external liabilities Liabilities of discontinued operation Inter-segment liabilities Total liabilities Net assets 2013 Financial investments Other external assets Inter-segment assets Total assets Policy liabilities Other external liabilities Liabilities of discontinued operation Inter-segment liabilities Total liabilities Net assets 37    Sagicor Financial Corporation 123 Amounts expressed in US$000 Sagicor Life USA Head office and other Adjustments Total Sagicor Life 1,259,473 379,124 134,254 1,772,851 1,197,480 87,733 - 23,620 1,308,833 Sagicor Jamaica 2,021,180 464,724 9,363 2,495,267 622,299 1,460,700 - 217 2,083,216 1,247,365 495,735 241 1,743,341 1,244,053 250,792 - 40,582 1,535,427 133,476 179,343 49,805 362,624 56,770 441,255 45,796 129,244 673,065 464,018 412,051 207,914 (310,441) 1,187,903 392,282 126,211 1,706,396 1,170,526 86,789 - 23,479 1,280,794 1,687,893 183,066 9,324 1,880,283 608,883 906,187 - 5,846 1,520,916 1,182,892 300,721 151 1,483,764 1,051,588 203,498 - 40,581 1,295,667 133,078 229,917 49,649 412,644 54,757 435,314 55,024 115,429 660,524 - - (193,663) (193,663) - - - (193,663) (193,663) - - - (185,335) (185,335) - - - (185,335) (185,335) 4,661,494 1,518,926 - 6,180,420 3,120,602 2,240,480 45,796 - 5,406,878 773,542 4,191,766 1,105,986 - 5,297,752 2,885,754 1,631,788 55,024 - 4,572,566 425,602 359,367 188,097 (247,880) - 725,186 2014 Annual Report   Sagicor Financial Corporation  123 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 124 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 4.4 Statement of financial position by segment (continued) 4.7 Geographical areas The principal non-controlling interests in the Group are in respect of Sagicor Group Jamaica Limited (Sagicor Jamaica). Out of the total non-controlling interests in the statement of financial position of $241,480 (2013 - $218,751), Sagicor Jamaica contributed $202,133 (2013 - $178,920). The Group operates in certain geographical areas which are determined by the location of the subsidiary or branch initiating the business. 4.5 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: 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 by geographical area are summarised in the following table. Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other 4.6 Products and services 2014 7,384 7,878 2,064 10,645 27,971 2013 5,986 3,946 1,124 11,548 22,604 Barbados Jamaica Trinidad & Tobago Other Caribbean USA External revenue Non-current assets 2014 2013 2014 2013 146,640 458,565 145,735 140,737 153,490 148,901 198,624 195,204 426,141 140,704 138,514 185,223 69,985 67,396 35,499 3,593 59,672 78,167 29,983 2,977 1,045,167 1,039,483 375,097 366,003 Total external revenues relating to the Group’s products and services are summarised as follows: Life, health and annuity insurance contracts issued to individuals 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 2014 2013 584,973 591,698 273,138 299,497 34,308 112,927 39,821 33,956 94,530 19,802 1,045,167 1,039,483 124 2014 Annual Report Sagicor Financial Corporation 38  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 5 INVESTMENT PROPERTY Sagicor Financial Corporation 125 Amounts expressed in US$000 6 ASSOCIATES AND JOINT VENTURE The movement in investment property for the year is as follows: The movements in the investment in associates and joint ventures during the year and the aggregate balances and results of associates and joint venture companies are summarised in the following table. Balance, beginning of year Additions at cost Transfer from property, plant and equipment Disposals Change in fair values Effects of exchange rate changes Balance, end of year 2014 2013 98,369 115,224 1,638 583 (8,269) (3,468) (87) 88,766 1,424 884 (18,040) 982 (2,105) 98,369 Investment property includes $14,372 (2013 - $15,223) which represents the Group’s proportionate interest in joint operations summarised in the following table. Description of property Percentage ownership Country Barbados Freehold lands Freehold office buildings Trinidad & Tobago Freehold office building 50% 10% -50% 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. Movement during the year: Investment, beginning of year Additions Disposals and divestitures Dividends received Share of: Income before taxes Amortisation of intangible assets identified on acquisition Income taxes Other comprehensive income Effects of exchange rate changes Investment, end of year Aggregate balances and results: Total assets Total liabilities Total revenue Net income for the year 2014 2013 44,202 42,433 540 - 266 (28) (7,860) (1,348) 4,419 (178) (738) 577 (156) 40,806 548,430 365,428 150,650 12,665 3,519 (181) (364) 923 (1,018) 44,202 532,852 374,794 139,858 14,413 39    2014 Annual Report   Sagicor Financial Corporation  125 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 126DRAFT - Notes to the Financial Statements Year ended December 31, 2014 7 PROPERTY, PLANT AND EQUIPMENT Sagicor Financial Corporation Amounts expressed in US$000 2014 Owner-occupied property Lands Land & buildings Office furnishings, equipment & vehicles Operating lease vehicles & equipment Owner-occupied properties Land Land & buildings 2013 Office furnishings, equipment & vehicles Operating lease vehicles & equipment Net book value, beginning of year 38,428 Additions at cost Additions arising from acquisitions Transfer to investment property Transfer to intangible assets (note 8) Other transfers Transfers to real estate developed or held for sale Disposals Change in fair values Depreciation charge Effects of exchange rate changes - - - - - (7) - (201) - - Net book value, end of year 38,220 66,281 2,173 11,568 (583) - 15 - - 278 (1,013) (818) 77,901 33,893 14,637 2,473 - (3,286) 386 - (834) - (6,713) (646) 39,910 Total 151,539 23,324 14,041 (583) (3,286) 401 (7) 12,937 6,514 - - - - - (2,748) (3,582) - 77 (3,265) (10,991) - (1,464) 38,428 - - - - - - - - - - 65,124 1,418 - (884) - 296 - (963) 3,451 (809) (1,352) 66,281 31,978 11,777 - - (1,801) 228 - 10,288 6,704 - - - - - (1,045) (1,361) - (6,126) (1,118) 33,893 - (2,694) - Total 145,818 19,899 - (884) (1,801) 524 - (3,369) 3,451 (9,629) (2,470) 13,438 169,469 38,428 12,937 151,539 Represented by: Cost or valuation 38,220 80,885 111,025 19,707 249,837 38,428 67,253 99,453 18,188 223,322 Accumulated depreciation - (2,984) (71,115) (6,269) (80,368) - (972) (65,560) (5,251) (71,783) 38,220 77,901 39,910 13,438 169,469 38,428 66,281 33,893 12,937 151,539 Owner-occupied lands are largely utilised for farming operations. Owner-occupied land and buildings consist largely of commercial office buildings. 126 2014 Annual Report Sagicor Financial Corporation 40  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 8 INTANGIBLE ASSETS 8.1 Analysis of intangible assets and changes for the year Sagicor Financial Corporation 127 Amounts expressed in US$000 Goodwill 2014 Customer & broker relationships Software Total Goodwill 2013 Customer & broker relationships Software Total Net book value, beginning of year 47,948 16,220 Additions at cost Assumed on acquisition Transfer from property, plant and equipment (note 7) Amortisation - - - - Effects of exchange rate changes Net book value, end of year (1,305) 46,643 - 10,304 - (5,995) (1,400) 19,129 7,725 2,469 - 3,286 (3,056) (140) 10,284 71,893 2,469 10,304 3,286 (9,051) (2,845) 76,056 Represented by: Cost or valuation 48,456 40,224 39,776 128,456 Accumulated depreciation and impairments (1,813) (21,095) (29,492) (52,400) 46,643 19,129 10,284 76,056 50,338 20,801 - - - - (2,390) 47,948 49,761 (1,813) 47,948 - - - (2,094) (2,487) 16,220 8,473 1,015 - 1,801 (3,326) (238) 7,725 79,612 1,015 - 1,801 (5,420) (5,115) 71,893 32,577 33,288 115,626 (16,357) (25,563) (43,733) 16,220 7,725 71,893 41    2014 Annual Report   Sagicor Financial Corporation  127 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 128 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 8.2 Impairment of intangible assets Goodwill arises from past acquisitions and is allocated to cash generating units (CGUs). Goodwill is tested annually for impairment. The recoverable amount of a CGU is determined as the higher of its value in use or its fair value less costs to sell. Annually, the management of each operating segment or other operating company prepares financial projections for the next three years. For those CGU’s which the fair value less costs to sell methodology is used, the financial projections are used as inputs to determine maintainable earnings over time to which is applied an appropriate earnings multiple. For those CGU's which the value in use methodology is used, cash flows are extracted from the financial projections to which are applied appropriate discount factors and residual growth rates, or alternatively, the cash flows from the financial projections are extended to 50 years using an actuarial appraisal value technique which incorporates appropriate discount rates and solvency capital requirements. The Group obtains independent professional advice in order to select the relevant discount factors, residual growth rates and earnings multiples. The carrying values of goodwill and the impairment test factors used are considered in the following sections. Sagicor Financial Corporation Amounts expressed in US$000 8.2 Impairment of intangible assets (continued) (i) Years ended Decembe r 31, 2014 & 2013 An actuarial appraisal value technique was adopted to test goodwill impairment. The principal assumptions included the following: • • • • • Discount rates of 8 - 9% (2013 - 9%) for individual life and annuity inforce business, New individual life and annuity business was included for the five year period 2015 to 2019, Annual growth rate for new individual life and annuity business was 7.5% from 2014 to 2019 (2013 – 7.5% and 10.0% from 2014 to 2018, and 2.0% from 2019 to 2023), Discount ratesof 12 - 13% (2013 - 13%) for new individual life and annuity business, Required Minimum Continuing Capital and Surplus Ratio (MCCSR) of 200%. Sensitivity The excess of the appraisal value over carrying value of the operating segment was also tested by varying the discount rates and capital ratios. The results are set out in the following tables. Negative amounts illustrate the extent of possible impairment. (a) Sagicor Life operating segment Barbados, Eastern Caribbean, Dutch Caribbean, Bahamas and Central America MCCSR target ratio Low Mid 2014 2013 Discount rate Inforce New business 175% 200% High 225% Carrying value of goodwill 27,157 27,031 Low Mid High 7% 9% 11% 11% 13% 15% 266,629 154,566 74,961 266,910 150,955 68,931 267,204 147,144 62,617 128 2014 Annual Report Sagicor Financial Corporation 42  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 129 Amounts expressed in US$000   8.2 Impairment of intangible assets (continued) 8.2 Impairment of intangible assets (continued) Trinidad and Tobago MCCSR target ratio (c) Other operating companies 2014 2013 Carrying value of goodwill 4,869 4,869 The Group recognised goodwill on the acquisition of its interests in Sagicor General Insurance Inc and Globe Finance Inc. The value in use methodology has been used to test goodwill impairment in both years. The after tax discount factors were 14.0% and 13.1% respectively for each company and the residual growth rates were 3.8% and 2.1% respectively. Discount rate Inforce New business 175% 200% Low Mid High 225% Low Mid High 6% 8% 10% 10% 12% 14% 109,346 106,917 104,224 46,310 4,448 39,851 (4,070) 32,574 (13,820) (b) Sagicor Jamaica operating segment 2014 2013 Carrying value of goodwill 14,617 16,048 The fair value less cost to sell methodology was adopted to test goodwill impairment in both years. The after tax multiple used for the segment was 7.1 (2013 – 7.1) which was derived from a pre-tax factor of 6.14 (2013 - 6.36) using an iterative method. Sensitivity The possible impairment of goodwill is sensitive to changes in earnings multiples and after tax earnings. This is illustrated in the following table. 2014 test Scenario 1 Scenario 2 Scenario 3 After tax earnings multiples Reduction in forecast earnings 7.1 n/a Excess of recoverable amount (of 49.11% interest) 38,234 Impairment (of 49.11% interest) Nil 6.4 10% 328 Nil 5.6 10% n/a (25,392) 43    2014 Annual Report   Sagicor Financial Corporation  129 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 130 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 9 FINANCIAL INVESTMENTS 9.1 Analysis of financial investments 9.1 Analysis of financial investments (continued) Sagicor Financial Corporation Amounts expressed in US$000 2014 2013 Held to maturity securities: Debt securities Available for sale securities: Debt securities Equity securities Financial assets at fair value through income: Debt securities Equity securities Derivative financial instruments (note 41.6) Mortgage loans Securities purchased for resale Loans and receivables: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale Deposits 2014 2013 Carrying value Fair value Carrying value Fair value Non-derivative financial assets at fair value through income comprise: Assets designated at fair value upon initial recognition 299,611 288,491 20,364 21,102 20,200 20,466 Debt securities comprise: Government and government-guaranteed debt securities 1,776,729 1,609,133 2,357,014 2,357,014 2,074,114 2,074,114 Collateralised mortgage obligations 76,221 76,221 92,375 92,375 Corporate debt securities 2,433,235 2,433,235 2,166,489 2,166,489 Other securities 227,519 195,858 1,325,583 1,289,061 117,718 97,724 3,447,549 3,191,776 142,840 142,840 148,306 148,306 118,053 118,053 103,185 103,185 23,268 38,718 - 23,268 38,718 - 45,215 36,838 162 45,215 36,838 162 322,879 322,879 333,706 333,706 927,331 972,759 949,156 981,486 255,515 255,630 220,769 221,427 133,483 142,150 134,236 141,464 410,585 417,476 165,050 161,631 31,524 26,271 40,713 40,713 126,578 126,578 161,447 161,447 1,885,016 1,940,864 1,671,371 1,708,168 9.2 Pledged assets Debt and equity securities include $226,153 (2013 - $213,703) 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 $8,434 (2013 - $7,143), and mortgages and mortgage backed securities having a total market value of $199,387 (2013 - $160,250). 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, 2014, these pledged assets totalled $764,909 (2013 - $643,127). Of these assets pledged as security, $73,501 (2013 – $30,934) 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. Total financial investments 4,661,494 4,718,080 4,191,766 4,228,829 130 2014 Annual Report Sagicor Financial Corporation 44  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 131 Amounts expressed in US$000 9.3 Returns accruing to the benefit of contract-holders 9.4 Reclassification of financial investments (continued) 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. The following disclosures are in respect of these reclassified assets. Debt securities Equity securities Mortgage loans Securities purchased for re-sale 9.4 Reclassification of financial investments 2014 2013 95,316 111,950 38,718 - 93,864 97,255 36,838 162 245,984 228,119 2014 2013 Carrying value Fair value Carrying value Fair value Government debt securities maturing after September 2018 49,282 56,236 51,342 49,344 Other debt securities 2,721 3,479 3,458 4,095 52,003 59,715 54,800 53,439 In 2008, the Group reclassified certain securities from the available for sale classification to the loans and receivables classification. The assets reclassified were primarily:   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. Cumulative net fair value loss, beginning of year Net fair value gains / (losses) subsequent to restatement Disposals Effect of exchange rate changes 2014 2013 (7,322) 9,437 174 (295) (4,783) (2,716) - 177 The reclassifications were made because the markets for these securities were considered by management to have become inactive. Cumulative net fair value gain / (loss), end of year 1,994 (7,322) The net fair value gain or loss subsequent to restatement approximates the fair value gain or loss 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. 45    2014 Annual Report 131   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 132 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 10 REINSURANCE ASSETS 12 MISCELLANEOUS ASSETS AND RECEIVABLES Reinsurers’ share of: Actuarial liabilities (note 13.1) Policy benefits payable (note 14.2) Provision for unearned premiums (note 14.3) Other items 2014 2013 470,271 285,250 31,998 20,152 4,750 28,325 20,153 2,699 527,171 336,427 The provision for unearned premiums and other items are expected to mature within one year of the financial statements date. 11 INCOME TAX ASSETS Deferred income tax assets (note 33) Income and withholding taxes recoverable 2014 2013 28,310 29,193 57,503 4,808 24,227 29,035 Income and withholding taxes recoverable are expected to be recovered within one year of the financial statements date. Sagicor Financial Corporation Amounts expressed in US$000 2014 2013 1,055 12,199 20,753 39,731 34,174 48,718 156,630 495 14,626 15,688 36,318 - 81,024 148,151 Net defined benefit assets (note 31) Real estate developed or held for resale (ii) Prepaid and deferred expenses Premiums receivable Legal claim (iii) Other assets and accounts receivable (i) (i) Other assets and accounts receivables include: (a) Nil (2013 - $50,104) representing the liquidation of collateral for a banker's letter of credit facility (see note 38); and (b) $7,493 (2013 - $4,636) due from managed funds. (ii) Real estate developed for resale includes $6,953 (2013 - $6,699) which is expected to be realised within one year of the financial statements date. Prepaid and deferred expenses are also expected to be realised within one year of the financial statements date. (iii) $34,174 (2013 – Nil) Legal claim In March 2014, the Supreme Court of Jamaica granted judgement in favour of a claimant in a case brought against Sagicor Bank of Jamaica Limited (formerly RBC Royal Bank of Jamaica Limited). This claim pre-dated the acquisition of control of the Bank by Sagicor Group Jamaica Limited, and also pre-dated the acquisition of control of the Bank by RBTT International Limited from Finsac Limited (Finsac) in 2001. By virtue of the Share Sale Agreement entered into between Finsac, RBTT Financial Holdings Limited and RBTT International Limited, Finsac agreed to fully indemnify RBTT International Limited (now SGJ Holdings (St. Lucia) Limited). Though the judgement is being appealed, the amount computed as settlement has been recorded as payable to the claimant and correspondingly receivable from Finsac (Note 20). 132 2014 Annual Report Sagicor Financial Corporation 46  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 13 ACTUARIAL LIABILITIES 13.1 Analysis of actuarial liabilities Gross liability Reinsurers’ share 2014 2013 2014 2013 Contracts issued to individuals: Life insurance - participating policies 251,011 319,075 100 106 Sagicor Financial Corporation 133 Amounts expressed in US$000 13.2 Movement in actuarial liabilities Gross liability Reinsurers’ share 2014 2013 2014 2013 Balance, beginning of year 2,324,319 2,040,907 285,250 56,683 Amounts assumed on business and portfolio acquisitions (note 13.2(a)) Changes in actuarial liabilities: - 33,910 - - Life insurance and annuity - non-participating policies Health insurance Unit linked funds 1,698,485 1,424,285 448,021 260,031 Recorded in income 226,018 338,331 185,021 228,568 11,190 7,115 503 517 Recorded in other comprehensive 28,473 (43,840) - (326) (886) - - - - - - - - (1) Reinsurance contracts held 29,135 23,037 146,703 133,882 - - - - De-recognised on divestiture Other movements 2,136,524 1,907,394 448,624 260,654 Effect of exchange rate changes (16,263) (44,103) Contracts issued to groups: Life insurance Annuities Health insurance 36,554 38,575 819 1,448 351,826 343,291 20,681 22,981 37,317 35,059 147 167 425,697 416,925 21,647 24,596 Total actuarial liabilities 2,562,221 2,324,319 470,271 285,250 The following notes are in respect of the foregoing table: • • • Life insurance includes coverage for disability and critical illness. Actuarial liabilities include $98,666 (2013 - $101,731) in assumed reinsurance. The liability for reinsurance contracts held occurs because the reinsurance premium costs exceed the mortality costs assumed in determining the gross liability of a policy contract. Balance, end of year 2,562,221 2,324,319 470,271 285,250 Analysis of changes in actuarial liabilities Arising from increments and decrements of inforce policies and from the issuance of new policies Arising from changes in assumptions for mortality, lapse, expenses, investment yields and asset default Other changes: Actuarial modelling, refinements, improvements and corrections Other items Total 270,600 403,700 185,021 228,609 2,349 (68,454) (6,378) (5,928) (12,080) (34,827) - - - (41) - - 254,491 294,491 185,021 228,568 47    2014 Annual Report   Sagicor Financial Corporation  133 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 134 Year ended December 31, 2014 13.2 Movement in actuarial liabilities (continued) (a) Acquisition of insurance portfolio During 2013, Sagicor Life Inc acquired the British American Insurance Company Limited (BAICO) Eastern Caribbean insurance portfolio. This was accounted for as a portfolio acquisition. The insurance portfolio acquired by Sagicor was made up of group pensions and traditional life policies issued by BAICO in the Eastern Caribbean. The obligation to pay certain unpaid amounts to policyholders under these policies (being claims, maturities, surrenders and bonuses) has been assumed by Sagicor with the transfer of the insurance portfolio, and the Eastern Caribbean Governments funded the payment of these in accordance with the terms of the policies. The payment of claims will be subject to the claimant meeting the requirements of the policy terms, and signing an appropriate release. The effects of this transaction in the financial statements are set out below. Fair Value 5,598 594 36,299 (33,910) (7,185) 1,396 5,600 4,204 Net assets acquired: Financial investments Miscellaneous assets and receivables Cash resources Actuarial liabilities Other insurance liabilities Total net assets Purchase consideration and related costs Loss arising on net assets acquired 134 Sagicor Financial Corporation 2014 Annual Report Sagicor Financial Corporation Amounts expressed in US$000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 13.3 Assumptions – life insurance and annuity contracts 13.3 Assumptions – life insurance and annuity contracts (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) (a) Process used to set actuarial assumptions and margins for adverse deviations (d) Assumptions for investment yields (f) Asset defaults 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. Any recent changes in actuarial standards and practice are also incorporated in the current valuation. (b) Assumptions for mortality and morbidity Mortality rates are related to the incidence of death in the insured population. Morbidity rates are related to the incidence of sickness and disability in the insured population. Annually, insurers update studies of recent mortality experience. The resulting experience is compared to external mortality studies including the Canadian Institute of Actuaries (CIA) 1997 - 2004 tables. Appropriate modification factors are selected and applied to underwritten and non-underwritten business respectively. Annuitant mortality is 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 Policyholders may allow their policies to lapse prior to the maturity date either by choosing not to pay premiums or by surrendering their policy for its cash value. Lapse studies are updated annually by insurers to determine the persistency of the most recent period. Assumptions for lapse experience are generally based on five-year averages. 49    48  government bonds. Ultimate rate of return Barbados Jamaica Trinidad & Tobago Other Caribbean USA Returns on existing variable rate securities, shares, investment property and policy loans are linked to The AA of each insurer includes a provision for asset default in the modelling of the cash flows. The the current economic scenario. Yields on reinvested assets are also tied to the current economic provision is based on industry and Group experience and includes specific margins, where scenario. Returns are however assumed to decrease and it is assumed that at the end of twenty years appropriate, for assets backing the actuarial liabilities, e.g. for investment property, equity securities, from the valuation date, all investments, except policy loans, are reinvested in long-term, default free debt securities, mortgage loans and deposits. The ultimate rate of return is the assumed rate that will ultimately be earned on long-term government bonds. It is established for each geographic area and is summarised in the following table. Margins for adverse deviations are determined for the assumptions in the actuarial valuations. The (g) Margins for adverse deviations 2014 6.5% 5.0% 4.5% 2013 6.0% 5.0% 4.25% 4.5% - 6.5% 4.5% - 6.0% 0.85% - 4.75% 1.75% - 3.96% application of these margins resulted in provisions for adverse deviations being included in the actuarial liabilities as set out in the following table. Provisions for adverse deviations 2014 2013 Mortality and morbidity Lapse Other Investment yields and asset default Operating expenses and taxes 79,362 61,605 51,630 17,273 2,726 81,199 64,469 45,851 19,777 2,846 212,596 214,142 (e) Assumptions for operating expenses and taxes Policy acquisition and policy maintenance expense costs for the long-term business of each insurer 13.4 Assumptions – health insurance contracts are measured and monitored using internal expense studies. Policy maintenance expense costs are reflected in the actuarial valuation after adjusting for expected inflation. Costs are updated annually and are applied on a per policy basis. 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 Taxes reflect assumptions for future premium taxes and income taxes levied directly on investment income (see note 32). For income taxes levied on net income, actuarial liabilities are adjusted for from the date of the financial statements. policy related recognised deferred tax assets and liabilities.   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 135 13.3 Assumptions – life insurance and annuity contracts (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) (d) Assumptions for investment yields (f) Asset defaults 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 long-term government bonds. It is established for each geographic area and is summarised in the following table. Ultimate rate of return Barbados Jamaica Trinidad & Tobago Other Caribbean USA 2014 6.5% 5.0% 4.5% 2013 6.0% 5.0% 4.25% 4.5% - 6.5% 4.5% - 6.0% 0.85% - 4.75% 1.75% - 3.96% (e) Assumptions for operating expenses and taxes Policy acquisition and policy maintenance expense costs for the 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 are updated annually and are applied on a per policy basis. Taxes reflect assumptions for future premium taxes and income taxes levied directly on investment income (see note 32). For income taxes levied on net income, actuarial liabilities are adjusted for policy related recognised deferred tax assets and liabilities. 49    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, where appropriate, for assets backing the actuarial liabilities, e.g. for investment property, 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 provisions for adverse deviations being included in the actuarial liabilities as set out in the following table. Provisions for adverse deviations 2014 2013 Mortality and morbidity Lapse Investment yields and asset default Operating expenses and taxes Other 79,362 61,605 51,630 17,273 2,726 81,199 64,469 45,851 19,777 2,846 212,596 214,142 13.4 Assumptions – health insurance contracts The outstanding liabilities for health insurance claims incurred but not yet reported and for claims reported but not yet paid are determined by statistical methods using expected loss ratios which have been derived from recent historical data. No material claim settlements are anticipated after one year from the date of the financial statements.   Sagicor Financial Corporation  2014 Annual Report 135 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 136 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 14 OTHER INSURANCE LIABILITIES 14.2 Policy benefits payable (continued) 14.1 Analysis of other insurance liabilities Dividends on deposit and other policy balances Policy benefits payable Provision for unearned premiums 14.2 Policy benefits payable 2014 2013 68,542 95,276 33,602 70,036 90,834 33,564 Gross liability Reinsurers’ share 2014 2013 2014 2013 Movement for the year: Balance, beginning of year 90,834 83,814 28,325 25,080 Policy benefits assumed on business and portfolio acquisitions - 7,185 - - 197,420 194,434 Policy benefits incurred 485,321 457,010 51,272 33,997 Policy benefits paid (479,423) (454,975) (47,477) (30,576) Effect of exchange rate changes (1,456) (2,200) (122) (176) Balance, end of year 95,276 90,834 31,998 28,325 Gross liability Reinsurers’ share 2014 2013 2014 2013 14.3 Provision for unearned premiums Analysis of policy benefits payable: Life insurance and annuity benefits 65,987 64,498 14,711 12,400 Health claims Property and casualty claims 3,389 25,900 95,276 2,687 23,649 90,834 2,071 15,216 31,998 2,759 13,166 28,325 Gross liability Reinsurers’ share 2014 2013 2014 2013 Analysis of the provision: Property and casualty insurance 32,413 32,410 20,152 20,153 Health insurance 1,189 1,154 - - 33,602 33,564 20,152 20,153 The provision for unearned premiums is expected to mature within a year of the financial statements’ date. 136 2014 Annual Report 49      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 137 14.3 Provision for unearned premiums (continued) 16 NOTES AND LOANS PAYABLE Movement for the year: Balance, beginning of year Premiums written Premium revenue Gross liability Reinsurers’ share 2014 2013 2014 2013 33,564 72,704 33,353 71,875 20,153 47,882 20,323 47,914 (72,669) (71,661) (47,883) (48,086) Effect of exchange rate changes 3 (3) - 2 Balance, end of year 33,602 33,564 20,152 20,153 15 INVESTMENT CONTRACT LIABILITIES At amortised cost: Deposit administration liabilities Other investment contracts At fair value through income: Unit linked deposit administration liabilities 2014 2013 Carrying value Fair value Carrying value Fair value 128,404 115,748 244,152 128,404 119,512 119,512 119,317 133,115 135,876 247,721 252,627 255,388 116,809 116,809 114,374 114,374 360,961 364,530 367,001 369,762 2014 2013 Carrying value Fair value Carrying value Fair value 7.5% senior notes due 2016 147,182 154,867 145,178 156,924 6.5% convertible redeemable preference shares due 2016 4.6% notes due 2015 Finance lease payable 107,689 122,863 100,417 115,339 43,363 43,363 43,174 43,174 708 708 1,391 1,391 298,942 321,801 290,160 316,828 The Group issued ten year $150,000 senior notes which are repayable in 2016. The notes carry a 7.5% annual 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. Financial covenants in respect of these notes are summarised in note 46.3(a). Details of the 6.5% convertible redeemable preference shares due 2016 are set out in note 21.2. The initial fair value of the subscription proceeds was determined by discounting the ultimate redemption value ($120,000), at a rate of 6.5% for 5 years. The subsequent finance cost recognised is the amortisation of the difference between the ultimate redemption value and the initial carrying value, calculated on an effective interest method for the 5 years to maturity. On December 18, 2013, the Company issued eighteen month $43,386 notes which are repayable in 2015. The notes carry a 4.6% annual rate of interest fixed for the period and interest is payable semi- annually. Issue costs amounted to $290. Financial covenants in respect of these notes are summarised in note 46.3(a). 51    2014 Annual Report   Sagicor Financial Corporation  137 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 138DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 17 DEPOSIT AND SECURITY LIABILITIES 18 PROVISIONS At amortised cost: Other funding instruments Customer deposits Securities sold for re-purchase Bank overdrafts At fair value through income: 2014 2013 Carrying value Fair value Carrying value Fair value 360,810 570,567 664,802 1,459 362,514 589,519 657,506 1,459 313,439 219,192 524,232 1,933 316,632 235,393 525,267 1,933 1,597,638 1,610,998 1,058,796 1,079,225 Net defined benefit liabilities (note 31) Other provisions 19 INCOME TAX LIABILITIES Deferred income tax liabilities (note 33) Structured products 20,068 20,068 17,371 17,371 Income taxes payable Derivative financial instruments (note 41.6) 6,265 6,265 29,916 29,916 26,333 26,333 47,287 47,287 2014 77,926 430 78,356 2013 74,767 316 75,083 2014 2013 31,557 10,210 41,767 22,532 6,693 29,225 Income taxes payable are expected to be settled within a year of the financial statements’ date. 1,623,971 1,637,331 1,106,083 1,126,512 20 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Other funding instruments consist of loans from banks and other financial institutions and include balances of $189,928 (2013 - $157,608) 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 capitalize on current market trends. Collateral for other funding instruments and securities sold under agreements to resell is set out in note 9.2.  138 2014 Annual Report Sagicor Financial Corporation Amounts due to policyholders Amounts due to reinsurers Legal claim (i) Other accounts payable and accrued liabilities 2014 2013 16,526 28,404 34,174 118,340 197,444 16,830 22,929 - 91,478 131,237 (i) In March 2014, the Supreme Court of Jamaica granted judgement in favour of a claimant in a case brought against Sagicor Bank of Jamaica Limited (formerly RBC Royal Bank of Jamaica Limited). This claim pre-dated the acquisition of control of the Bank by Sagicor Group Jamaica Limited, and also pre-dated the acquisition of control of the Bank by RBTT International Limited from Finsac Limited (Finsac) in 2001. By virtue of the Share Sale Agreement entered into between Finsac, RBTT Financial Holdings Limited and RBTT International Limited, Finsac agreed to fully indemnify RBTT International Limited (now SGJ Holdings (St. Lucia) Limited). Though the judgement is being appealed, the amount computed as settlement has been recorded as payable to the claimant and correspondingly receivable from Finsac (Note 12). 52  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 139 21 COMMON AND PREFERENCE SHARES 21.2 Convertible redeemable preference shares The Company is authorised to issue: • • • an unlimited number of common shares, an unlimited number of preference shares, and an unlimited number of convertible redeemable preference shares. In each case the shares are without nominal or par value. On July 18, 2011, the Company issued 120,000,000 convertible redeemable preference shares with the following features: • • Issue price of US $1.00 or Barbados $2.00 per share; Annual dividend rate of 6.5%, dividends to be declared by the Company’s directors and payable half yearly on May 15 and November 15; Convertible into common shares at a ratio of 1.98 preference shares to 1.00 common shares, conversion to be at the option of the shareholder and exercisable on May 16 or November 16 in any year prior to the redemption date; Redeemable on July 18, 2016 at issue price, if not converted before. • • 21.1 Common shares Issued and fully paid: 2014 2013 Number in 000’s Share capital Number in 000’s Share capital The preference shares are accounted for as a compound financial instrument and were initially recognised in the statement of financial position as a financial liability (note 16) and also as equity (note 22). The preference shares are listed on the Barbados and Trinidad & Tobago stock exchanges. Put option rights in respect of the preference shares are disclosed in note 46.3(b). Balance, beginning of year 303,917 301,600 303,917 301,600 21.3 Dividends Balance, end of year 303,917 301,600 303,917 301,600 Treasury shares: Shares held for LTI and ESOP, end of year (note 30.1) (3,145) (5,611) (3,583) (6,150) Total 300,772 295,989 300,334 295,450 The common shares are listed on the Barbados, Trinidad & Tobago and London stock exchanges. The dividends declared and paid during the year in respect of the Company’s convertible redeemable preference shares and common shares are set out in the following table. Dividends declared and paid: Preference shares Common shares 2014 2013 Per share Total Per share Total 6.50 ¢ 4.0 ¢ 7,800 6.50 ¢ 12,035 4.0 ¢ 19,835 7,800 12,035 19,835 53      Sagicor Financial Corporation  2014 Annual Report 139 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 140 21.3 Dividends (continued) The dividends declared after the date of the financial statements in respect of the Company’s convertible redeemable preference shares and common shares are set out in the following table. Dividends proposed: Preference shares - May 15 Common shares - final for current year 2014 2013 Per share Total Per share 3.25 ¢ 2.0 ¢ 3,900 6,018 9,918 3.25 ¢ 2.0 ¢ Total 3,900 6,018 9,918 21.4 Restrictions on common share dividends The Company’s Articles of Incorporation include the following limitations on the payment of common share dividends. (i) (ii) For any 6 month period that the convertible redeemable preference shares are not paid, dividends on common shares shall be suspended for that period plus the next 6 month period, and the Company shall not repurchase any of its common shares, except when pursuant to the LTI plan and ESOP. The Company shall not pay any dividends on its common shares, in respect of the 2011 financial year or thereafter, or repurchase any of its common shares, other than a repurchase pursuant to the LTI plan and ESOP, if the cumulative amount of such dividends and repurchases after July 31, 2011 would exceed 50% of the cumulative amount of Group net income from January 1, 2011. 140 2014 Annual Report Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 22 RESERVES Sagicor Financial Corporation 141 Amounts expressed in US$000 Fair value reserves Available for sale assets Actuarial liabilities Owner occupied property Currency translation reserves Preference share reserves Other reserves Total reserves 2014 Balance, beginning of year 25,433 8,798 (16,779) (77,411) 16,743 38,391 Other comprehensive income from continuing operations allocated to reserves (184) 35,052 (21,777) (10,535) Transactions with holders of equity instruments: Allocated to reserve for equity compensation benefits Eliminated from reserve for equity compensation benefits Transfers to retained earnings and other movements Balance, end of year 2013 Balance, beginning of year Other comprehensive income from continuing operations allocated to reserves Other comprehensive income from discontinued operation Transactions with holders of equity instruments: Allocated to reserve for equity compensation benefits Eliminated from reserve for equity compensation benefits Transfers to retained earnings and other movements Balance, end of year - - - - - - - - - - - - 25,249 43,850 (38,556) (87,946) 10,481 38,157 - - - (6,262) - 2,057 (2,520) 229 (4,825) 2,556 2,057 (2,520) (6,033) (8,765) 22,978 3,109 - - - (654) 25,433 59,946 (47,224) (77,864) 23,005 35,570 16,411 (51,624) 30,445 (18,343) 476 - - - - - - - 18,796 - - - 8,798 (16,779) (77,411) - - - - (6,262) 16,743 - - (36,413) 19,272 2,169 (46) 698 38,391 2,169 (46) (6,218) (4,825) Other reserves comprise reserves for equity compensation benefits of $16,070 (2013 - $16,533) and statutory reserves of $22,087 (2013 - $21,858). Sagicor Financial Corporation 2014 Annual Report 141 54  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 142DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 23 PARTICIPATING ACCOUNTS 24 PREMIUM REVENUE The movements in the participating accounts during the year and the amounts in the financial statements relating to participating accounts were as follows: Closed participating account Open participating account 2014 2013 2014 2013 Life insurance Annuity Health insurance Gross premium Ceded to reinsurers 2014 2013 2014 2013 361,552 358,876 32,445 34,627 309,329 445,135 177,564 271,665 151,571 146,055 5,672 5,132 Property and casualty insurance 66,669 66,472 47,883 48,086 889,121 1,016,538 263,564 359,510 Movement for the year: Balance, beginning of year (3,159) 2,273 (2,503) (12,606) Total comprehensive income / (loss) 2,209 (5,432) 4,053 10,345 Return of transfer to support profit distribution to shareholders - - (236) (242) Balance, end of year (950) (3,159) 1,314 (2,503) Financial statement amounts: Assets Liabilities Revenues Benefits Expenses Income taxes 86,687 87,637 8,524 5,512 606 172 95,096 98,255 8,110 11,938 1,447 159 200,007 229,543 198,693 232,046 28,636 21,176 2,813 681 23,441 5,549 6,873 580 The Group has the ability to reduce future policy bonuses and dividends in order to eliminate a deficit in a participating account. 142 2014 Annual Report 55      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 25 NET INVESTMENT INCOME 25 NET INVESTMENT INCOME (continued) 2014 2013 Further details of interest income and investment gains are set out in the following table. Sagicor Financial Corporation 143 Amounts expressed in US$000 Investment income: Interest income Dividend income Rental income from investment property Net investment gains Share of operating income of associates and joint venture Other investment income Investment expenses: Allowances for impairment losses Direct operating expenses of investment property Other direct investment expenses 264,361 248,811 2,577 4,760 2,235 3,723 47,668 36,544 4,419 382 3,519 250 324,167 295,082 12,638 2,410 1,904 16,952 12,562 1,284 1,886 15,732 Net investment income 307,215 279,350 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 classification. 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. Interest income: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale Deposits Other balances Net investment gains / (losses): Debt securities Equity securities Investment property Other financial instruments 2014 2013 201,441 201,982 17,652 9,683 31,121 1,960 2,422 82 18,926 8,951 15,270 1,094 2,623 (35) 264,361 248,811 21,560 15,087 (626) 11,647 47,668 7,685 16,741 1,195 10,923 36,544 Sagicor Financial Corporation 2014 Annual Report 143 56  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 144 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 26 FEES AND OTHER REVENUE 28 INTEREST EXPENSE  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 Other operating and miscellaneous income 2014 2013 19,406 1,363 28,653 14,694 3,225 16,003 19,300 1,033 40,424 15,150 11,382 20,020 Insurance contracts Investment contracts Other funding instruments Customer deposits Securities sold for re-purchase Other items Loss arising on acquisition of insurance portfolio (note 13.2 (a)) - (4,204) 83,344 103,105 2014 2013 2,607 15,241 6,552 9,989 2,912 14,697 6,038 7,310 28,805 26,218 545 436 63,739 57,611 27 POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES 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 classification. Gross benefit Ceded to reinsurers 2014 2013 2014 2013 The capital and income returns of most financial liabilities designated at fair value through income accrue directly from the capital and income returns of financial assets designated at fair value through income. Therefore, the related interest expense does not affect the net income of the Group. Life insurance benefits 208,096 199,420 Annuity benefits 149,092 126,698 Health insurance claims 111,486 117,480 Property and casualty claims 20,078 15,814 Total policy benefits 488,752 459,412 12,409 23,276 3,420 12,166 51,271 12,298 8,997 3,937 8,765 33,997 Change in actuarial liabilities 226,018 338,331 185,021 228,567 Total policy benefits and change in actuarial liabilities 714,770 797,743 236,292 262,564 144 2014 Annual Report 57      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 145 Amounts expressed in US$000 29 EMPLOYEE COSTS 30.1 The Company (continued) Included in administrative expenses, commissions and related compensation are the following: The movement in restricted share grants during the year is as follows: 2014 2013 Administrative staff salaries, directors’ fees and short-term benefits 98,529 85,666 Social security and defined contribution retirement costs Equity-settled compensation benefits (note 30.1 to 30.3) Defined benefit expense (note 31 (b)) 7,917 3,732 6,635 3,499 14,936 12,493 125,114 108,293 30 EQUITY COMPENSATION BENEFITS 30.1 The Company Effective December 31, 2005, the Company introduced a Long Term Incentive (LTI) plan for designated executives of the Sagicor Group and an Employee Share Ownership Plan (ESOP) for permanent administrative employees and sales agents of the Group. A total of 26,555,274 common shares of the Company (or 10% of shares then in issue) have been set aside for the purposes of the LTI plan and the ESOP. (a) LTI plan – restricted share grants Restricted share grants have been granted to designated key management of the Group. 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. 2014 2013 Number of grants ‘000 Weighted average price Number of grants ‘000 Weighted Average price Balance, beginning of year 3,524 US$1.14 2,618 US$1.25 Grants issued Grants vested 2,576 US$1.00 2,183 US$1.03 (897) US$1.07 (1,229) US$1.17 Grants lapsed/forfeited (1,454) US$1.29 (48) US$1.30 Balance, end of year 3,749 US$1.02 3,524 US$1.14 Grants issued may be satisfied out of new shares issued by the Company or by shares acquired in the market. The shares acquired in the market and distributed during the year were as follows: 2014 2013 Number in 000’s $000 Number in 000’s $000 Balance, beginning of year Shares acquired Shares distributed Balance, end of year 673 753 714 819 (1,424) (1,531) 2 2 112 561 - 673 92 622 - 714 Sagicor Financial Corporation 2014 Annual Report 145 58  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 146DRAFT - Notes to the Financial Statements Year ended December 31, 2014 30.1 The Company (continued) (b) LTI plan – share options Share options have been granted to designated key management of the Group during the year. 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. Options vest over four years, 25% each on the first four anniversaries of the grant date. Options are exercisable up to 10 years from the grant date. The movement in share options for the year and details of the share options and assumptions used in determining their pricing are as follows: 2014 2013 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year 13,290 US$1.75 11,255 US$1.86 Options granted Options lapsed/forfeited Balance, end of year 2,916 US$1.08 2,269 US$1.15 - - (234) US$1.68 16,206 US$1.63 13,290 US$1.75 Exercisable at the end of the year 10,264 US$1.88 8,228 US$1.99 Share price at grant date US $1.08 – 2.50 US $1.15 – 2.50 Fair value of options at grant date Expected volatility Expected life Expected dividend yield Risk-free interest rate US$0.24 – 0.69 19.3% – 35.8% 7.0 years 2.6% - 3.7% 4.8% - 6.8% US$0.28 – 0.69 19.3% – 35.8% 7.0 years 2.6% - 3.5% 4.8% - 6.8% Sagicor Financial Corporation Amounts expressed in US$000 30.1 The Company (continued) The expected volatility of options is based on statistical analysis of monthly share prices over the 7 years prior to grant date. (c) ESOP From 2006, the Company approved awards under the ESOP in respect of permanent administrative employees and sales agents of the Company and certain subsidiaries. The ESOP is administered by Trustees under a discretionary trust. The amount awarded is used by the Trustees to acquire company shares. Administrative employees and sales agents are required to serve a qualifying period of five years from the award date in order to qualify as a beneficiary. Shares are distributed to beneficiaries upon their retirement or termination of employment. During 2012, the rules were amended so that vesting will take place in four equal annual instalments commencing one year after the award. The change came into effect during 2013. The shares acquired by the Trustees during the year were as follows: 2014 2013 Number in 000’s $000 Number in 000’s $000 Balance, beginning of year 2,910 5,436 2,916 5,450 Shares acquired Shares distributed 286 (53) 295 (122) - (6) - (14) Balance, end of year 3,143 5,609 2,910 5,436 30.2 Sagicor Group Jamaica Limited (a) Long-term incentive plan The Group offers stock grants and stock options to senior executives as part of its long-term incentive plan. The Group has set aside 150,000,000 of its authorised but un-issued shares of J$0.10 each for the stock grants and stock options. 146 2014 Annual Report 59      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 147 Amounts expressed in US$000 30.2 Sagicor Group Jamaica Limited (continued) 30.2 Sagicor Group Jamaica Limited (continued) In January 2007, the Group introduced a new Long Term Incentive (LTI) plan which replaced the previous Stock Option plan. Under the LTI plan, executives are entitled but not obliged to purchase the Group stock at a pre-specified price at some future date. The options are granted each year on the date of the Board of Directors Human Resources Committee meeting following the performance year at which the stock option awards are approved. Stock options vest in 4 equal installments beginning the first December 31 following the grant date and for the next three December 31 dates thereafter (25% per year). Options are not exercisable after the expiration of 7 years from the date of grant. The number of stock options in each stock option award is calculated based on the LTI opportunity via stock options (percentage of applicable salary) divided by the Black-Scholes value of a stock option of Sagicor Group Jamaica Limited stock on 31 March of the measurement year. The exercise price of the options is the closing bid price on 31 March of the measurement year. In December 2013, the Sagicor Group of companies in Jamaica was reorganized to establish a new holding company which directly or indirectly carries the Group’s holdings in member companies. As a consequence Sagicor Life Jamaica (SLJ) was delisted from the Jamaica Stock Exchange (JSE) and Sagicor Group Jamaica Limited (SGJ) was listed. Further, to harmonize compensation plans across the Group and considering the pending delisting of the subsidiary, Sagicor Investments Jamaica Limited (SIJL), all outstanding options in SIJL as at December 2013 were converted to corresponding SGJ options with equivalent monetary value. From the 2013 measurement year, all executives of the Group participate in the SGJ LTI plan. Details of the share options outstanding are set out in the following table. J$ represents Jamaica $. Further details of share options and the assumptions used in determining their pricing are as follows: 2014 2013 Fair value of options outstanding J$70,025,000 J$72,148,000 Share price at grant date Exercise price J$4.20 – 14.10 J$4.20 – 14.10 J$4.20 – 14.10 J$4.20 – 14.10 Standard deviation of expected share price returns 27.0% 25.0% Remaining contractual term Risk-free interest rate 0.25 - 7 years 0.25 - 7 years 9.19% 8.04% The expected volatility is based on statistical analysis of daily share prices over three years. (b) Employee share purchase plan Sagicor Life Jamaica 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 $711 (2013 – $285). 2014 2013 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year Options granted Options exercised 72,148 19,077 (13,826) J$8.22 J$7.11 J$5.68 Options lapsed/forfeited (7,374) J$10.56 Balance, end of year Exercisable at the end of the year 70,025 50,841 J$8.19 J$9.69 44,590 30,918 (1,524) (1,836) 72,148 55,885 J$6.39 J$10.58 J$4.82 J$6.50 J$8.22 J$7.92 Sagicor Financial Corporation 2014 Annual Report 60  147 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 148 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 31 EMPLOYEE RETIREMENT BENEFITS 31 EMPLOYEE RETIREMENT BENEFITS (continued) The Group maintains a number of defined contribution and defined benefit retirement benefit plans for eligible sales agents and administrative employees. The plans for sales agents and some for administrative administrative employees provide defined contribution benefits. The plans employees in Barbados, Jamaica, Trinidad, Eastern Caribbean and certain other Caribbean countries provide defined benefits based on final salary and number of years active service. Also, in these countries, retired employees may be eligible for medical and life insurance benefits which are partially or wholly funded by the Group. The principal defined benefit retirement plans are as follows: Funded Plans Unfunded Plans Sagicor Life Barbados & Eastern Caribbean Pension Sagicor Life Trinidad Pension Sagicor Life Jamaica Pension Sagicor Life (Heritage Life of Barbados - Barbados & Eastern Caribbean) Pension Sagicor Investments Jamaica Pension Group medical and life plans The above plans also incorporate employees of the Company and other subsidiaries, whose attributable obligations and attributable assets are separately identified for solvency, contribution rate and reporting purposes. The assets of the Sagicor Life Trinidad and Sagicor Life (Heritage Life of Barbados) pension plans are held under deposit administration contracts with Sagicor Life Inc and because these assets form part of the Group's assets, these plans are presented as unfunded in accordance with IAS 19 (revised). The above pension plans are registered with the relevant regulatory authorities in the Caribbean and are governed by Trust Deeds which conform with the relevant laws. The plans are managed by the Group under the direction of appointed Trustees. The group medical and life obligations arise from employee benefit insurance plans where benefits are extended to retirees. All disclosures in sections 31(a) to (d) of this note relate only to defined retirement benefit plans. (a) Amounts recognised in the statement of financial position 2014 2013 Present value of funded pension obligations 186,752 162,772 Fair value of retirement plan assets (169,380) (136,084) 17,372 26,688 Present value of unfunded pension obligations Present value of unfunded medical and life benefits Net liability Represented by: Amounts held on deposit by the Group as deposit administration contracts Other recognised liabilities Total recognised liabilities (note 18) Recognised assets (note 12) Net liability 35,034 24,465 76,871 40,623 37,303 77,926 (1,055) 76,871 32,164 15,420 74,272 42,143 32,624 74,767 (495) 74,272 Pension plans have purchased annuities from insurers in the Group to pay benefits to plan retirees. These obligations are included in actuarial liabilities in the statement of financial position and are excluded from the table above. 148 2014 Annual Report 61      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 31 EMPLOYEE RETIREMENT BENEFITS (continued) (b) Movements in balances Sagicor Financial Corporation 149 Amounts expressed in US$000 2014 2013 Retirement obligations Retirement plan assets Total Retirement obligations Retirement plan assets Net liability / (asset), beginning of year 210,356 (136,084) Current service cost Interest expense / (income) Past service cost and gains / losses on settlements Net expense recognised in income (Gains) / losses from changes in assumptions (Gains) / losses from changes in experience Return on plan assets excluding interest income Net losses recognised in other comprehensive income Contributions made by the Group Contributions made by employees and retirees Benefits paid Liabilities assumed on acquisition of subsidiary Other items Effect of exchange rate movements Other movements 8,424 18,933 1,766 29,123 (4,848) (8,526) - (13,374) 419 6,532 (13,088) 31,846 1,150 (6,713) 20,146 - (14,301) 114 (14,187) - (3,670) 2,099 (1,571) (6,297) (5,316) 11,546 (22,268) 105 4,692 (17,538) Net liability / (asset), end of year 246,251 (169,380) 74,272 8,424 4,632 1,880 14,936 (4,848) (12,196) 2,099 (14,945) (5,878) 1,216 (1,542) 9,578 1,255 (2,021) 2,608 76,871 189,276 (131,476) 7,067 14,021 2,895 23,983 16,634 (6,923) - 9,711 184 5,308 (8,860) - 3,840 (13,086) (12,614) - (11,490) - (11,490) (1,805) 1,567 1,330 1,092 (5,088) (4,177) 7,292 - (2,897) 10,660 5,790 210,356 (136,084) Total 57,800 7,067 2,531 2,895 12,493 14,829 (5,356) 1,330 10,803 (4,904) 1,131 (1,568) - 943 (2,426) (6,824) 74,272 Sagicor Financial Corporation 2014 Annual Report 62  149 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 150 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 31 EMPLOYEE RETIREMENT BENEFITS (continued) 31 EMPLOYEE RETIREMENT BENEFITS (continued) (c) Retirement plan assets (d) Significant actuarial assumptions 2014 2013 The significant actuarial assumptions for the principal geographic areas as of December 31, 2014 were as follows: Equity unit linked pension funds under Group management: Sagicor Equity Fund (Barbados) Sagicor Bonds Fund (Barbados) Sagicor Pooled Investment Funds (Jamaica): Equity Funds Mortgage & Real Estate Fund Fixed Income Fund Foreign Currency Funds Money Market Fund Other Funds Other assets Total plan assets (24,579) (13,847) (19,827) (13,270) (21,689) (18,130) (5,221) (17,161) (27,921) (17,955) (15,768) (12,730) (12,894) (12,043) (9,433) (5,220) (133,724) (113,964) (35,656) (22,120) (169,380) (136,084) The equity unit linked pension funds are funds domiciled in Barbados and Jamaica. Annual reports of these funds are available to the public. 150 2014 Annual Report 63    Pension plans Barbados & Eastern Caribbean Jamaica Trinidad Discount rate - local currency benefits 7.75% Discount rate - US$ indexed benefits Expected return on plan assets Future promotional salary increases n/a 7.75% 4.50% Future inflationary salary increases Future pension increases Future increases in National Insurance Scheme Ceilings Mortality table Termination of active members Early retirement 9.50% 6.50% 9.50% 0.00% 5.50% 2.00% n/a 4.00% n/a 4.00% 0.0% 3.00% 0.00% 0.00% 4.50% for 5 years, 5.75% thereafter 2.00% 3.50% UP94 with projection scale AA GAM1994 with 5 year improvement UP94 with projection scale AA 3% up to age 30, reducing to 1% at age 50, 0% at age 51 10% up to age 30, reducing to 5% at age 50, 0% at age 51 3% up to age 30, reducing to 1% at age 50, 0% at age 51 n/a 100% at the earliest possible age receive unreduced benefits 100% at the earliest possible age receive unreduced benefits   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 151 Amounts expressed in US$000 31 EMPLOYEE RETIREMENT BENEFITS (continued) 31 EMPLOYEE RETIREMENT BENEFITS (continued) Group medical and life plans Long term increase in health costs Jamaica 8.00% (e) Sensitivity of actuarial assumptions (f) Amount, timing and uncertainty of future cash flows In addition to the annual actuarial valuations prepared for the purpose of annual financial statement reporting, full actuarial valuations of pension plans are conducted every 3 years. These full valuations contain recommendations for Group and employee contribution levels which are implemented by the Group as the recommendations are made. The sensitivity of the pension retirement benefit obligations to individual changes in actuarial assumptions is summarised below: For the 2014 financial year, the total Group contributions to its defined benefits pension plans are estimated at $10,457. Barbados & Eastern Caribbean Jamaica Trinidad Base pension obligation 71,029 114,130 12,704 Change in absolute assumption Increase / (decrease) in pension obligations Decrease discount rate by 1.0% 9,833 7,414 2,220 Increase discount rate by 1.0% Decrease salary growth rate by 0.5% Increase salary growth rate by 0.5% Increase average life expectancy by 1 year (7,493) (1,862) 2,086 206 (5,837) (2,385) 6,464 1,099 (1,618) (497) 565 16 Sagicor Financial Corporation 2014 Annual Report 151 64  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 152 Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 32 INCOME TAXES 32 INCOME TAXES (continued) Group companies operating in Caribbean countries are largely taxed according to the taxation rules of the country where the operations are carried out. The principal rates of taxation are summarised in note 2.18(c). The income tax expense and the income subject to taxation in the statement of income are set out in the following table. Income tax on the total income subject to taxation differs from the theoretical amount that would arise is as follows: 2014 2013 2014 2013 Total income / (loss) subject to taxation 166,534 (3,658) Income tax expense: Current tax Deferred tax Share of tax of associates Sources of income subject to tax: Investment income subject to direct taxation Net income / (loss) subject to direct taxation Total income / (loss) subject to taxation 14,548 16,315 1,414 738 2,245 364 16,700 18,924 115,957 105,638 50,577 (109,296) Taxation at the applicable rates on income subject to tax 34,343 Adjustments to current tax for items not subject to / allowed for tax (28,839) Other current tax adjustments Adjustments for current tax of prior periods (78) 23 (7,346) 11,228 (21) 770 Movement in unrecognised deferred tax asset 7,666 11,792 Deferred tax relating to the origination of temporary differences Deferred tax relating to changes in tax rates or new taxes Deferred tax that arises from the write down / (reversal of a write down) of a tax asset (424) (17) (752) 1,598 3,180 16,700 (91) 8 (524) - 3,108 18,924 166,534 (3,658) Tax on distribution of profits from policyholder funds Other taxes In addition to the above, the income tax on items in other comprehensive income is set out in note 35. 152 2014 Annual Report 65      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 153 Amounts expressed in US$000 33 DEFERRED INCOME TAXES 33 DEFERRED INCOME TAXES (continued) 2014 2013 Analysis of deferred income tax liabilities 2014 2013 Accelerated tax depreciation Policy liabilities taxable in the future Defined benefit assets Accrued interest 1,748 40,064 111 963 1,773 40,577 39 902 Unrealised gains on financial investments (1,744) 2,175 Off-settable tax assets in respect of unused tax losses and other items Other items Total (note 19) (9,984) (23,524) 399 590 31,557 22,532 Deferred income tax liabilities to be settled within one year 6,211 7,124 Analysis of deferred income tax assets: Defined benefit liabilities Unrealised losses on financial investments Unused tax losses Off-settable tax liabilities in respect of policy liability timing differences and other items Other items Total deferred income tax assets (note 11) (note 37) Deferred income tax assets to be recovered within one year Unrecognised tax balances: Tax losses Potential deferred income tax assets Expiry period for unrecognised tax losses: 2014 2015 2016 2017 2018 2019 After 2019 7,330 - 26,413 - (5,433) 28,310 4,771 3,271 (1,525) 1,586 (953) 2,429 4,808 2,083 217,174 54,305 204,404 51,050 - 14,370 18,807 20,495 25,334 27,627 110,541 217,174 9,160 14,337 18,795 21,063 25,750 27,687 87,612 204,404 Sagicor Financial Corporation 2014 Annual Report 153 66  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 154DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 34 EARNINGS PER COMMON SHARE 34 EARNINGS PER COMMON SHARE (continued) The basic earnings per common share is computed by dividing earnings attributable to common shareholders by the weighted average number of shares in issue during the year, after deducting treasury shares. Earnings attributable to common shareholders recognise the impact on net income of the Company’s convertible redeemable preference shares (note 21.2). The table below derives the earnings attributable to common shareholders and the basic earnings per common share. The table below derives the adjusted earnings attributable to common shareholders, the adjusted weighted average number of common shares, and the fully diluted earnings per common share. Earnings / (loss) attributable to common shareholders 25,832 (37,908) Weighted average number of shares in issue in thousands 301,558 301,591 2014 2013 2014 2013 LTI restricted share grants ESOP shares 3,131 2,697 2,252 2,337 Adjusted weighted average number of shares in issue 307,386 306,180 Fully diluted earnings / (loss) per common share 8.4 ¢ (12.6) ¢ Attributable to: Continuing operations Discontinued operation 16.6 ¢ (8.2) ¢ 12.2 ¢ (24.8) ¢ Net income / (loss) attributable to common shareholders Finance costs attributable to preference share subscription Amortisation of issue expenses allocated to preference share reserve Preference share dividends declared Earnings / (loss) attributable to common shareholders 27,370 6,483 (36,370) 6,483 (221) (221) (7,800) 25,832 (7,800) (37,908) Weighted average number of shares in issue in thousands 301,558 301,591 Basic earnings / (loss) per common share 8.6 ¢ (12.6) ¢ Attributable to: Continuing operations Discontinued operation 17.3 ¢ (8.7) ¢ 12.5 ¢ (25.1) ¢ The computation of diluted earnings per common share recognises the dilutive impact of LTI share grants and share options (note 30.1), ESOP shares grants (note 30.1), and the convertible redeemable preference shares. In computing diluted earnings per share, the income attributable to common shareholders is adjusted by the dilutive impact of the convertible preference shares and the weighted average number of common sha res is adjusted by the dilutive impacts of the aforementioned share grants, options and preference shares. 154 2014 Annual Report 67      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 35 OTHER COMPREHENSIVE INCOME (OCI) Schedule to OCI from continuing operations Items that may be reclassified subsequently to income: Available for sale assets: Sagicor Financial Corporation 155 Amounts expressed in US$000 2014 2013 After tax OCI is attributable to After tax OCI is attributable to OCI tax expense Shareholders Participating policyholders Non- controlling interests Total OCI tax expense Shareholders Participating policyholders Non- controlling interests Total Gains / (losses) arising on revaluation (15,278) 36,707 (1,792) 3,471 38,386 19,218 (43,215) (15) (4,212) (47,442) (Gains) / losses transferred to income Net change in actuarial liabilities Retranslation of foreign currency operations 1,158 8,503 - (1,655) (21,777) (10,535) (5,617) 2,740 - (1,175) (2,830) 1,807 47 62 - (11,548) (19,970) (22,036) (9,252) (6,450) 1,643 (13,396) - 7,465 (8,409) 30,445 (18,343) (39,522) Items that will not be reclassified subsequently to income: Gains / (losses) arising on revaluation of owner- occupied property Defined benefit gains / (losses) Other items (48) (184) (1,733) - (1,781) 7,971 (108) 7,679 - - - - 211 27 (32) 3,109 5,241 13,212 1,328 (3,240) - (108) 5,452 13,131 - 1,296 - (131) - - (77) (92) - - - - (6,360) (14,769) - 30,445 (18,021) (36,441) (28,593) (68,207) 704 3,813 (6,235) - (9,475) - (5,531) (5,662) Total OCI movements (7,398) 10,419 62 (3,800) 6,681 8,761 (39,653) (92) (34,124) (73,869) Allocated to equity reserves Allocated to retained earnings 2,556 7,863 10,419 (36,413) (3,240) (39,653) Sagicor Financial Corporation 2014 Annual Report 155 68  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 156 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 36 CASH FLOWS 36.1 Operating activities Sagicor Financial Corporation Amounts expressed in US$000 36.1 Operating activities (continued) The gross changes in investment property, debt securities and equity securities are as follows. Adjustments for non-cash items, interest and dividends: Interest and dividend income Net investment (gains) Gain arising on acquisition Net increase in actuarial liabilities Interest expense and finance costs Depreciation and amortisation Increase in provision for unearned premiums Other items Net increase in investments and operating assets: Investment property Debt securities Equity securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits Other assets and receivables 2014 2013 (266,938) (251,046) (47,668) (29,051) 40,997 86,283 20,220 44 10,258 (36,544) - 109,764 74,754 15,230 390 11,711 (185,855) (75,741) 9,472 16,616 (222,964) (270,725) 8,463 (35,500) (4,491) (17,510) (3,632) 37,346 (16,956) (23,156) 2,785 (3,332) (24,504) (24,547) (24,426) (115) (245,772) (351,404) Investment property: Disbursements Disposal proceeds Debt securities: Disbursements Disposal proceeds Equity securities: Disbursements Disposal proceeds Net increase in operating liabilities: Insurance liabilities Investment contract liabilities Other funding instruments Deposits Securities sold for re-purchase Other liabilities and payables 2014 2013 (1,638) 11,110 9,472 (1,424) 18,040 16,616 (1,037,913) (1,115,332) 814,949 844,607 (222,964) (270,725) (70,757) 79,220 8,463 2,930 1,314 55,072 32,877 151,980 61,803 305,976 (90,976) 67,820 (23,156) 2,007 38,667 57,330 47,636 (24,712) 62,451 183,379 156 2014 Annual Report 69      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 157 Amounts expressed in US$000 Management has assessed the bank's ability to recognise the deferred tax asset arising from tax losses and has deemed it appropriate to have such recognition based on projections of future profits. Banking operations of the acquired and existing bank were combined during 2014, management has restructured the organisation to remove duplication of resources and costs. The bank is also expected to benefit in 2015 from improved efficiencies and synergies within the Sagicor Group. 36.2 Investing activities Property, plant and equipment: Purchases Disposal proceeds 36.3 Financing activities Other 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 37 SUBSIDIARY ACQUISITION AND OWNERSHIP CHANGES 2014 2013 (23,324) 2,408 (20,916) (19,899) 1,615 (18,284) 2014 2013 - (683) (683) 43,096 (664) 42,432 2014 2013 402,525 226,370 57,782 (1,459) (17,654) 67,998 (1,933) (33,835) 441,194 258,600 Net assets acquired: Property, plant and equipment Intangible assets Financial investments Deferred tax asset Miscellaneous assets and receivables Cash resources Other insurance liabilities Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total net assets Share of net assets acquired Purchase consideration and related costs Goodwill arising on acquisition (note 8) On June 27, 2014, the Group acquired 100% of the share capital of RBC Royal Bank (Jamaica) Limited and its subsidiary, RBC Securities (Jamaica) Limited. The net assets acquired amounted to $113,427 for a purchase consideration of $84,378. This gave rise to negative goodwill of $29,051. Details of acquiree’s net income and total revenue: For the year ended December 31, 2014 Consolidated from acquisition date to December 31, 2014 Sagicor Financial Corporation Fair Value Acquiree's carrying value 14,041 10,304 6,390 8,816 255,036 255,036 30,602 45,946 178,778 (10,957) - 17,503 178,778 (10,957) (356,044) (356,044) (6,107) (4,228) (9,770) 79,417 (40,281) (4,228) (9,770) 113,427 113,427 84,378 (29,051) Total Revenue Net Income 56,317 18,626 (7,425) (5,049) 2014 Annual Report 157 70  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 158 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 38 DISCONTINUED OPERATION 38 Discontinued operation (continued) On July 29, 2013, the Company entered into an agreement to sell Sagicor Europe and its subsidiaries to AmTrust Financial Services, Inc. (AmTrust), subject to regulatory approvals. Final regulatory approvals were obtained on December 23, 2013, on which date the sale was completed. The operations of the Sagicor Europe operating segment are presented as discontinued operations in these financial statements and a financial liability has been included for the settlement of open underwriting years. The Group's effective shareholder's interest in these companies prior to divestment was 100% and the effective legal interest was 93%. The consideration for the sale was £56,178,000 ($91,913), representing the assumption by AmTrust of indebtedness of Sagicor Europe and its subsidiaries to Sagicor. The terms of the sale required the Company to take certain actions and provide certain commitments which included: (ii) The purchase prior to the sale by Sagicor of the legal 7% shareholding interest held by the minority shareholders; (iii) Future price adjustments to the consideration, representing adjusted profits or losses from January 1, 2013 in the run-off of the 2011, 2012 and 2013 underwriting years of account of syndicates 1206 and 44, the total price adjustments subject to a limit. Immediately prior to the sale, Sagicor purchased the minority shareholdings for $1,157. The minority shareholders were participating employees who had subscribed in cash for shares of Sagicor Europe. Each participating employee had contracted with Sagicor Europe and the Company under a share subscription agreement. Under the provisions of these agreements, participating employees could exercise a put option to the Company to acquire their shares at the prevailing fair value. The first tranches of put options vested in 2012 and 2013 representing 7% of the total shareholding and were exercised for cash consideration of $1,305. The put options were accounted for as cash settled share based payment arrangements. As of December 31, 2014, the price adjustments have been estimated at £28,833,000 ($45,003) which has been recorded as a liability to AmTrust. The anticipated settlement dates are as follows: March 31, 2014 March 31, 2015 (i) March 31, 2016 March 31, 2019 2014 - 21,069 30,682 (5,955) 45,796 2013 34,262 - 33,758 (12,996) 55,024 (i) On March 20, 2015, the Group entered into a Convertible Senior Note with AmTrust. This facility becomes due in 2016 (Note 48). Movement in Price Adjustments Balance Payable end 2013 Payment made Experience loss for 2014 Net currency movements Payable end 2014 2014 55,024 (35,003) 26,192 (417) 45,796 The price adjustments have a limit of a further £19,948,726 ($31,135) which is the Group's maximum possible contingent liability for future price adjustments. The price adjustments are subject to insurance risk (as indicated in note 3.5) and to investment and foreign currency risk as the results of run-off of the underwriting years up to 2013 could vary if there are future deviations in projected underwriting returns, investment returns and foreign exchange rates. 158 2014 Annual Report 71      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 159 Amounts expressed in US$000 38 Discontinued operation (continued) 38 Discontinued operation (continued) After accounting for its status as a discontinued operation and for the details of the sale, the net loss recognised in the statement of income and the statement of comprehensive income is as follows. Included in premium revenue and reinsurance premium expense are property and casualty insurance lines as follows: Statement of income Loss from operations Write-down of carrying value of investment in Sagicor Europe Expenses incurred on sale Available for sale asset fair value loss realised on sale Currency translation gain / (loss) realised on sale Other expenses Movement in price adjustment Net loss Other comprehensive income: Items that may be reclassified subsequently to income: Fair value reserve for available for sale assets: Net fair value movements prior to sale Cumulative loss transferred to income on sale Net currency translation movements prior to sale Currency translation loss transferred to income on sale Other comprehensive loss Total comprehensive loss 2014 - - - - 417 (592) (26,192) (26,367) - - - - - 2013 (33,247) (21,123) (2,900) (623) (17,615) - - (75,508) (147) 623 1,181 17,615 19,272 (26,367) (56,236) Direct property Direct motor Direct accident and liability Reinsurance assumed Gross premium Ceded to reinsurers 2013 134,072 (6,269) 133,406 29,762 290,971 2013 24,719 (5) 15,813 6,084 46,611 Included in policy benefits and change in actuarial liabilities (reinsured) are property and casualty insurance claims as follows: Direct property Direct motor Direct accident and liability Reinsurance assumed Gross benefit Ceded to reinsurers 2013 97,901 (2,799) 83,266 29,206 207,574 2013 30,908 (5,146) 2,066 3,250 31,078 Sagicor Financial Corporation 2014 Annual Report 159 72  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 160DRAFT - Notes to the Financial Statements Year ended December 31, 2014 38 Discontinued operation (continued) Net cash flows from the discontinued operation were as follows: Operating activities Investing activities Financing activities Cash on disposal Effects of exchange rate changes Year ended December 23, 2013 (20,653) (167) 1,150 (61,069) 1,857 (78,882) Under the terms of sale, the banker's letter of credit facility and the reinsurance financing facility were cancelled. The b anker's letter of credit was secured by $50,104 which was returned to Sagicor in January 2014. These funds were included in other receivables at December 31, 2013 (note 12). As a result of the sale, Sagicor has no Funds at Lloyd's in respect of the 2013 and prior underwriting years of account. Sagicor Financial Corporation Amounts expressed in US$000 39 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: 2014 2013 Customer guarantees and letters of credit (1) 16,288 12,372 (1) 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. 160 2014 Annual Report 73      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 161 Amounts expressed in US$000 40 FAIR VALUE OF PROPERTY 40 Fair value of property (continued) Investment and owner-occupied property are carried at fair value as determined by independent valuations 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. The highest and best use of a property may also be considered in determining its fair value. Some tracts of land are currently used for farming operations or are un-developed or are leased to third parties. In determining the fair value of all lands, their potential for development within a reasonable period is assessed, and if such potential exists, the fair value reflects that potential. These lands are mostly in Barbados and the Group has adopted a policy of orderly development and transformation to realise their full potential over time. The fair value hierarchy has been applied to the valuations of the Group's property. The different levels of the hierarchy are as follows:    Level 1 - fair value is determined by quoted un-adjusted prices in active markets for identical assets; Level 2 - fair value is determined by inputs other than quoted prices in active markets that are observable for the asset either directly or indirectly; Level 3 - fair value is determined from inputs that are not based on observable market data. The results of applying the fair value hierarchy to the Group's property as of December 31, 2013 are as follows: Investment property Owner-occupied lands Owner-occupied land and buildings Level 1 Level 2 Level 3 Total - - - - - - - - 88,766 38,220 77,901 88,766 38,220 77,901 204,887 204,887 For Level 3 investment property, reasonable changes in fair value would affect net income. For Level 3 owner occupied property, reasonable changes in fair value would affect other comprehensive income. The following table represents the movements in Level 3 property for the current year. Investment property Owner-occupied property Lands Land and buildings Total Balance, beginning of year Additions Transfers in / (out) Fair value changes recorded in net investment income Fair value changes recorded in other comprehensive income Depreciation Disposals and divestitures Effect of exchange rate changes 98,369 1,638 583 (3,468) - - (8,269) (87) 38,428 66,281 203,078 - (7) - 13,741 15,379 (568) 8 - (3,468) (201) 278 77 - - - (1,013) (1,013) - (8,269) (818) (905) Balance, end of year 88,766 38,220 77,901 204,887 Sagicor Financial Corporation 2014 Annual Report 74  161 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 162DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 41 FINANCIAL RISK 41.1 Credit 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 default, liquidity and market risks. Market risks arise from changes in interest rates, equity prices, currency exchange rates or other market factors. The principal insurance risks are identified in notes 42 and 43. 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. 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 Group has developed an internal credit rating standard. 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. The amounts disclosed in this note and in notes 42 and 43, exclude amounts in the statement of financial position as liabilities of discontinued operation. 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 Moderate risk Acceptable risk Average risk A BBB BB B A Baa Ba B A BBB BB B a bbb bb b Higher risk CCC, CC Caa, Ca CCC, CC ccc, cc Special mention C Substandard Doubtful D C C 10 Loss c d C DDD DD D 162 2014 Annual Report 75      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 163 Amounts expressed in US$000 41.1 Credit risk (continued) 41.1 Credit risk (continued) The Group applies this rating scale to three categories of exposures:  Investment portfolios, comprising debt securities, deposits, securities purchased for re-sale, and cash balances;  Lending portfolios, comprising mortgage, policy and finance loans and finance leases;  Reinsurance exposures, comprising reinsurance assets for life, annuity and health insurance (see note 43.3) or realistic disaster scenarios for property and casualty insurance (see note 42.3). The 3 default grades are used for lending portfolios while investment portfolios and reinsurance exposures use one default grade: 8. 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. Investment portfolios Lending portfolios Reinsurance assets Other financial assets 2014 2013 $000 % $000 4,008,176 71.4 3,620,468 838,301 14.9 507,019 145,891 9.0 2.6 556,893 316,274 162,557 % 76.7 11.8 6.7 3.4 Total financial statement exposures 5,499,387 97.9 4,656,192 98.6 Loan commitments Customer guarantees and letters of credit Other 69,307 16,288 25,415 Total off financial statement exposures 1 11 ,010 1.2 0.4 0.5 2.1 40,728 12,372 13,626 66,726 0.9 0.2 0.3 1.4 Total 5,610,397 100.0% 4,722,918 100.0% The amounts in respect of customer guarantees and letters of credit represent potential claims against customers in the event of a call on customer guarantees and letters of credit issued by the Group. Sagicor Financial Corporation The Group’s largest exposures to individual counterparty credit risks as of December 31, 2014 and 2013 are set out below. The individual ratings reflect the rating of the counterparty listed below, while the amounts include exposures with subsidiaries of the counterparty. Sagicor Risk Rating 2014 Sagicor Risk Rating 2013 Investment portfolios: Government of Jamaica Government of Trinidad and Tobago Government of Barbados The Bank of Nova Scotia Government of St Lucia The Federal National Mortgage Association The Federal Home Loan Mortgage Corporation Lending portfolios: Value Assets International S.A. and Egret Limited Reinsurance assets: Guggenheim Partners(1) 5 2 5 1 5 1 1 4 5 929,353 156,574 297,742 86,405 79,013 91,943 81,139 5 2 4 1 5 1 1 869,609 144,897 301,385 74,886 70,370 88,020 66,444 32,611 4 59,452 412,516 5 229,433 (1)The reinsurance asset held in the name of Guggenheim Partners are secured by assets held in trust totalling $421,098 (2013 - $230,255). 2014 Annual Report 163 76  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 164 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.1 Credit risk (continued) (a) Investment portfolios Sagicor Financial Corporation Amounts expressed in US$000 41.1 Credit risk (continued) (b) Lending portfolios The results of the risk rating of investment portfolios are as follows: The results of the risk rating of lending portfolios are as follows: Investment portfolios Risk Rating Classification 2014 2013 Exposure $000 Exposure % Exposure $000 Exposure % 1 2 3 4 5 6 7 8 Minimal risk Low risk Moderate risk Acceptable risk 587,359 642,099 994,603 119,418 Average risk 1,610,551 Higher risk Special mention Substandard 11,575 5,692 10,851 15% 16% 25% 3% 40% 0% 0% 0% 484,677 677,896 792,690 432,679 1,182,436 15,849 6,461 9,535 TOTAL RATED EXPOSURES 3,982,148 99% 3,602,223 UN-RATED EXPOSURES 26,028 1% 18,245 13% 19% 22% 12% 33% 0% 0% 0% 99% 1% Lending portfolios Risk Rating Classification 1 2 3 4 5 6 7 8 9 Minimal risk Low risk Moderate risk Acceptable risk Average risk Higher risk Special mention Substandard Doubtful 10 Loss 2014 2013 Exposure $000 Exposure % Exposure $000 Exposure % 407,558 57,952 198,498 16,919 30,102 12,779 647 13,763 5,665 11,020 49% 7% 24% 2% 4% 2% 0% 2% 1% 1% 92% 8% 134,565 101,367 122,481 37,076 54,500 13,250 904 10,977 2,381 2,469 479,970 76,923 24% 18% 22% 7% 10% 2% 0% 2% 0% 0% 85% 15% TOTAL 4,008,176 100% 3,620,468 100% TOTAL RATED EXPOSURES 754,903 UN-RATED EXPOSURES 83,398 Investment portfolio assets are mostly unsecured except for securities purchased under agreement to resell for which title to the securities is transferred to the Group for the duration of each agreement. TOTAL 838,301 100% 556,893 100% 164 2014 Annual Report 77      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 165 Amounts expressed in US$000 41.1 Credit risk (continued) 41.1 Credit risk (continued) Exposure to credit risk is also managed in part by obtaining collateral and guarantees for lending portfolios. For mortgage loans, the collateral is real estate property, and the approved loan limit is 80% 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 $4,592. 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 may be advanced to the extent of available cash surrender value. Mortgage loans less than 90 to 180 days past due and finance loans and finance leases less than 30 to 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. Accumulated allowances for impairment reflect the Group’s assessment of total individually impaired assets at the date of the financial statements. The following tables set out the carrying values of debt securities, mortgage loans, finance loans and finance leases, analysed by past due or impairment status. Exposure to the lending portfolios by geographic area is as follows. Barbados Jamaica Trinidad & Tobago Other Caribbean USA 2014 2013 212,236 361,387 111,662 97,585 55,431 206,762 123,276 78,364 91,217 57,274 838,301 556,893 (c) Past due and impaired financial assets 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 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. Debt securities Mortgage loans Finance loans & leases 2014 Neither past due nor impaired 3,435,400 233,202 330,215 Past due up to 3 months, but not impaired Past due up to 12 months, but not impaired Past due up to 5 years, but not impaired Past due over 5 years, but not impaired 683 125 - - 23,810 67,037 8,944 9,177 4,765 419 - - Total past due but not impaired 808 46,696 67,456 Impaired assets (net of impairment) 11,341 14,335 12,914 Total carrying value 3,447,559 294,233 410,585 Accumulated allowances on impaired assets Accrued interest on impaired assets 9,334 216 3,976 400 20,575 212 Sagicor Financial Corporation 2014 Annual Report 78  165 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 166DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.1 Credit risk (continued) Debt securities Mortgage loans Finance loans & leases 2013 Neither past due nor impaired 3,175,967 167,522 143,909 Past due up to 3 months, but not impaired Past due up to 12 months, but not impaired Past due up to 5 years, but not impaired Past due over 5 years, but not impaired 6,587 250 - - 55,945 11,444 4,034 6,881 16,937 193 - - Total past due but not impaired 6,837 78,304 17,130 Impaired assets (net of impairment) 8,972 11,781 4,011 Total carrying value 3,191,776 257,607 165,050 Accumulated allowances on impaired assets Accrued interest on impaired assets 9,759 4,096 3,034 319 2,682 132 The Group is also exposed to impaired premiums receivable. Property and casualty insurers frequently provide settlement terms to customers and intermediaries which extend up to 3 months. 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. (d) 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. Sagicor Financial Corporation Amounts expressed in US$000 41.1 Credit risk (continued) (e) 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. 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. Asset liability matching is a tool used by the Group to mitigate liquidity risks particularly in operations with significant maturing short-term liabilities. For long-term insurance 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. 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. Investment property may be held to back insurance liabilities. As these assets are relatively illiquid, the insurers hold less than 5% of their total assets in investment property. 166 2014 Annual Report 79      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.2 Liquidity risk (continued) (a) Insurance liabilities Sagicor Financial Corporation 167 Amounts expressed in US$000 The Group’s monetary 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. 2014 Actuarial liabilities Other insurance liabilities Total 2013 Actuarial liabilities Other insurance liabilities Total Maturing within 1 year 193,615 95,220 288,835 159,515 92,323 251,838 Expected discounted cash flows Maturing 1 to 5 years 597,671 13,691 611,362 547,912 12,567 560,479 Maturing after 5 years 1,770,935 54,907 1,825,842 1,616,892 55,980 1,672,872 Total 2,562,221 163,818 2,726,039 2,324,319 160,870 2,485,189 Sagicor Financial Corporation 2014 Annual Report 167 80  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 168DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.2 Liquidity risk (continued) (b) Financial liabilities and commitments Sagicor Financial Corporation Amounts expressed in US$000 Contractual cash flow obligations of the Group in respect of its financial liabilities and commitments are summarised in the following table. 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. 2014 - Contractual un-discounted cash flows 2013 - Contractual un-discounted cash flows On demand or within 1 year 1 to 5 years After 5 years Total On demand or within 1 year 1 to 5 years After 5 years Total Financial liabilities: Investment contract liabilities Notes and loans payable Deposit and security liabilities: Other funding instruments Customer deposits Structured products Securities sold for re-purchase Derivative financial instruments Bank overdrafts Accounts payable and accrued liabilities Total financial liabilities Off financial statement commitments: Loan commitments Non-cancellable operating lease and rental payments Guarantees, acceptances and other financial facilities Total off financial statements commitments 314,269 56,353 330,844 532,004 1,221 669,455 9,063 1,459 117,784 2,032,452 47,732 4,553 22,730 75,015 43,026 275,644 31,778 44,978 18,860 122 1,425 - 45,859 461,692 7,656 7,875 1,542 9,241 - 11,527 4 - - - - 34,870 55,642 13,919 4,324 2,486 366,536 331,997 374,149 576,986 20,081 669,577 10,488 1,459 198,513 301,539 13,968 283,099 178,566 9,548 503,906 28,730 1,933 109,316 2,549,786 1,430,605 69,307 16,752 26,758 31,288 7,001 10,321 48,610 17,073 20,729 112,817 61,773 331,571 33,510 48,357 7,823 23,755 5,877 - 21,649 534,315 8,187 16,581 1,917 26,685 10,759 - 9,010 - - - - - 374,071 345,539 325,619 226,923 17,371 527,661 34,607 1,933 844 131,809 20,613 1,985,533 1,253 5,908 134 7,295 40,728 29,490 12,372 82,590 Total 2,107,467 478,765 76,371 2,662,603 1,479,215 561,000 27,908 2,068,123 168 2014 Annual Report 81      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.2 Liquidity risk (continued) (c) Financial and insurance assets Sagicor Financial Corporation Amounts expressed in US$000 169 The contractual maturity periods of monetary financial assets and the expected maturity periods of monetary insurance assets are summarised in the following table. Amounts are stated at their carrying values recognised in the financial statements. For this disclosure, monetary insurance assets comprise policy loans and reinsurance assets. Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits Derivative financial instruments Reinsurance assets: share of actuarial liabilities Reinsurance assets: other Premiums receivable Other assets and accounts receivable Cash resources Total 2014 – Contractual or expected discounted cash flows 2013 – Contractual or expected discounted cash flows 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 427,885 892,531 2,127,133 3,447,549 375,659 810,560 2,005,557 3,191,776 24,449 5,237 106,041 31,487 116,070 21,845 52,877 32,082 39,731 42,436 28,132 14,298 143,164 37 8,530 1,423 241,652 113,948 161,380 - 1,978 - 168,454 248,940 4,449 - 217 - 3,010 37,446 294,233 133,483 410,585 31,524 126,578 23,268 470,271 36,748 39,731 82,892 27,096 5,387 47,044 40,875 147,406 40,362 29,966 27,260 36,318 79,625 402,525 - - 402,525 226,370 31,945 14,851 73,670 - 11,434 4,853 198,566 113,998 44,336 - 2,607 - 102,656 152,628 3,539 - 534 - 225 - 865 - 257,607 134,236 165,050 40,875 161,447 45,215 285,250 31,024 36,318 81,024 226,370 1,302,665 1,264,028 2,932,694 5,499,387 1,083,368 1,054,042 2,518,782 4,656,192 Sagicor Financial Corporation 2014 Annual Report 82  169 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 170 Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 41.3 Interest rate risk 41.3 Interest rate risk (continued) 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 Group manages its interest rate risk by a number of measures, including where feasible the selection of assets which best match the maturity of liabilities, the offering of investment contracts which match the maturity profile of assets, the re-pricing of interest rates on loans receivable, policy contracts and financial liabilities in response to market changes. In certain Caribbean markets, where availability of suitable investments is often a challenge, the Group holds many of its fixed rate debt securities to maturity and therefore mitigates the transient interest rate changes in these markets. The 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:    minimum annuity rates which are guaranteed to be applied at some future date; minimum guaranteed death benefits which are applicable when the performance of an interest bearing or unit linked fund falls below expectations; minimum guaranteed returns in respect of cash values and universal life investment accounts. 170 2014 Annual Report 83      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.3 Interest rate risk (continued) Sagicor Financial Corporation Amounts expressed in US$000 171 The table following summarises the exposures to interest rates on the Group’s monetary 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. Exposure within 1 year Exposure 1 to 5 years 43,990 312,935 4,859 40,052 708 298,637 325,194 533,351 184 655,048 4,600 1,459 8,117 28,443 37,048 13,149 6,158 - - 292 2014 Exposure after 5 years 54,422 7,974 - 6,681 4 - - - - - Not exposed to interest 60,547 - (403) 492 164 6,735 3,596 1,665 - Total 163,818 360,961 298,942 360,810 570,567 20,068 664,802 6,265 1,459 189,035 197,444 Other insurance liabilities Investment contract liabilities Notes and loans payable Deposit and security liabilities: Other funding instruments Customer deposits Structured products Securities sold for re-purchase Derivative financial instruments Bank overdrafts Accounts payable and accrued liabilities Exposure within 1 year Exposure 1 to 5 years 2013 Exposure after 5 years Not exposed to interest 45,521 300,215 5,133 57,617 55,981 9,169 54,235 - 683 292,813 - (3,336) 278,196 174,979 8,640 497,455 - 1,933 10,050 27,362 43,133 6,016 23,162 26,168 - - 7,699 - - - - - - 182 1,080 2,715 3,615 3,748 - 121,187 131,237 Total 160,870 367,001 290,160 313,439 219,192 17,371 524,232 29,916 1,933 Total 1,885,586 428,638 69,081 261,831 2,645,136 1,317,672 481,404 72,849 183,426 2,055,351 Sagicor Financial Corporation 2014 Annual Report 84  171 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 172 Year ended December 31, 2014 41.3 Interest rate risk (continued) Sagicor Financial Corporation Amounts expressed in US$000 The table following summarises the exposures to interest rate and reinvestment risks of the Group’s monetary 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. 2014 2013 Exposure within 1 year Exposure 1 to 5 years Exposure after 5 years Not exposed to interest Total Exposure within 1 year Exposure 1 to 5 years Exposure after 5 years Not exposed to interest Total 627,847 828,091 1,942,487 49,124 3,447,549 497,918 860,716 1,788,189 44,953 3,191,776 742 49,590 4,358 288,177 31,378 115,621 4,999 2,281 2,286 5,229 273,993 - 33,754 14,049 64,861 - 207,015 110,646 55,637 - 8,422 1,570 - - - 605 - - 217 - 12 - - 193,532 194,274 3,874 4,430 1,910 146 965 18,269 34,250 37,445 77,046 294,233 133,483 410,585 31,524 126,578 23,268 36,748 39,731 82,892 14,811 122,658 4,368 46,137 40,713 146,554 - 1,842 2,435 1,683 - 34,703 14,599 73,647 - 11,529 24,847 - - 207 - - 180,749 195,560 96,436 110,682 44,236 - 3,810 4,587 1,030 162 257,607 134,236 165,050 40,875 2,282 1,082 161,447 - 225 - 27 - 20,368 28,957 33,883 79,107 63,327 45,215 31,024 36,318 81,024 226,370 128,532 402,525 163,043 1,406,501 949,782 2,317,584 549,523 5,223,390 1,042,162 1,020,248 2,042,077 462,015 4,566,502 Debt securities Equity securities Mortgage loans Policy loans Finance loans and leases Securities purchased for re-sale Deposits Derivative financial instruments Reinsurance assets: other Premiums receivable Other assets and accounts receivable Cash resources Total 172 85    2014 Annual Report   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 173 Amounts expressed in US$000 41.3 Interest rate 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 in respect of continuing operations. Sagicor Investments Jamaica Limited and Sagicor Bank Jamaica Limited 2014 2013 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 the above companies which operate in Jamaica. Financial assets: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits Financial liabilities: Investment contract liabilities Notes and loans payable Other funding instruments Deposits Securities sold for re-purchase 6.3% 6.6% 7.5% 11.4% 5.6% 1.7% 5.4% 8.3% 2.0% 2.6% 5.0% 6.6% 7.5% 7.1% 10.0% 3.7% 1.8% 5.3% 7.2% 2.2% 3.6% 4.8% a) Sensitivity Sensitivity to interest rate risk is considered by operating subsidiaries. The effects of changes in interest rates of assets backing actuarial liabilities are disclosed in note 43.4. 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 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 in the following paragraphs.  The sensitivity of income is the effect of the assumed changes in interest rates on income based on floating rate debt securities 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. Change in interest rate JMD USD 2014 Effect on net income Effect on TCI Change in interest rate JMD USD 2013 Effect on net income Effect on TCI - 1% - 0.5% (996) 11,653 - 1% - 0.5% +2.5% + 2% 1,799 (37,376) +2.5% + 2% (2,287) 6,174 8,831 (27,580) 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 amounts 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. Sagicor Financial Corporation 2014 Annual Report 173 86  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 174 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.4 Foreign exchange risk (continued) Sagicor Financial Corporation Amounts expressed in US$000 2014 US$ 000 equivalents of balances denominated in Barbados $ Jamaica $ Trinidad $ Eastern Caribbean $ US $ Other Currencies Total ASSETS Financial investments(1) Reinsurance assets Receivables (1) Cash resources Total monetary assets Other assets (2) Total assets of continuing operations LIABILITIES Actuarial liabilities Other insurance liabilities(1) Investment contracts Notes and loans payable Deposit and security liabilities Provisions Accounts payable and accruals Total monetary liabilities Other liabilities (2) Total liabilities of continuing operations Net position 478,885 689,190 289,162 135,458 2,684,225 190,300 4,467,220 10,174 16,357 16,313 521,729 211,032 732,761 911 65,213 48,162 803,476 275,029 1,078,505 401,181 270,145 68,178 34,726 18,630 87,245 26,744 29,863 666,567 13,059 679,626 53,135 18,861 66,206 - 521,969 29,400 79,045 985,626 6,258 991,884 86,621 10,149 10,382 71,990 381,683 83,939 465,622 327,944 26,603 126,811 - 1,774 13,586 12,912 509,630 22,208 531,838 (66,216) 2,507 8,400 9,137 481,543 17,751 205,568 155,502 3,389,087 33,860 66,396 189,362 3,455,483 71,624 9,351 48,703 - 12,293 1,026 7,677 1,404,396 27,799 76,544 280,312 969,762 1,492 64,800 1,735 4,520 51,355 247,910 10,777 258,687 86,931 13,026 7,971 - 507,019 122,623 402,525 5,499,387 681,033 6,180,420 2,562,221 163,818 360,961 298,942 30,928 1,623,971 6,108 3,147 78,356 197,444 150,674 2,825,105 148,111 5,285,713 3,652 29,110 1,082 75,369 154,326 2,854,215 149,193 5,361,082 35,036 601,268 109,494 819,338 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets 174 2014 Annual Report 87      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.4 Foreign exchange risk (continued) Sagicor Financial Corporation 175 Amounts expressed in US$000 2013 US$ 000 equivalents of balances denominated in Barbados $ Jamaica $ Trinidad $ Eastern Caribbean $ US $ Other Currencies Total ASSETS Financial investments(1) Reinsurance assets Receivables (1) Cash resources Total monetary assets Other assets (2) Total assets of continuing operations LIABILITIES Actuarial liabilities Other insurance liabilities(1) Investment contracts Notes and loans payable Deposit and security liabilities Provisions Accounts payable and accruals Total monetary liabilities Other liabilities (2) Total liabilities of continuing operations Net position 485,069 566,073 294,036 122,584 2,298,468 229,976 3,996,206 8,291 12,051 25,244 530,655 209,384 740,039 412,830 65,868 35,797 17,372 92,762 30,339 29,701 684,669 13,765 698,434 41,605 664 24,730 12,884 604,351 190,941 795,292 288,580 18,538 69,879 - 260,637 25,088 30,540 693,262 3,738 697,000 98,292 10,617 9,761 24,929 339,343 96,006 435,349 303,083 25,696 116,304 - 1,946 11,780 16,541 475,350 20,378 495,728 (60,379) 2,277 6,365 7,420 138,646 34,280 172,926 70,562 11,225 44,852 - 11,865 961 6,543 292,327 9,885 129,525 2,730,205 100,589 2,830,794 1,162,915 26,263 92,551 272,788 699,248 1,119 42,090 2,098 54,550 26,368 312,992 10,360 323,352 86,349 13,280 7,618 - 316,274 117,342 226,370 4,656,192 641,560 5,297,752 2,324,319 160,870 367,001 290,160 39,625 1,106,083 5,796 5,822 75,083 131,237 146,008 2,296,974 158,490 4,454,753 3,151 20,216 1,541 62,789 149,159 2,317,190 160,031 4,517,542 23,767 513,604 163,321 780,210 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets Sagicor Financial Corporation 2014 Annual Report 88  175 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 176DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 41.4 Foreign exchange risk (continued) 41.4 Foreign exchange risk (continued) 41.5 Fair value of financial instruments 41.5 Fair value of financial instruments (continued) (a) Sensitivity JMD currency risk The fair value of financial instruments is measured according to a fair value hierarchy which reflects In assessing the fair value of non-traded financial liabilities, the Group uses a variety of methods the significance of market inputs in the valuation. This hierarchy is described and discussed in including obtaining dealer quotes for specific or similar instruments and the use of internally The Group is exposed to currency risk in its operating currencies whose values have noticeably fluctuated against the United States dollar (USD). The effect of a 10% depreciation in the JMD relative to the USD arising from JMD reporting units as of December 31, 2014 and for the year then ended are considered in the following table. sections (i) to (iii) below. (i) Level 1 – unadjusted quoted prices in active markets for identical instruments Amounts denominated in JMD USD Total amounts Effect of a 10% depreciation A financial instrument is regarded as quoted in an active market if quoted prices are readily and which are carried at fair value. The Group assigns a fair value hierarchy of Level 2 to the contract regularly available from an exchange or other independent source, and those prices represent actual liability if the liability represents the unadjusted fair value of the underlying pool of assets. The exposure to currency risk may result in three types of risk, namely:  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). Financial position: Assets Liabilities Net position Represented by: 1,292,783 1,052,094 2,344,877 1,045,321 1,143,878 2,189,199 247,462 (91,784) 155,678  Currency risk of reported results of foreign operations 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 results at a different rate of exchange results in either less or more income being consolidated in the Group’s income statement.  Currency risk of the Group’s investment in foreign operations This occurs when a reporting unit’s functional currency depreciates or appreciates in value when retranslated to the USD, which is the Group’s presentational currency. In this instance, the conversion of the reporting unit’s assets and liabilities at a different rate of exchange results in a currency loss or gain which is recorded in the currency translation reserve (note 22). If the reporting unit was disposed of, either wholly or in part, then the corresponding accumulated loss or gain in the currency translation reserve would be transferred to income or retained earnings. Income statement: Revenue Benefits Expenses Income taxes Net income Represented by: 375,719 53,251 428,970 (212,992) (8,973) (221,965) (132,177) (14,270) (146,447) (7,740) 22,810 - 30,008 (7,740) 52,818 Currency risk relating to the future cash flows of monetary balances Currency risk of reported results of foreign operations (129,279) (104,532) (24,747) (24,747) (47,065) 21,299 13,218 774 (11,774) (9,493) (2,281) (11,774) 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. Certain of the Group’s policy liabilities are unit linked, i.e. derive their value from a pool of assets (iii) Level 3 – inputs for the instrument that are not based on observable market data A financial instrument is classified as Level 3 if:   The fair value is derived from quoted prices of similar instruments that are observable and which would be classified as Level 2; or The fair value is derived from inputs that are not based on observable market data. 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 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 instrument is not classified as Level 1. (ii) Level 2 – inputs that are observable for the instrument, either directly or indirectly A financial instrument is classified as Level 2 if:   as Level 1; or The fair value is determined from quoted prices that are observable but there is no data The fair value is derived from quoted prices of similar instruments which would be classified 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. available to substantiate frequent market trading of the instrument. Level 3 assets designated fair value through income include mortgage loans and securities purchased In estimating the fair value of non-traded financial assets, the Group uses a variety of methods such and deposit administration contracts. These assets are valued with inputs other than observable for re-sale for which the full income return and capital returns accrue to holders of unit linked policy 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 market data. government securities in the same country of issue as the security; for non-government securities, an The techniques and methods described in the preceding section (ii) for non traded financial assets interest spread is added to the derived rate for a similar government security rate according to the and liabilities may also used in determining the fair value of Level 3 instruments. perceived additional risk of the non-government security. The operating currency whose value noticeably fluctuate against the USD is the Jamaica dollar (JMD). The theoretical impact of JMD currency risk on reported results and of the Group’s investment in foreign operations is considered in the following section. A 10% appreciation in the JMD relative to the USD would have equal and opposite effects to those disclosed above. 176 2014 Annual Report 89      Sagicor Financial Corporation  Sagicor Financial Corporation 90  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 177 Amounts expressed in US$000 41.5 Fair value of financial instruments 41.5 Fair value of financial instruments (continued) The fair value of financial instruments is measured according to a fair value hierarchy which reflects the significance of market inputs in the valuation. This hierarchy is described and discussed in sections (i) to (iii) below. (i) Level 1 – unadjusted quoted prices in active markets for identical instruments 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 instrument is not classified as Level 1. (ii) Level 2 – inputs that are observable for the instrument, either directly or indirectly A financial instrument is classified as Level 2 if:   The fair value is derived from quoted prices of similar instruments which would be classified as Level 1; or The fair value is determined from quoted prices that are observable but there is no data available to substantiate frequent market trading of the instrument. 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. 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. 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. (iii) Level 3 – inputs for the instrument that are not based on observable market data A financial instrument is classified as Level 3 if:   The fair value is derived from quoted prices of similar instruments that are observable and which would be classified as Level 2; or The fair value is derived from inputs that are not based on observable market data. 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. Level 3 assets designated fair value through income include mortgage loans and securities purchased for re-sale for which the full income return and capital returns accrue to holders of unit linked policy and deposit administration contracts. These assets are valued with inputs other than observable market data. The techniques and methods described in the preceding section (ii) for non traded financial assets and liabilities may also used in determining the fair value of Level 3 instruments. Sagicor Financial Corporation 2014 Annual Report 90  177 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 178 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.5 Fair value of financial instruments (continued) (a) Financial instruments carried at fair value Sagicor Financial Corporation Amounts expressed in US$000 Available for sale securities: Debt securities Equity securities Investments at fair value through income: Debt securities Equity securities Derivative financial instruments Mortgage loans Securities purchased for re-sale Total assets 2014 2013 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 396,980 1,947,067 36,010 29,200 432,990 1,976,267 22,824 20,841 - - - 49,495 91,108 6,663 - - 43,665 147,266 476,655 2,123,533 12,967 11,011 23,978 70,521 6,104 16,605 38,718 - 131,948 155,926 2,357,014 76,221 2,433,235 142,840 118,053 23,268 38,718 - 322,879 2,756,114 327,742 1,734,391 59,898 22,834 387,640 1,757,225 22,674 20,268 - - - 57,235 76,992 28,488 - - 42,942 162,715 430,582 1,919,940 11,981 9,643 21,624 68,397 5,925 16,727 36,838 162 128,049 149,673 2,074,114 92,375 2,166,489 148,306 103,185 45,215 36,838 162 333,706 2,500,195 Total assets by percentage 17% 77% 6% 100% 17% 77% 6% 100% Investment contracts: Unit linked deposit administration liabilities Deposit and security liabilities: Structured products Derivative financial instruments Total liabilities Total liabilities by percentage 178 2014 Annual Report 91    - - - - - 0% - - 6,265 6,265 6,265 4% 116,809 116,809 20,068 - 20,068 136,877 96% 20,068 6,265 26,333 143,142 100% - - - - - 0% - - 29,916 29,916 29,916 19% 114,374 114,374 17,371 - 17,371 17,371 29,916 47,287 131,745 161,661 81% 100%   Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.5 Fair value of financial instruments (continued) Balances totalling $165 have been transferred from Level 1 to Level 2 in 2014 (2013 - $10,018). Sagicor Financial Corporation 179 Amounts expressed in US$000 For Level 3 instruments, reasonable changes in inputs which could be applied to the valuation of available for sale securities would affect other comprehensive income. Reasonable changes in inputs which could be applied to the valuations of investments designated at fair value are largely offset in income, since the changes in fair value are borne by contract holders. Changes in the valuations of structured products reflect changes in the underlying securities and are borne by the contract holders. The following table presents the movements in Level 3 instruments for the year. 2014 Available for sale securities Investments at fair value through income Derivative instruments Total assets 2013 Total assets Balance, beginning of year Additions Issues Settlements Fair value changes recorded within net investment income Fair value changes recorded within interest expense Fair value changes recorded in other comprehensive income Disposals Transfers out of Level 3 Transfers from (to) instruments carried at amortised cost 21,624 2,763 - - 1,189 - 19 111,322 27,814 - - 184 - - - - - - 16,727 13,057 - - 149,673 43,634 144,465 49,923 - - - - 5,473 6,846 13,128 - 28 (31,795) (20,599) - - - 19 - - - - - 130 (691) (25,033) (18,652) (44,376) 2014 2013 Policy liabilities Structured products Total liabilities Total liabilities 114,374 17,371 131,745 113,300 - 15,888 (6,332) - (742) - - - - 3,963 - - - - - - - - 19,851 (6,332) - 20,460 (5,379) - - (742) 5,524 - - - (7,766) - - - - - (7,766) Effect of exchange rate changes (926) 1,056 Balance, end of year 23,978 115,343 16,605 155,926 (5,477) 149,673 1,387 116,809 (1,266) 20,068 121 (2,160) 136,877 131,745 Fair value changes recorded in investment income for instruments held at end of year Fair value changes recorded in interest expense for instruments held at end of year - - 183 - 3,835 4,018 7,506 - - - - (742) - - - - (742) 5,524 Sagicor Financial Corporation 2014 Annual Report 179 92  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 180 Year ended December 31, 2014 41.5 Fair value of financial instruments (continued) (b) Financial instruments carried at amortised cost The carrying values of the Group’s non-traded financial assets and financial liabilities carried at amortised cost approximate their fair value in notes 10, 12, and 20. The fair value hierarchy of other financial instruments carried at amortised cost as of December 31, 2014 is set out in the following tables. Level 1 Level 2 Level 3 Total Held to maturity securities: Debt securities - 21,102 - 21,102 Loans and receivables: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale 6,171 372,708 593,880 972,759 95 19,284 236,251 255,630 - - - - - - 142,150 142,150 417,476 417,476 26,271 26,271 6,266 391,992 1,416,028 1,814,286 6,266 413,094 1,416,028 1,835,388 Sagicor Financial Corporation Amounts expressed in US$000 41.5 Fair value of financial instruments (continued) Level 1 Level 2 Level 3 Total Investment contracts: Deposit administration liabilities Other investment contracts Notes and loans payable: Convertible redeemable preference shares Notes and lease payables Deposit and security liabilities Other funding instruments Customer deposits Securities sold for repurchase - - - - - - - - - - - 10,003 118,401 128,404 - 119,317 119,317 10,003 237,718 247,721 122,863 - 122,863 154,867 44,071 198,938 277,730 44,071 321,801 - 362,514 362,514 2,305 587,214 589,519 - 657,506 657,506 2,305 1,607,234 1,609,539 290,038 1,889,023 2,179,061 180 2014 Annual Report 93      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 41.5 Fair value of financial instruments (continued) (c) Equity price risk The Group is exposed to equity price risk arising from changes in the market values of its equity securities. The Group mitigates this risk by establishing overall limits of equity holdings for each investment portfolio and by maintaining diversified holdings within each portfolio of equity securities. 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, 2014 on total comprehensive income before tax (TCIBT) are as follows. Available for sale equities Carrying value 20% change on TCIBT Listed on Caribbean stock exchanges and markets Listed on US stock exchanges and markets Listed on other exchanges and markets 18,510 49,319 8,392 76,221 3,702 9,864 1,678 15,244 41.6 Derivative financial instruments and hedging activities The Group's derivative activities give rise to open positions in portfolios of derivatives. These positions are managed to ensure that they remain within acceptable risk levels, with matching deals being utilised to achieve this where necessary. When entering into derivative transactions, the Group employs its credit risk management procedures to assess and approve potential credit exposures. Sagicor Financial Corporation 181 Amounts expressed in US$000 41.6 Derivative financial instruments and hedging activities (continued) 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 contract or notional amounts of derivatives and their fair values are set out below. 2014 Derivatives held for trading: Cross currency swap Equity indexed options 2013 Derivatives held for trading: Currency forwards Cross currency swap Equity indexed options Contract / notional amount Fair value Assets Liabilities 19,226 473,982 493,208 2,763 24,965 317,699 345,427 5,022 18,246 23,268 2,683 24,965 17,567 45,215 4,626 1,639 6,265 2,763 26,313 840 29,916 Sagicor Financial Corporation 2014 Annual Report 181 94  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 182 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 41.6 Derivative financial instruments and hedging activities (continued) 41.6 Derivative financial instruments and hedging activities (continued) For certain universal life and annuity insurance contracts, an insurer has purchased custom call 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 insurer has regarding the options is mitigated by ensuring that the counterparty is sufficiently capitalized. 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. (i) Currency forwards and swaps 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 gross basis. (ii) Cross currency swap A Group company entered into a currency swap with an initial notional principal amount of Euro 45 million maturing in February 2015. Under the terms of this swap, the Group company pays Euro at a rate of 5% and receives 4.26% in US dollars on the notional principal amount. The Group company obtains principal and interest in Euros on a promissory note included in debt securities classified as financial assets at fair value through income in note 9. (iii) 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. 182 2014 Annual Report 95      Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 41.7 Offsetting Financial Assets and Liabilities The Group is eligible to present certain financial assets and financial liabilities on a net basis on the balance sheet pursuant to criteria described in Note 1 “Accounting Policies: 2.15 Offsetting financial instruments”. The following tables provide information on the impact of offsetting on the consolidated balance sheet, as well as the financial impact of netting for instruments subject to an enforceable master netting arrangement or similar agreement as well as available cash and financial instrument collateral. 183 2014 ASSETS Financial investments Securities purchases under resale agreement Derivative financial instruments LIABILITIES Security Liabilities Derivative financial instruments 2013 ASSETS Financial investments Securities purchases under resale agreement Derivative financial instruments LIABILITIES Security Liabilities Derivative financial instruments Gross amounts of financial assets Gross amounts set off on the balance sheet Net amounts of financial assets presented on the balance sheet Impact of master netting arrangements Financial instruments collateral Net amount 4,606,702 31,524 23,268 4,661,494 1,617,706 6,265 1,623,971 4,105,838 40,713 45,215 4,191,766 1,076,167 29,916 1,106,083 - - - - - - - - - - - - - - 2 4,606,70 31,524 23,268 4,661,494 1,617,706 6,265 1,623,971 4,105,838 40,713 45,215 4,191,766 1,076,167 29,916 1,106,083 (750,813) (31,524) (6,663) (789,000) (750,813) (6,265) (757,078) (592,511) (40,713) (26,413) (659,637) (592,511) (27,737) (620,248) (106,365) - - (106,365) (106,365) - (106,365) (56,422) - - (56,422) (56,422) - (56,422) 3,749,524 - 16,605 3,766,129 760,528 - 760,528 3,456,905 - 18,802 3,475,707 427,234 2,179 429,413 2014 Annual Report 183 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 184DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 42 INSURANCE RISK – PROPERTY & CASUALTY CONTRACTS 42.2 Claims risk (continued) Property and casualty insurers in the Group are exposed to insurance risks such as underwriting, claims and availability of reinsurance, and to credit risk in respect of reinsurance counterparties. Sagicor General Insurance is the principal insurer within the Group's continuing operations that issues property and casualty insurance contracts. It operates mainly in Barbados and Trinidad and Tobago. The principal insurance risks affecting property and casualty contracts are disclosed in the following sections. 42.1 Underwriting risk Risks are priced to achieve an adequate return on capital on the insurer’s business as a whole. This return is expressed as a premium target return. Budgeted expenses and reinsurance costs are included in the pricing process. Various pricing methodologies, including benchmark exposure rates and historic experience are used and are generally applied by class of insurance. All methods produce a technical price, which is compared against the market to establish a price margin. Annually, the overall risk appetite is reviewed and approved. The risk appetite is defined as the maximum loss the insurer is willing to incur from a single event or proximate cause. Risks are only underwritten if they fall within the risk appetite. Individual risks are assessed for their contribution to aggregate exposures by nature of risk, by geography, by correlation with other risks, before acceptance. Underwriting a risk 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. Inaccurate pricing or inappropriate underwriting of insurance contracts, which may arise from poor pricing or lack of underwriting control, can lead to either financial loss or reputational damage to the insurer. 42.2 Claims risk Incurred claims are triggered by an event and may be categorised as: • attritional losses, which are expected to be of reasonable frequency and are less than established threshold amounts; 184 2014 Annual Report Sagicor Financial Corporation • • large losses, which are expected to be relatively infrequent and are greater than established threshold amounts; catastrophic losses, which are an aggregation of losses arising from one incident or proximate cause, affecting one or more classes of insurance. These losses are infrequent and are generally very substantial. The insurer records claims based on submissions made by claimants. The insurer may also obtain additional information from loss adjustors, medical reports and other specialist sources. The initial claim recorded may only be an estimate, which has to be refined over time until final settlement occurs. In addition, from the pricing methodology used for risks, it is assumed that at any particular date, there are claims incurred but not reported (IBNR). Claims risk is the risk that incurred claims may exceed expected losses. Claims risk may arise from • • • • invalid or fraudulent claim submissions; the frequency of incurred claims; the severity of incurred claims; the development of incurred claims. Claims 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. Concentration of risk is mitigated through risk selection, line sizes, event limits, quota share reinsurance and excess of loss reinsurance. Total insurance coverage on insurance policies provides a quantitative measure of absolute risk. However, 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 by class of insurance. 96  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 185 Amounts expressed in US$000 42.2 Claims risk (continued) 42.3 Reinsurance risk (continued) Total insurance coverage 2014 2013 Property Motor Accident and liability Total Gross Net Gross Net Gross Net Gross Net 6,196,281 1,435,522 356,963 178,482 5,999,030 1,347,863 346,662 173,331 2,153,760 2,053,672 1,035,102 8,707,004 2,649,106 995,697 8,399,364 2,516,891 The insurer assesses its exposures by modelling realistic disaster scenarios of potential catastrophic events. Claims arising from wind storms, earthquakes and floods and events triggering multi-coverage corporate liability claims are considered to be the potential sources of catastrophic losses arising from insurance risks. A realistic disaster scenario modelled for 2014 is presented below and results in estimated gross and net losses.   A Barbados and St. Lucia windstorm having a 200 year return period. 293,355 5,000 Gross loss Net loss The Group selects reinsurers which have well established capability to meet their contractual obligations and which generally have a Sagicor credit risk rating of 1 or 2. Insurers also place reinsurance coverage with various reinsurers to limit their exposure to any one reinsurer. The reinsurance programmes are negotiated annually with reinsurers for coverage generally over a 12 month period. It is done by class of insurance, though for some classes there is aggregation of classes and / or subdivision of classes by the location of risk. 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. For other insurance risks, insurers limit their exposure by event or per person by excess of loss or quota share treaties. Retention limits represent the level of risk retained by the insurer. Coverage in excess of these limits is ceded to reinsurers up to the treaty limit. Claim amounts in excess of reinsurance treaty limits revert to the insurer. Principal features of retention program used by Sagicor General for its property insurance class is summarised in the following table. The occurrence of one or more catastrophic events in any year may have a material impact on the reported net income of the Group. Type of risk Retention by insurers - currency amounts in thousands 42.3 Reinsurance risk To limit the potential loss for single policy claims and for aggregations of catastrophe claims, 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 • • • the credit risk of holding a recovery from 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. 97    Property • • • • maximum retention of $5,250 for a single event; maximum retention of $5,000 for a catastrophic event; quota share retention to maximum of 30% in respect of treaty limits; quota share retention is further reduced to a maximum of $1,500 per event. The effects of reinsurance ceded are disclosed in notes 14, 24 and 27 and information on reinsurance balances is included in notes 10, 20 and 41. 2014 Annual Report   Sagicor Financial Corporation  185 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 186DRAFT - Notes to the Financial Statements Year ended December 31, 2014 42.3 Reinsurance risk (continued) In order to assess the potential reinsurance recoveries on the occurrence of a catastrophic insurance event, the Sagicor credit risk ratings of the reinsurance recoverable are assessed using the following realistic disaster scenario: • Hurricane with a 200 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 foregoing are assigned internal credit ratings as follows: Risk Rating Classification Exposure $000 Exposure % 1 2 3 4 5 6 7 8 Minimal risk Low risk Moderate risk Acceptable risk Average risk Higher risk Special mention Substandard 218,546 402,484 19,291 - - - - - 34% 63% 3% 0% 0% 0% 0% 0% TOTAL 640,321 100% 43 INSURANCE RISK – LIFE, ANNUITY & HEALTH CONTRACTS Insurers are exposed to insurance risks such as product design and pricing, mortality and morbidity, lapse, expense, reinsurance, and actuarial liability estimation in respect of life, annuity and health contracts. Disclosure of these risks is set out in the following sections. 43.1 Contracts without investment returns These contracts are principally term life, critical illness and health insurance. Individual term life and critical illness products are generally long-term contracts while group term life and health insurance products are generally one year renewable. The principal insurance risks associated with these contracts are product design and pricing and mortality and morbidity. 2014 Annual Report 186 Sagicor Financial Corporation Sagicor Financial Corporation Amounts expressed in US$000 43.1 Contracts without investment returns (continued) (a) Product design and pricing risk Product design and pricing risk arises from poorly designed or inadequately priced contracts and can lead to both financial loss and reputational damage to the insurer. Risks are priced to achieve an adequate return on capital on the insurer’s business as a whole. 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. Pricing inadequacy may arise either from the use of inadequate experience and statistical data in deriving pricing factors or from market softening conditions. The underwriting process has established 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. (b) Mortality and morbidity risk 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 and the associated risk is that of increased disability and medical claims. Insurance claims are triggered by the incurrence 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 may result in future adjustments to the pricing or re-pricing of these contracts. Critical illness claims arise from the diagnosis of a specific illness incurred by the policy beneficiary. The Group annually reviews its critical illness claims experience and compares it to industry statistics. This review may result in future adjustments to the pricing or re-pricing of these contracts. The concentration risks of term life and critical illness contracts are included in the related disclosure on other long-term contracts in note 43.2(b). 98  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 187 Amounts expressed in US$000 43.1 Contracts without investment returns (continued) 43.2 Contracts with investment returns 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 pricing or re-pricing of these contracts. For health insurance contracts, the concentration of insurance risk is illustrated by the distribution of premium revenue by the location of the insured persons. Life and annuity insurance contracts with investment returns generally have durations of 5 or more years. The contract terms provide for the policyholder to pay either a single premium at contract inception, or periodic premiums over the duration of the contract. From the premium 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 in respect of product design and pricing, mortality and longevity, lapse, expense and investment. 2014 Premium revenue by location of insureds Gross Ceded Net (a) Product design and pricing risk Barbados Jamaica Trinidad & Tobago Other Caribbean USA Total (c) Sensitivity of incurred claims 19,909 79,978 24,805 26,737 142 1,160 2,177 794 1,431 110 18,749 77,801 24,011 25,306 32 151,571 5,672 145,899 Product design and pricing risk arises from poorly designed or inadequately priced contracts and can lead to both financial loss and reputational damage to the insurer. Risks are priced to achieve an adequate return on capital on the insurer’s business as a whole. In determining the pricing of a contract, the insurer considers the age of the policyholder and/or beneficiary, the expenses and taxes associated with the contract, the prospective investment returns to be credited to the contract, and the guaranteed values within the contract. Pricing inadequacy may arise either from the use of inadequate experience and statistical data in deriving pricing factors or from future changes in the economic environment. The sensitivity of term life and critical illness claims is included in the related disclosure on other long- term contracts in note 43.4. The impact on gross claims of increasing the total liability by 5% for un- reinsured health insurance claims is illustrated in the following table. 2014 2013 Liability 5% increase in liability Liability 5% increase in liability 48,507 3,389 51,896 2,425 169 2,594 42,174 2,687 44,861 2,109 134 2,243 Actuarial liability Claims payable 99    (b) Mortality and longevity risk Mortality risk is the risk that worsening mortality rates will result in an increase of death claims. Longevity risk is the risk that improving mortality rates will lengthen the payout period of annuities. For contracts providing death benefits, higher mortality rates will result in an increase in death claims over time. For contracts providing the payout of annuities, improving mortality rates will lead to increased annuity benefits over time. Insurers annually review their mortality experience and compare it to industry mortality tables. This review may result in future adjustments to the pricing or re-pricing of these contracts. 2014 Annual Report   Sagicor Financial Corporation  187 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 188 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 43.2 Contracts with investment returns (continued) 43.2 Contracts with investment returns (continued) Mortality risk may be concentrated in geographic locations, affecting the risk profile of the insurer. The most significant exposure for this type of risk arises where a single event or pandemic could result in a large number of claims. Total insurance coverage on insurance policies provides a quantitative measure of absolute mortality risk. However, 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 in respect of both contracts with or without investment returns at December 31, gross and net of reinsurance, are summarised by geographic area below. Total insurance coverage Individual contracts Group contracts Individual contracts Group contracts 2014 2013 Barbados Gross 3,575,173 1,293,251 3,443,539 1,575,665 Net 3,245,153 1,244,721 3,095,266 1,508,962 Jamaica Gross 6,579,009 4,894,151 6,495,724 4,362,914 Net 6,396,752 4,875,291 6,262,554 4,349,803 Trinidad & Tobago Gross 3,040,062 1,775,661 2,778,294 1,640,918 Net 2,458,724 1,660,732 2,206,915 1,519,513 Other Caribbean Gross 7,248,379 2,382,119 7,146,664 2,532,093 USA Total Net Gross Net 6,025,887 2,100,054 5,833,715 1,872,424 4,630,990 1,821,525 50,022 47,230 3,954,741 1,731,024 57,145 53,909 Gross 25,073,613 10,395,204 23,818,962 10,168,735 Net 19,948,041 9,928,028 19,129,474 9,304,611 Total liability under annuity contracts which represents the present value of future annuity benefits provides a good measure of longevity risk exposure. Total liability under annuity contracts Individual contracts Group contracts Individual contracts Group contracts 2014 2013 Barbados Jamaica Gross Net Gross Net Trinidad & Tobago Gross Net Other Caribbean Gross USA Total Net Gross Net Gross Net 99,604 99,604 541 541 112,401 112,401 19,998 19,998 852,121 418,838 1,084,665 651,382 54,160 54,160 266,893 266,893 - - 69 69 29,757 9,076 350,879 330,198 92,777 92,777 483 483 97,115 97,115 19,090 19,090 656,932 405,068 866,397 614,533 53,838 53,838 236,506 236,506 - - 66 66 33,087 10,106 323,497 300,516 188 2014 Annual Report Sagicor Financial Corporation 100  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 189 Amounts expressed in US$000 43.2 Contracts with investment returns (continued) 43.3 Reinsurance risk (c) 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:   Acquisition costs are not recovered from the policyholder; In order to settle benefits, investments are liquidated prematurely resulting in a loss to the insurer;  Maintenance expenses are allocated to the remaining policies, resulting in an increase in expense risk. (d) Expense risk The Group monitors policy acquisition and policy maintenance expenses. Expenses are managed through policy design, fees charged and expense control. However, there are a significant number of inforce contracts for which insurers have limited or no ability to re-price for increases in expenses caused by inflation or other factors. Therefore growth in maintenance expenses has to be funded either by increasing the volume of inforce policies or by productivity gains. Failure to achieve these goals will require increases in actuarial liabilities held. (e) Investment risk A substantial proportion of the Group’s financial investments support insurer obligations under life and annuity contracts with investment returns. The financial risks outlined in note 41 pertaining to credit, liquidity, interest rate, foreign exchange and equity price are considered integral investment risks associated with these insurance contracts. Asset defaults, mismatches in asset and liability cash flows, interest rate and equity price volatility generally have the effect of increasing investment risk and consequential increases in actuarial liabilities held. 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 for new business a Sagicor credit risk rating of 1 or 2 is usually selected. 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. Insurers have limited 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 following table. Type of insurance contract Retention by insurers - currency amounts in thousands Health insurance contracts with individuals Retention per individual to a maximum of $88 Health insurance contracts with groups Retention per individual to a maximum of $88 Life insurance contracts with individuals Retention per individual life to a maximum of $500 Life insurance contracts with groups Retention per individual life to a maximum of $306 43.4 Sensitivity arising from the valuation of actuarial liabilities The estimation of actuarial liabilities is sensitive to a number of assumptions. Changes in those assumptions could have a significant effect on the valuation results which are discussed below. The valuation of actuarial liabilities of life insurance and annuity contracts is sensitive to:     the economic scenario used, the investments allocated to back the liabilities, the underlying assumptions used (note 13.3 (b) to (f)), and the margins for adverse deviations (note 13.3 (g)). 101    2014 Annual Report 189    Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 190DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 43.4 Sensitivity arising from the valuation of actuarial liabilities (continued) 43.4 Sensitivity arising from the valuation of actuarial liabilities (continued) Under Canadian accepted actuarial standards, the AA is required to test the actuarial liability under economic scenarios. The scenarios developed and tested by insurers were as follows. 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. Sensitivity Worsening rate of lapse High interest rate Low interest rate Worsening mortality and morbidity Sagicor Life Inc segment Scenario Sagicor Jamaica Segment Sagicor USA segment Sagicor Life segment Sagicor Jamaica segment Sagicor Life USA segment Lapse rates were either doubled or halved, and the more adverse result was selected. rates were Lapse doubled. Assumed increases in the investment portfolio yield rates of 0.25% per year for 5 years, with the rates remaining constant thereafter. Assumed decreases in investment portfolio yield rates of 0.25% per year for 5 years, with the rates remaining constant thereafter. increases in Assumed the investment portfolio yield rates of 0.5% for 10 years. A 1% increase was applied to the investment portfolio rate. Assumed decreases in investment portfolio yield rates of 0.5% per year for 10 years. A 1% decrease was applied to the investment portfolio rate. 2014 2013 2014 2013 2014 2013 Base net actuarial liability 882,151 864,680 488,320 458,188 715,303 709,225 Scenario increase in liability increase in liability increase in liability Worsening rate of lapse 120,151 108,682 41,484 42,921 27,804 24,967 High interest rate (76,586) (146,739) (98,548) (90,059) (42,745) (42,476) Low interest rate 143,890 206,820 126,221 116,950 49,378 48,998 Worsening mortality / morbidity 33,049 35,006 26,624 25,871 15,295 15,276 Higher expenses 26,770 30,777 16,860 17,413 4,983 5,478 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 life For insurance products only, the base assumed rates were increased annually by 3% cumulatively over the next 5 years. Higher expenses Policy unit maintenance expense rates were increased by 5% per year for 5 years above those reflected in the base scenario. 190 2014 Annual Report Sagicor Financial Corporation 102  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation 191 Amounts expressed in US$000 43.5 Dynamic capital adequacy testing (DCAT) 44 FIDUCIARY RISK DCAT is a technique used by the Group to assess the adequacy of the insurer’s financial position and financial condition in the light of different future economic and policy experience scenarios. DCAT assesses the impact over the next 5 years on the insurer’s financial position and financial condition under specific scenarios.  The Group provides investment management and pension administration services to investment and pension funds which involve the Group making allocation, purchase and sale decisions in relation to a wide range of investments. These services give rise to fiduciary risk that may expose the Group to claims for mal-administration or under-performance of these funds. 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. In the ordinary course of business, the Group manages assets of pension funds, mutual funds and unit trusts which are held in a fiduciary capacity and are not included in the Group’s financial statements. The investments and cash under administration are summarised in the following table. 2014 2013 Pension and insurance fund assets 1,324,229 1,282,487 Mutual fund, unit trust and other investment fund assets 581,393 431,816 1,905,622 1,714,303 The purpose of the DCAT is Fee income under administration is discussed in Note 26.    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 some insurers within the Group. 45 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 $1,169,848 (2013 - $1,202,220) 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. 103    2014 Annual Report 191    Sagicor Financial Corporation  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 192DRAFT - Notes to the Financial Statements Year ended December 31, 2014 46 CAPITAL MANAGEMENT The Group's objectives when managing capital, which is a broader concept than equity in the statement of financial position, are:      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. 46.1 Capital resources The principal capital resources of the Group are as follows: Shareholders’ equity Non-controlling interest Notes and loans payable 2014 2013 531,698 241,480 298,942 512,097 218,751 290,160 Total financial statement capital resources 1,072,120 1,021,008 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. Sagicor Financial Corporation Amounts expressed in US$000 46.2 Capital adequacy The capital adequacy of the principal operating subsidiaries is discussed in this section.  (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 Capital and Surplus 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. Jamaica and the USA have recognised capital adequacy standards. The consolidated MCCSR for the Sagicor Group as of December 31 has been estimated as 273% (2013 – 259%). This is the principal standard of capital adequacy used to assess the overall strength of the Sagicor Group. However, because of the variations in capital adequacy standards across jurisdictions, the consolidated result should be regarded as applicable to the Group as a whole and not necessarily applicable to each individual segment, insurance subsidiary or insurance subsidiary branch. 192 2014 Annual Report Sagicor Financial Corporation 104  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 193 46.2 Capital adequacy (continued) 46.2 Capital adequacy (continued) (i) Sagicor Life Jamaica (b) Sagicor Investments Jamaica Limited and Sagicor Bank Jamaica Limited Sagicor Life Jamaica is governed by the Jamaican MCCSR regime which requires an insurer to maintain a minimum ratio of 150%. For the years ended December 31, 2014 and 2013, this ratio was 182% and 180% respectively. (ii) Sagicor Life Insurance Company (USA) A risk-based capital (RBC) formula and model were adopted by the National Association of Insurance Commissioners (NAIC) of the United States. RBC is designed to assess minimum capital requirements and raise the level of protection that statutory surplus provides for policyholder obligations. The RBC formula for life insurance companies measures four major areas of risk: (i) underwriting, which encompasses the risk of adverse loss developments and property and casualty insurance product mix; (ii) declines in asset values arising from credit risk; (iii) declines in asset values arising from investment risks, including concentrations; and (iv) off-balance sheet risk arising from adverse experience from non-controlled assets such as reinsurance guarantees for affiliates or other contingent liabilities and reserve and premium growth. If an insurer's statutory surplus is lower than required by the RBC calculation, it will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. The RBC methodology provides for four levels of regulatory action. The extent of regulatory intervention and action increases as the ratio of surplus to RBC falls. The least severe regulatory action is the "Company Action Level" (as defined by the NAIC) which requires an insurer to submit a plan of corrective actions to the regulator if surplus falls below 200% of the RBC amount. Sagicor Life Insurance Company looks to maintain at least 300% of the Company Action Level, and has maintained these ratios as of December 31, 2014 and 2013 respectively. Capital adequacy and the use of regulatory capital are monitored monthly by 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 hold the minimum level of regulatory capital, and to maintain a minimum ratio of total regulatory capital to the risk-weighted assets. 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 capital adequacy ratios. During 2014 and 2013, all applicable externally imposed capital requirements were complied with. Sagicor Investments Jamaica Sagicor Bank Jamaica 2014 2013 2014 2013 13% 10% 15% 10% 15% 10% 17% 10% Actual capital base to risk weighted assets Required capital base to risk weighted assets 105       Sagicor Financial Corporation  2014 Annual Report 193 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements 194 Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 46.3 Financial covenants 46.3 Financial covenants (continued) (a) 7.5% senior notes due 2016 and 4.6% notes due 2015 (b) International Finance Corporation (IFC) Under an indenture and a trust deed entered into by the Group on the issue of the senior notes and notes respectively (see note 16), the Group has to comply with permitted lien covenants, which will not allow the Company nor 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 and 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 and notes, prior to) the obligations so secured for so long as such obligations are so secured. Permitted liens are liens existing on the dates of issue of the senior notes and notes respectively, certain liens which would arise in the course of normal business, and other liens whose outstanding principal amounts in aggregate outstanding principal amount do not exceed 10% of the consolidated net tangible assets (as is defined in the indenture and trust deed). As of December 31, 2014 and 2013, the Group satisfied these requirements. On March 31, 2011, the Company entered into subscription and policy agreements with IFC, regarding the latter’s participation in the issue of new common and convertible redeemable preference shares. Pursuant to the aforementioned agreements, on July 18, 2011, 12,269,938 common shares and 78,339,530 convertible redeemable preference shares were issued to IFC. The financial covenants included in these agreements are summarised as follows. (i) Put option IFC has been granted the right to require the Company to purchase IFC’s holding of convertible redeemable preference shares in the event that the Company is in breach of any of the policy reporting or IFC policy covenants. The Company may nominate a third party to purchase the shares. The purchase must take place within 10 and 60 days of the date of notice. If the Company either fails to purchase or does not arrange a third party purchase, IFC may sell the shares to a third party and the Company is required to pay a late payment charge of 6.5% per annum. 194 Sagicor Financial Corporation 2014 Annual Report 106  Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 DRAFT - Notes to the Financial Statements Year ended December 31, 2014 Sagicor Financial Corporation Amounts expressed in US$000 195 47 RELATED PARTY TRANSACTIONS 48 EVENTS AFTER DECEMBER 31, 2014 Other than as disclosed in notes 5, 12, 26, 30, 31 and 44, there are no material related party transactions except as disclosed below. 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 2014 2013 On March 20, 2015, the Group entered into a Convertible Note arrangement with AmTrust Financial Services Inc. Under the terms of this arrangement, AmTrust Financial Services Inc agreed to accept all present and future obligations under the Deed of Undertaking, entered into on the sale of Sagicor Europe. The cost of this arrangement was $12.2 million, and will be expensed in 2015. At the end of the year, the balance due to AmTrust was $45.8 million and, together with the $12.2 million cost of this arrangement, will result in a total convertible note amount of $58 million. The note will bear interest at the rate of 5% per annum if AmTrust exercises its conversion option on, or prior to maturity. Otherwise, interest will be at the rate of 10% per annum retroactive to the date of the note purchase. The note will mature on May 31, 2016. Salaries, directors’ fees and other short-term benefits Equity-settled compensation benefits Pension and other retirement benefits 20,177 2,324 1,672 24,173 21,027 3,346 2,479 26,852 Balance, beginning of year Advances Repayments Effects of exchange rate changes Balance, end of year Mortgage loans 5,441 735 (1,009) - 5,167 Other loans Total loans 395 134 (101) (16) 412 5,836 869 (1,110) (16) 5,579 Interest rates prevailing during the year 3.75% - 12.5% 7.5% - 48.0% 107       Sagicor Financial Corporation  2014 Annual Report 195 Notes to the Financial Statements Sagicor Financial Corporation Year ended December 31, 2014 Amounts expressed in US $000 175 years of commitment When we find something worth supporting, our support must be unwavering. We stand by each and every commitment that we make. SHAREHOLDER INFORMATION DIVIDENDS An interim dividend of US 2 cents per common share, approved for the half-year ended June 30, 2014, was paid on November 15, 2014 to the holders of common shares, including depositary interest holders, whose names were registered on the books of the Company at the close of business on October 22, 2014. A final common dividend of US 2 cents per common share, payable on May 15, 2015, was approved for the financial year ended December 31, 2014 to the holders of common shares, including depositary interest holders, whose names were registered on the books of the Company at the close of business on April 15, 2015. The total dividend on common shares for the 2014 financial year amounted to US 4 cents per share. An interim dividend of US 3.25 cents per convertible redeemable preference share was paid on November 15, 2014 to the holders of convertible redeemable preference shares, whose names were registered on the books of the Company at the close of business on October 22, 2014. A final dividend of US 3.25 cents per convertible redeemable preference share, payable on May 15, 2015, was approved for the financial year ended December 31, 2014 to the holders of convertible redeemable preference shares, whose names were registered on the books of the Company at the close of business on April 15, 2015. The total convertible redeemable preference dividend for the 2014 financial year amounted to US 6.50 cents per share. SHARES The following Shareholders own more than 5% and 3% respectively of the capital of the Company as at December 31, 2014: Common Shares Convertible Redeemable Preference Shares Number of Shares Percentage Number of Shares Percentage International Finance Corporation: National Insurance Board, Barbados: Republic Bank Limited – 1162: 12,269,938 18,950,000 N/A 4.04 6.24 N/A 78,339,530 10,000,000 4,000,000 65.28 8.33 3.33 The total number of issued shares as at December 31, 2014 and as at December 31, 2013 is set out below. No new shares were issued in 2014. Common Shares Convertible Redeemable Preference Shares As at 31-Dec-14 As at 31-Dec-13 As at 31-Dec-14 As at 31-Dec-13 303,917,020 303,917,020 120,000,000 120,000,000 198 2014 Annual Report Sagicor Financial CorporationLONG TERM INCENTIVE PLAN (LTI) The Tables below show grants of restricted stock and stock options as at December 31, 2014 under the LTI for Executives. Award Year Value attributable to Stock Grant Awards Made and in Effect Vested Not Vested Vested in 2014 Restricted Stock As of December 31, 2014 2006 – 2008 US$ 1.98, 2.01, 2.50 2009 2010 2011 2012 2013 2014 US$ 1.58, 2.50 US$ 1.6 US$ 1.48 US$ 1.53 US$ 1.15 US$ 1.075 1,302,161 1,031,429 744,162 600,129 1,409,816 2,070,618 2,634,725 9,793,040 1,302,161 1,031,429 744,162 600,129 640,574 780,301 374,931 5,473,687 0 0 0 0 769,242 1,290,317 2,259,794 4,319,353 0 0 0 65,440 160,968 270,880 374,931 872,219 Allocated for settlement of tax 2014 (289,010) Total converted to shares 2014 583,209 2014 Annual Report 199 Sagicor Financial CorporationAward Year Exercise Price of Stock Option Awards Made and in Effect Stock Options As of December 31, 2014 Vested Exercised Not Exercised Not Vested Vested in 2014 US$ 1.98 577,121 577,121 120,443 456,678 US$ 2.01 1,245,090 1,245,090 72,839 1,172,251 US$ 2.5 US$ 2.5 US$ 1.6 875,859 875,859 1,038,889 1,038,889 1,535,342 1,535,342 US$ 1.48 1,932,137 1,449,092 US$ 1.53 1,203,995 US$ 1.15 1,885,288 US$ 1.075 2,916,007 601,991 471,308 0 0 0 0 0 0 0 0 875,859 1,038,889 1,535,342 1,449,092 601,991 0 0 0 0 0 483,045 602,004 0 0 0 0 433,585 543,393 330,149 520,887 0 471,308 1,413,980 0 2,916,007 13,209,728 7,794,692 193,282 7,601,410 5,415,036 1,828,014 2006 2007 2008 2009 2010 2011 2012 2013 2014 200 2014 Annual Report Sagicor Financial CorporationANALYSIS OF COMMON SHAREHOLDING Common Shareholders by Size of Holding Number of Common Shareholders by Size of Holding as at December 31, 2014 (with 2013 Comparison) Size of Holding Number of Shareholders Percentage of Shareholders Total Shares Held Percentage of Shares Held 1 - 1,000 2014 6,335 2013 6,348 1,001 - 2,500 15,009 15,132 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 7,003 4,031 2,920 663 230 24 7,103 4,071 2,958 687 225 23 2014 2013 2014 2013 2014 2013 17.49 41.44 19.34 11.13 8.06 1.83 0.64 0.07 17.37 3,823,240 3,840,582 41.40 24,897,535 25,107,553 19.44 24,306,373 24,665,252 11.14 28,825,664 29,070,097 8.09 1.88 0.62 0.06 42,058,378 42,605,565 31,454,944 32,948,906 67,944,123 66,180,202 80,606,763 79,498,863 1.26 8.19 8.00 9.48 13.84 10.35 22.36 26.52 1.26 8.26 8.12 9.57 14.02 10.84 21.78 26.16 Total 36,215 36,547 100.00 100.00 303,917,020 303,917,020 100.00 100.00 2014 Annual Report 201 Sagicor Financial CorporationCommon Shareholders by Country of Residence Number of Common Shareholders by Country of Residence and by Type as at December 31, 2014 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shareholders % Shareholders % Shareholders % Shareholders % 104 178 25 13 20 340 0.29 0.49 0.07 0.04 0.06 0.94 639 262 35 34 5 975 1.76 0.72 0.10 0.09 0.01 2.69 15,079 11,400 7,026 168 1,227 41.64 31.48 19.40 0.46 3.39 15,822 11,840 7,086 215 1,252 43.69 32.69 19.57 0.59 3.46 34,900 96.37 36,215 100.00 Common Shares held by Country of Residence Number of Common Shares held by Country of Residence and by Type as at December 31, 2014 Country Directors, Management, Staff, Advisors Companies Individuals Total Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total Shares 1,855,739 8,449,064 67,178 1,349,998 1,585,661 13,307,640 % 0.61 2.78 0.02 0.44 0.52 4.38 Shares % Shares % Shares % 71,783,081 23.62 82,366,071 27.10 156,004,891 51.33 37,487,173 12.33 54,987,283 18.09 100,923,520 33.21 1,377,215 3,646,368 12,779,778 0.45 1.20 4.21 19,869,541 1,321,353 4,991,517 6.54 0.43 1.64 21,313,934 6,317,719 19,356,956 7.01 2.08 6.37 127,073,615 41.81 163,535,765 53.81 303,917,020 100.00 202 2014 Annual Report Sagicor Financial CorporationANALYSIS OF CONVERTIBLE REDEEMABLE PREFERENCE SHAREHOLDING Preference Shareholders by Size of Holding Number of Preference Shareholders by Size of Holding as at December 31, 2014 (with 2013 Comparison) Size of Holding Number of Shareholders Percentage of Shareholders Total Shares Held Percentage of Shares Held 2014 2013 2014 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 417 186 256 109 77 71 31 7 418 186 257 104 73 66 33 7 36.14 16.12 22.18 9.45 6.67 6.15 2.69 0.61 2013 36.54 16.26 22.47 9.09 6.38 5.77 2.88 0.61 2014 2013 2014 2013 227,309 227,309 371,404 371,404 1,177,810 1,182,810 954,598 904,598 1,419,995 1,334,995 4,224,049 4,039,049 12,902,500 13,217,500 98,722,335 98,722,335 0.19 0.31 0.98 0.80 1.18 3.52 10.75 82.27 0.19 0.31 0.99 0.75 1.11 3.37 11.01 82.27 Total 1,154 1,144 100.00 100.00 120,000,000 120,000,000 100.00 100.00 2014 Annual Report 203 Sagicor Financial CorporationPreference Shareholders by Country of Residence Number of Preference Shareholders by Country of Residence and by Type as at December 31, 2014 Country Directors, Management, Staff, Advisors Companies Individuals Total USA Trinidad and Tobago Barbados Other Total Shareholders 0 10 39 0 49 % 0 0.87 3.38 0 4.25 Shareholders % Shareholders % Shareholders % 1 96 43 0 0.09 8.32 3.73 0 140 12.13 1 398 564 2 965 0.09 34.49 48.87 0.17 83.45 2 504 646 2 0.17 43.67 55.98 0.17 1,154 100.00 Preference Shares held by Country of Residence Number of Preference Shares held by Country of Residence and by Type as at December 31, 2014 Country Directors, Management, Staff, Advisors Companies Individuals Total USA Trinidad and Tobago Barbados Other Total Shares 0 250,000 2,238,090 0 % 0 0.21 1.87 0 Shares % Shares 78,339,530 65.28 1,000 15,154,507 12.63 4,368,204 19,505,770 16.25 139,799 0 0 3,100 2,488,090 2.07 112,999,807 94.17 4,512,103 % 0.00 3.64 0.12 0.00 3.76 Shares % 78,340,530 65.28 19,772,711 16.48 21,883,659 18.24 3,100 0.00 120,000,000 100.00 204 2014 Annual Report Sagicor Financial Corporation 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 AUDITOR PricewaterhouseCoopers SRL LEGAL ADVISORS Allen & Overy LLP, New York, USA Allen & Overy LLP, London, United Kingdom Carrington & Sealy, Barbados Barry L V Gale, QC, LLB (Hons), Barbados Patterson K H Cheltenham, QC, LLM, Barbados M Hamel Smith & Co, Trinidad and Tobago Hobsons, Trinidad and Tobago Holman Fenwick Willan LLP, London, United Kingdom Shutts & Bowen LLP, Florida, USA BANKERS First Citizens Bank (Barbados) Limited CIBC FirstCaribbean International Bank Limited RBC Royal Bank (Trinidad & Tobago) Limited RBC Royal Bank (Barbados) Limited The Bank of Nova Scotia 2014 Annual Report 205 Sagicor Financial CorporationOFFICES Sagicor Corporate Head Office SAGICOR FINANCIAL CORPORATION Cecil F de Caires 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 Cecil F de Caires Building Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: contactus@sagicor.com Website: www.sagicorlife.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 Sir Sydney Walling Highway St John’s Tel: (268) 480-5550 Fax: (268) 480-5520 Email: info_antigua@sagicor.com Belize Coney Drve Business Plaza Coney Drve Belize City, Belize Tel: (501)223-3147 Fax: (501) 223-7390 Email: info@sagicor.com Curaçao Schottegatweg Oost #11 Tel: (599) 9 736-8558 Fax: (599) 9 736-8575 Email: info_curacao@sagicor.com Grenada TransNemwil 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 Anico Insurance Co Ltd Manico Headuarters Cosley Drve, The Valley Tel: (264) 497-3712 Fax: (264) 497-3710 Aruba Lyder Insurance Consultants Seroe Blanco 56A Tel: (297) 582-6133 Curaçao Guillen Insurance Consultants PO Box 4929 Kaya E, Salas No 34 Tel: (599) 9 461-2081 Fax: (599) 9 461-1675 Email: chris-guillen@betlinks.an Dominica WillCher Services Inc 44 Hillsborough Street Corner Hillsborough & Independence Streets Roseau Tel: (767) 440-2562 Fax: (767) 440-2563 Email: info_dominica@sagicor.com Haiti Cabinet d’Assurance Fritz de Catalogne Angles Rues de Peuple et des Miracles Port-au-Prince Tel: (509) 3701 1737 206 2014 Annual Report Sagicor Financial CorporationMontserrat Sagicor Life Inc C/o V. Yvette Fenton-Ryan Ryan Investments P. O. Box 280 Brades Montserrat Tel: (664) 491-3403 Fax: (664) 491-7307 St Maarten C/o Charlisa NV, Walter Nisbeth Road #99B Phillipsburg Tel: (721) 542-2070 Fax: (721) 542-3079 Email: capital@sintmaarten.net 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 Frenches Kingstown Tel: (784) 456-1159 Fax: (784) 456-2232 SAGICOR GENERAL INSURANCE INC. P. O. Box 150 Beckwith Place, Lower Broad Street Bridgetown, Barbados Tel: (246) 431-2886 Fax: (246) 228-8266 Email: sgi-info@sagicorgeneral.com Sagicor General Insurance Inc Haggatt Hall St Michael Tel: (246) 431-2800 Fax: (246) 426-0752 Email: sgi-info@sagicorgeneral.com St Lucia Sagicor Life Inc Sagicor Financial Centre Choc Estate Castries St Lucia Tel: (758) 452-0994 Fax: (758) 450-4870 Antigua Sagicor Life Inc Sagicor Financial Centre #9 Sir Sydney Walling Highway St John’s Tel: (268) 480-5555 Fax: (268) 480-5550 Trinidad and Tobago 122 St Vincent Street Port of Spain Tel: (868) 623-4744 Fax: (868) 628-1639 or (868) 625-1927 Willcher Services Inc 44 Hillsborough Street Corner Hillsborough & Independence Streets Roseau Dominica Tel: (767) 440-2562 Fax: (767) 440-2563 JE Maxwell & Company Limited Linmores Building Castries St Lucia Tel: (758) 451-7829 Fax: (758) 451-7271 Email: jemax@candw.lc GLOBE FINANCE INC Shirley House Hastings Main Road Christ Church Tel: (246) 426-4755 Fax: (246) 426-4772 Website: www.globefinanceinc.com SAGICOR FUNDS INCORPORATED Cecil F de Caires Building Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 436-8829 Email: info@sagicor.com Sagicor General Insurance Agencies HHV Whitchurch & Company Limited Old Street PO Box 771 Roseau Dominica Tel: (767) 448-2182 Fax: (767) 448-5787 SAGICOR ASSET MANAGEMENT INC Cecil F de Caires Building Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 426-1153 Email: info@sagicor.com 2014 Annual Report 207 Sagicor Financial CorporationSAGICOR FINANCE INC Sagicor Financial Centre Choc Estate Castries St Lucia 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 Trinidad 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 BARBADOS FARMS LIMITED Bulkeley St George Barbados Tel: (246) 427-5299 Fax: (246) 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 CAPITAL LIFE INSURANCE COMPANY BAHAMAS LIMITED C/o Family Guardian Insurance Company Limited East Bay & Shirley Street PO Box SS-6232 Nassau, NP Bahamas Tel: (242) 393-4000 Fax: (242) 393-1100 Email: info@familyguardian.com SAGICOR LIFE ARUBA NV Fergusonstraat #106 AHMO Plaza Building, Suites 1 and 2 Oranjestad, Aruba Tel: (297) 582-3967 Fax: (297) 582-6004 Email: calico@setarnet.aw LOJ HOLDINGS LIMITED 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 EMPLOYEE BENEFITS ADMINISTRATORS LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com SAGICOR LIFE OF THE CAYMAN ISLANDS 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 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 LIMTED 78a Hagley Park Road Kingston 10 Jamaica Tel: (876) 929-9182 Fax: (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 HEALTH CORPORATION JAMAICA LTD SAGICOR INSURANCE BROKERS LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com 208 2014 Annual Report Sagicor Financial Corporation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 Tel: (868) 625-6505 Fax: (868) 624-7607 SAGICOR INVESTMENTS JAMAICA LIMITED Sagicor Bank Building 60 Knutsford Boulevard Kingston 5, Jamaica Tel: (876) 929-5583 Fax: (876) 926-4385 Email: options@sagicor.com Website: www.sagicorjamaica.com SAGICOR BANK JAMAICA LIMITED Sagicor Bank Building 60 Knutsford Boulevard Kingston 5, Jamaica Tel: (876) 929-5583 Fax: (876) 926-4385 Website: www.sagicorjamaica.com SAGICOR USA, INC 4010 W. Boy Scout Blvd, Suite 800 Tampa, Florida 33607, USA Tel: (813)-287-1602 Fax: (813)-287-7420 SAGICOR LIFE INSURANCE COMPANY 4010 W. Boy Scout Blvd, Suite 800 Tampa, Florida 33607, USA Tel: (813) 287-1602 Fax: (813) 287-7420 4343 N. Scottsdale Road, Suite 300 Scottsdale, Arizona, 85251, USA Tel: 1-800-531-5067 Fax: (480) 425-5150 Website: www.sagicorlifeusa.com SAGICOR FINANCE LIMITED Maples Corporate Services Limited Ugland House South Church Street George Town, Grand Cayman Cayman Islands 2014 Annual Report 209 Sagicor Financial CorporationTheme Design: GREY Canada Layout and Artwork: GENESIS Graphics Pre-Press and Printing: COT Media Group 

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