STRENGTH TO STRENGTH Creating Value Annual Report 2018 Sagicor Financial Corporation Limited OUR VISION To be a great company committed to improving the lives of people in the communities in which we operate. CONTENTS 05 About Sagicor 69 Board of Directors 09 Chairman’s Statement 77 Executive Management 13 17 Financial Highlights 88 Index to the Financial Statements • Financial Statements & Notes Management Discussion and Analysis 245 Shareholder Information • Shares • Dividends • Advisors & Bankers • Offices SAGICOR FINANCIAL CORPORATION LIMITED 1 Our Values Sagicor is Timeless, Borderless, and Colourless. These values speak to the all-encompassing nature of our company, guiding our behaviour, procedures, business decisions and relationships. TIMELESS We are building a company for today which, while relevant to the current time, will continue to remain relevant for all times. Therefore we will always be innovative and embrace change, never allowing ourselves to become staid or obsolete so that we can retain our edge to compete in the future. COLOURLESS We conduct our business and interpersonal relationships on that consciously high level which creates an environment characterised by a philosophy of equitable treatment and equal opportunity for all. BORDERLESS We view ourselves as members of one organisation, and will not be constrained by any self-imposed physical, intellectual or cultural limitations. We will conduct our business in a way that truly reflects this philosophy. Wise Financial Thinking for LifeThis is our promise to all of our stakeholders. “Wise Financial Thinking for Life” is far more than a tagline. It is the heart and soul of Sagicor, and summates why we do, what we do and how we do it. More importantly, it is the reason our clients choose Sagicor and stay with us. ABOUT SAGICOR Strength, Stability and Financial Prudence …. That is our heritage Sagicor means ‘wise judgement’ and has derived out of an inspirational framework that has supported the company for 179 years. SAGICOR FINANCIAL CORPORATION LIMITED 5 ABOUT SAGICOR SAGICOR – WISE FINANCIAL THINKING FOR LIFE Our Brand “Wise Financial Thinking for Life” is far more than a tagline. It is the heart and soul of Sagicor, and summates why we do, what we do and how we do it. More importantly, it is the reason our clients choose Sagicor and stay with us. Sagicor means “wise judgment” and has derived out of an inspirational framework that has supported the company for 179 years. Our name and reputation draw on the strength, stability and financial prudence that are our heritage, and this identity defines the flexibility that wise financial thinking can bring to our clients throughout their lives. OUR FINANCIAL SOLUTIONS Sagicor’s business is based on long-term relationships with our clients who entrust us with their financial well-being. Through local expertise and in partnership with world-class asset managers and reinsurers, together with sound risk management practices, Sagicor is able to provide wise financial advice that meets the needs of its clients. Sagicor’s wide range of financial solutions are designed to protect who you love and what you love. interested in life insurance, annuities, investments or group and individual health, Sagicor has a wide range of financial solutions suited to every need. OUR VISION As we move forward through 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 focused on our vision, “To be a great company, committed to improving the lives of people in the communities in which we operate”. Sagicor understands that when you truly love your family, your assets or your business, that it is only natural that you would wish to protect them in the best way possible. This is where Sagicor’s 179 years of experience and financial prudence becomes a trusted partner for all stakeholders. Whether one is In support of our vision, Sagicor provides financial and voluntary assistance, primarily in the areas of health, education, youth and community development and sports, to a wide range of organisations and institutions. TIMELESS Relevant Through All Times | BORDERLESS One Organization OUR STORY 1840 • First Office Opens, #2 High Street, Bridgetown, Barbados. 1845 • First Actuary, Henry Beckles Gall. 1849 - 1900 • St. Vincent was the first branch opened outside of Barbados. • Grenada and Trinidad opened in 1858. St. Kitts opened in 1861, Antigua and Montserrat opened in 1863. Followed by Guyana opening in 1866, Dominica in 1868, St. Lucia in 1888 and finally Jamaica in 1896. • Barbados Fire was established in Barbados in 1880 and issues its first policy in 1881. 1993 • Opening of Mutual Bank of the Caribbean. 1997 • Establishment of Mutual Asset Management Inc. • Mutual Funds Inc. is established. 1994 • Mutual Financial Services is established. • Caribbean Caricard Services is established. 1999 • Acquisition of Island Life Insurance Co. Ltd. in Jamaica and Nationwide Insurance in Trinidad and Tobago. • First AM Best Rating ‘A’ Excellent received by BMLAS and maintained by Sagicor Life Inc. 2002 • Acquisition of majority shares in Life of Barbados. • The establishment of the holding Company, Sagicor Financial Corporation, 45,000 policyholders awarded shares as a result of the demutualisation. The Initial Public Offering of Sagicor Shares, increasing shareholders to 49,000. 2000 • The acquisition of 23% interest in Life of Barbados. 1998 • Acquisition of the Panama branch of Atlantic Southern Insurance Company. 2003 • SFC Lists on the Barbados Stock Exchange. • The Mutual Bank is sold to Butterfield Bank. 2001 • Acquisition of Life of Jamaica in Jamaica and Allnation in the US. 1840 • Establishment of the Barbados Mutual Life Assurance Society. • Howard Gill, purchased the society’s first policy on 24th November, 1840. His annual premium was $312.00 for a sum assured of $10,000. 1895 • The Mutual Building designed by English Architectural Firm, Messrs. Cossin and Peacock. 1987 • Acquisition of Travellers Portfolio and the rebranding of Aruba, Bahamas, Belize, Cayman Islands, Curacao, St. Maarten and Haiti to Capital Life. 1990 • Barbados Fire & General Insurance Company Limited merged with Barbados Commercial Insurance Co. Limited to form Barbados Fire & Commercial Insurance Co. Ltd. 6 6 SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED • We consider the value of education to be immeasurable. We offer strong support across the region to learning institutions ranging from primary to tertiary, catering to traditional studies, as well as the educational experiences required for those with special needs. • Our 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 financial services industry, we lead by example, both within and outside of the organisation. • Our footprint spans over 22 countries worldwide, and our presence is mirrored ABOUT SAGICOR in each local community. As we grow and develop, our support for the growth and development of people and social infrastructure remains unwavering, and this is a legacy of which we are proud. including the USA and Latin America, Sagicor has total assets of US $7.3 billion, and $1.135 billion in equity. The Sagicor Group offers a wide range of products and services including life insurance, annuities and group and individual health, and has an insured base in the region of two (2) million. Sagicor is a widely-held publicly-traded company with over 36,000 Shareholders, and is listed on the stock exchanges of Barbados, Trinidad and Tobago and London. • 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 the barriers of, race, age and gender. STRONG PERFORMANCE Sagicor has followed a carefully crafted business strategy, which has seen the company transform 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. Today, operating in 22 countries, BORDERLESS One Organization | COLOURLESS Equitable to All 2004 • SFC Lists on the Trinidad & Tobago Stock Exchange. 2005 • Acquisition of Laurel Life and American Founders Life Insurance Company in the US. • Life of Jamaica acquires Cayman General Insurance. • Acquisition of 20% of FamGuard. • Acquisition of First Life Insurance Portfolio. • Acquisition of majority interest in Pan Caribbean Financial Services. 2008 • Acquisition of controlling interest in Barbados Farms Ltd. • Rebranding of Life of Jamaica to Sagicor Life Jamaica Ltd. • Rebranding of Byrne and Stacey Underwriting to Sagicor Underwriting. 2013 • Sagicor Group Jamaica enters into a Sale and Purchase Agreement to acquire RBC Jamaica. • SFC sells Sagicor Europe and its subsidiaries to AmTrust Financial Services. 2014 • Sagicor Group Jamaica acquires RBC Jamaica and operations rebranded as Sagicor Bank. 2015 • Sagicor launches Sagicor Foundation (Jamaica). 2016 • SFC redomiciles in Bermuda and the company name is changed to Sagicor Financial Corporation Limited. 2006 • US $15O Million Bond Offering on the US Market. • Sagicor Life Inc assigned a Standard and Poor’s (S&P) financial strength rating of “BBB+”. • American Founders Life Insurance Company rebrands as Sagicor Life Insurance Company Limited. 2007 • SFC Lists on the London Stock Exchange. • Establishment of Sagicor Europe Ltd. • Acquisition of Gerling at Lloyd’s Group in the UK, rebranded as Sagicor at Lloyd’s. 2012 • Sagicor launches the Sagicor Visionaries Challenge programme. • Sagicor Life Jamaica agrees to participate in the Government of Jamaica National Debt Exchange Programme. • Sagicor Life acquires the traditional life insurance policies of British American Insurance Company Limited in the Eastern Caribbean. 2015 • Sagicor celebrates 175 years. 2015 • Sagicor issues 7-year US $320 million Bond. • SFC completes US $320 million Bond Offering on the International Market. 2018 • Sagicor Life Inc and Sagicor General Insurance Inc divest interest in Globe Finance Inc. • Sagicor General Insurance Inc acquires Harmony General Insurance Company Limited in Barbados. • SFCL enters into arrangement Agreement with Alignvest Acquisition II Corporation and Agreement for Strategic Acquisition. SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED 7 7 Stephen McNamaraSagicor Group Chairman Sagicor remains focused on delivering consistent operational performance. Our strong performance is a reflection of our promise of Wise Financial Thinking for Life. CHAIRMAN’S STATEMENT Total Assets – US$7.3b Equity – US$1.135b The Sagicor Group delivered strong operational performance for the financial year 2018. Each business segment grew their revenue and each delivered positive net income. SAGICOR FINANCIAL CORPORATION LIMITED 9 CHAIRMAN’S STATEMENT The Sagicor Group delivered strong operational performance for financial year 2018. actuarial provisions for future benefits) reflects and is consistent with our revenue growth. Each business segment grew their revenue, and each delivered positive net income, in spite of significant one-time items, in particular the restructuring of the Government of Barbados debt (GoB). We are pleased with our performance in the face of these challenges. Total revenue increased 22% to US$1,484.3 million, compared to the prior year amount of US$1,218.6 million, an increase of US$265.7 million. All segments experienced year on year growth. The largest single source of revenue growth was increased premiums in the USA segment driven by a strategic direction to increase production and to cease reinsurance and retain 100% of production starting in Q2 2018. In addition, fee income grew significantly in the Jamaican segment due in part to growth in investment banking business. Group net income was US$103.0 million, compared to US$115.9 million in the prior year. Net income attributable to shareholders was US$43.7 million, compared to US$72.4 million in the prior year, a reduction of US$28.7 million. Both Group net income and net income attributable to shareholders were affected by the GoB restructuring. Management estimates that absent the GoB restructuring, net income attributable to shareholders would have been US$82.9 million, representing growth of 15%. Benefits were US$765.3 million, compared to US$659.4 million for the prior year, an increase of 16%. The growth in benefits (which include Expenses were US$590.7 million, compared to US$436.4 million for the prior year, driven in part by US$95.5 million of credit impairment provisions, which were partially offset by positive change in actuarial liabilities related to restructured debt. Administrative expenses grew 13% to US$303.1 million, as the company incurred one-time costs related to its ongoing transaction with Alignvest Acquisition II Corporation. Commissions and related compensation grew 19% to US$117.3 million, in line with growth in premiums. Income taxes were US$50.7 million. This compared to US$19.3 million in the prior year when the Company had a one-time tax benefit of US$14.2 million in the USA segment arising from the Tax Cuts and Jobs Act. The remaining increase in taxes resulted from growth in taxable lines of business. Group comprehensive income was US$38.9 million, compared to US$180.1 million for the prior year, a decrease of US$141.2 million. Group comprehensive income in 2018 included the provision for GoB debt restructuring. Group comprehensive income in 2017 also benefited from significant gains on available for sale assets and retranslation of foreign currency assets, both of which reversed to losses in 2018. Group assets were US$7.3 billion and Group liabilities were US$6.2 billion, resulting in Group equity of US$1.1 billion, compared to US$0.9 billion in the prior year. Shareholders’ equity was US$600.9 million, compared to US$624.6 million for the prior year. The Group’s debt was US$490.3 million, with a debt to capital ratio of 30.2%, compared to 30.6% for the prior year. The increase in the Group’s debt is related to the debt of the Sagicor X Fund Group, which remains unchanged, but is now consolidated onto our balance sheet. Sagicor has fully provisioned for the exchange of GoB debt as agreed with the Government of Barbados. On September 7, 2018 the Government of Barbados (GoB) entered into a Staff-Level Agreement with the International Monetary Fund (IMF) to provide financial and technical assistance. As part of the programme, the GoB announced on October 15, 2018 that its Exchange Offer received unanimous support from the domestic creditors including Sagicor. The Sagicor Group has made a gross provision of US$98.8 million and took a charge, net of offsetting adjustments, of US$48.8 million attributable to shareholders. During the year the Sagicor Group adopted two new accounting standards which became effective from January 1, 2018: IFRS 15, Revenue from Contracts with Customers, which affects how income is recognised on contracts by companies, and IFRS 9, Financial Instruments. IFRS 9 changes the way that financial instruments are recognised and measured. The standard introduces new measurement categories for financial instruments and an expected, instead of an incurred, credit loss model for impairment. In addition our subsidiary Sagicor Group Jamaica, was deemed to have effective control of Sagicor X Fund Group from October 1, 2018 based on its shareholding and influence, and from that date has accounted for Sagicor X Fund as a subsidiary as required by IFRS 10. This change has resulted in the operations, results and balance sheet of Sagicor X Fund Group being included within the financial statements. This SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED 10 10 has the effect of increasing assets and debt on our consolidated balance sheet, including a significant increase in non-controlling interests in subsidiaries. Corporation (Alignvest) which heralds in yet another significant milestone in our long and storied history. Through this transaction, CHAIRMAN’S STATEMENT subject to shareholders’ approval and customary regulatory approvals. On behalf of the Board of Sagicor, I wish to thank our shareholders, staff, agents and customers for their continued support. Stephen McNamara Chairman April 18, 2019 Sagicor will acquire a listing on the Toronto Stock Exchange, where we will have international exposure, greater access to capital to fund growth and be exposed to proper price discovery for our shares, providing an opportunity to unlock fair value for all shareholders. At the same time, Sagicor also announced that Sagicor and Alignvest will acquire Scotiabank’s life insurance operations in Jamaica and in Trinidad & Tobago. The completion of the transaction with Alignvest is expected in the second half of 2019, (in US Currency except percentages) Year ended December 31 FINANCIAL HIGHLIGHTS Total revenue Overall Group net income Overall shareholders’ net income Net income allocated to non-controlling interests Total equity Book Value per share Ratio of Debt to Capital Earnings per common share Annualised return to common shareholders’ equity 2018 $1,484.3m $103.0m $43.7m $52.1m $1,135.5m $1.96 30.2% 11.9¢ 6.2% 2017 $1,218.6m $115.9m $72.4m $44.5m $937.2m $2.04 30.6% 20.5¢ 11.3% The discontinued operations represent our UK business, which was sold in 2013. During 2018 there were positive developments in this exposure which resulted in net income of US$7.1 million. At close of the year the company carried a receivable of US$17.2 million in respect of this business which was settled by a cash payment to us in February 2019 to fully close off our exposure to this business. Sagicor voluntarily adopted Canadian risk based capital and reserving standards in 1991. The capital ratio, “Minimum Continuing Capital and Surplus Requirements” (MCCSR) seeks to demonstrate to stakeholders the financial strength of the company. Canadian regulators expected insurance companies to maintain an MCCSR ratio of 150% And Sagicor has consistently maintained a ratio above 200%. As at the end of the year our MCCSR Ratio was 234%. Sagicor is rated on an annual basis by Standard and Poor’s Global Ratings and Fitch Ratings. We have been rated by S&P since 2006 and Fitch since 2015. These ratings are an independent measure of our financial strength. Current ratings are as follows: • S&P - BB - • Fitch - BB - On November 27, 2018, Sagicor Group announced that it had entered into a transformative transaction with Alignvest Acquisition II SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED 11 11 Achieving Strategic and Operational GoalsSagicor exists to achieve results for the stakeholders in the communities in which it operates. FINANCIAL HIGHLIGHTS Sagicor’s prudent financial management is driven by a desire for the best results for all stakeholders. These results are quantifiably measured so that we meticulously gauge our performance and results over time. Consistent Results & Returns At Sagicor, we know that success is highly dependent on our relationship with our stakeholders, and an important part of that relationship is being able to share the success in terms of shareholder returns, a strong financial position and strong Group results. SAGICOR FINANCIAL CORPORATION LIMITED 13 FINANCIAL HIGHLIGHTS NET INCOME 1 COMMON DIVIDENDS 2018 2017 2016 2015 2014 37 62 60 56 54 2018 2017 2016 2015 2014 15 15 14 12 12 SHAREHOLDER RETURNS Amounts in US$ millions unless otherwise stated BOOK VALUE PER SHARE Amounts in US cents 2018 2017 2016 2015 2014 196 204 177 167 173 0 10 20 30 40 50 60 70 80 0 3 6 9 12 15 0 50 100 150 200 250 1 from continuing operations Basic earnings per share 1 Return on shareholder’s equity 1 6.2% 2018 11.9¢ 20.5¢ 2017 2016 19.5¢ 11.3% 12.3% 2015 2014 18.2¢ 17.3¢ 11.7% 11.2% ASSETS 1 OPERATING LIABILITIES EQUITY & DEBT CAPITAL (TOTAL CAPITAL) GROUP FINANCIAL POSITION Amounts in US$ millions unless otherwise stated 2018 2017 2016 2015 2014 7,308 6,805 6,532 6,400 6,180 2018 2017 2016 2015 2014 5,700 5,464 5,341 5,139 5,062 2018 2017 2016 2015 2014 1,625 1,352 1,190 1,215 1,072 0 1000 2000 3000 4000 5000 6000 7000 8000 0 1000 2000 3000 4000 5000 6000 0 500 1000 1500 2000 1 from continuing operations 2018 2015 2014 Debt to Capital 30.2% 30.6% 33.2% 39.2% 27.9% MCCSR 234% 258% 249% 301% 273% 2017 2016 14 SAGICOR FINANCIAL CORPORATION LIMITED FINANCIAL HIGHLIGHTS GROUP RESULTS 1 Amounts in US$ millions unless otherwise stated NET INCOME 1 REVENUE BENEFITS 2018 2017 2016 2015 2014 96 106 108 98 100 2018 2017 2016 2015 2014 1,484 1,219 1,134 1,105 1,045 2018 2017 2016 2015 2014 765 659 560 553 542 0 20 40 60 80 100 120 0 300 600 900 1200 1500 0 100 200 300 400 500 600 700 800 1 from continuing operations SAGICOR LIFE INC - NET INCOME 1 SAGICOR GROUP JAMAICA - NET INCOME 1 SAGICOR USA - NET INCOME 1 SEGMENT RESULTS Amounts in US$ millions unless otherwise stated 2018 2017 2016 2015 2014 47 64 65 71 50 2018 2017 2016 2015 2014 111 95 90 79 77 2018 2017 2016 2015 2014 18 13 10 7 12 0 10 20 30 40 50 60 70 80 0 20 40 60 80 100 120 0 5 10 15 20 Revenue 2018 424 Assets 2,008 2017 2016 421 411 1,953 2015 2014 362 471 1,773 1,928 1,904 1 from continuing operations SAGICOR FINANCIAL CORPORATION LIMITED Revenue 2018 596 2015 2014 485 Assets 3,104 2,836 2,674 2,513 2,495 2017 2016 524 590 511 Revenue 2018 421 Assets 2,293 2017 2016 149 159 1,901 1,982 2015 2014 153 1,743 78 1,783 15 Success occurs when preparation meets opportunity.Our connected organization is the sum of its diverse and dynamic parts. In a world where change is constant, our experience, vigilance and creativity drive opportunity for investors. MANAGEMENT DISCUSSION AND ANALYSIS For almost 180 years, Sagicor has been combining its capabilities, resources and experience to accelerate the growth of the Sagicor Group throughout the Caribbean and beyond. The insights gained along our journey, uniquely place us to achieve our growth ambitions for market leadership both now and in the future. Accelerating Our Growth Strategy 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. Our main business lines are life, critical illness and health insurance, annuities and pension management, asset management, together with 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 coverage. SAGICOR FINANCIAL CORPORATION LIMITED 17 INTRODUCTION This Management’s Discussion and Analysis (“MD&A”) contains important information about Sagicor’s business and its performance for the years ended, and as of, December 31, 2018, and 2017. This MD&A should be read in conjunction with the Company’s annual financial statements, prepared in accordance with International Financial Reporting Standards (IFRS) in effect on the date of such information. provisions in IFRS 15, the standard has been implemented using the modified retrospective method with no restatement of comparative information. There was no significant impact on the Group resulting from the implementation of the standard and consequently, no transition adjustment has been recorded in the statement of equity. The standard introduces new disclosure requirements, and these are set out in notes 2.24, 4.8, 12, 20 and 26 of the annual financial statements. The following discussion is based on the financial condition and results of operations of Sagicor, unless otherwise specified or indicated. Financial information for the years ended, and as of, December 31, 2018 and 2017 is presented in millions of US dollars. Amounts for subtotals, totals and percentage variances included in tables in this MD&A may not sum or calculate using the numbers as they appear in the tables due to rounding. Changes in Accounting Policies As disclosed in the Company’s annual financial statements for the year ended December 31, 2018, as of January 1, 2018, the Group adopted IFRS 9 - Financial Instruments (“IFRS 9”). As a result of the application of this new standard, the Group changed its accounting policies. As permitted by the transition provisions in IFRS 9, the Group has elected not to restate comparative period results; accordingly, all comparative period information on financial instruments is presented in accordance with IAS 39 Financial Instruments, the accounting policies where different are disclosed in notes 2.9 and 2.23 of the annual financial statements. Adjustments to the carrying amounts of financial assets and financial liabilities as of January 1, 2018 were recognised in equity. New or amended disclosures have been provided for in the current 2018 year, where applicable, and comparative year disclosures are consistent with those made in 2017. For further details on the impacts of the application of IFRS 9, including the description of accounting policies selected, refer to notes 2.23, 2.9, and 41 of the annual financial statements. The annual financial statements as of December 31, 2017 and the MD&A analysis thereon have not been adjusted for the adoption of IFRS 9. Effective January 1, 2018, the Sagicor Group also adopted IFRS 15. This standard clarifies revenue recognition principles and provides a framework for recognising revenue and cash flows from service contracts from customers. IFRS 15 does not apply to the Group’s primary activities of insurance and banking which are governed by IFRS 4 – ‘Insurance Contracts’ and IFRS 9 – ‘Financial Instruments’. In accordance with the transition Restatements Certain prior year restatements were made in the December 31, 2018 financial statements which are referenced in note 2.1 and note 50. These restatements were made retrospectively to January 1, 2017. Financial information included in this MD&A in respect of years ended prior to December 31, 2017, does not reflect these adjustments as their effect was not deemed to be material to the ability to properly assess the performance and/or the financial position of the Group. Result of Operations An understanding of Sagicor’s financial condition and the results and related risks of Sagicor’s operations for the periods discussed in this MD&A requires an understanding of Sagicor’s business. Accordingly, the following discussion should be read in conjunction with the discussion of these and related matters that appear elsewhere in this MD&A, including under the following headings: (i) Key Factors Affecting Results; (ii) Critical Accounting Estimates and Judgments; and (iii) Risk Management. Approval This MD&A is current as of December 31, 2018 and has been approved by the Board of Directors. NON-IFRS FINANCIAL INFORMATION Sagicor reports its financial results and statements in accordance with IFRS. It also publishes certain financial measures that are not based on IFRS (non- IFRS). A financial measure is considered a non-IFRS measure if it is presented other than in accordance with the generally accepted accounting principles used for the Company’s audited financial statements. These non-IFRS financial measures are often accompanied by and reconciled with IFRS financial measures. For certain non-IFRS financial measures, there are no directly comparable amounts under IFRS. The Company believes that these non- IFRS financial measures provide additional information to better understand 18 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS the Company’s financial results and assess its growth and earnings potential. Since non-IFRS financial measures do not have standardised definitions and meanings, they may differ from the non-IFRS financial measures used by other institutions and should not be viewed as an alternative to measures of financial performance determined in accordance with IFRS. The Company strongly encourages investors to review its financial statements and other publicly filed reports in their entirety and not to rely on any single financial measure. Sagicor believes that certain non-IFRS measures described below are more reflective of its ongoing operating results and provide readers with a better understanding of management’s perspective on the Company’s performance. These measures enhance the comparability of the Company’s financial performance from period to period, as well as measure relative contribution to shareholder value. The following represent non-IFRS financial measures: 1. Return on Shareholders’ Equity IFRS does not prescribe the calculation of return on shareholders’ equity and therefore a comparable measure under IFRS is not available. To determine this measure, reported net income/(loss) attributable to shareholders is divided by the total weighted average common shareholders’ equity for the period. The quarterly return on shareholders’ equity is annualised. 2. Book value per share To determine the book value per share, shareholders’ equity is divided by the number of shares outstanding at the period end, net of any treasury shares. 3. MCCSR The MCCSR was a capital adequacy measure for life insurance companies established by the Office of the Superintendent of Financial Institutions Canada (“OSFI”). It was a measure used to monitor that insurers maintain adequate capital to meet their financial obligations with 150% being the minimum standard that was recommended by Canadian regulators when it was in effect; companies were expected to establish and meet an internal target greater than 150%. Refer to note 46.2 of the 2018 audited annual financial statements for details. 16 to the audited annual financial statements) to total capital, where capital is defined as the sum of notes and loans payable and total equity. This ratio measures the proportion of debt a company uses to finance its operations as compared with its capital. 5. Debt to equity ratio The debt to equity ratio is the ratio of notes and loans payable (refer to note 16 to the audited annual financial statements) to total equity. This ratio measures the proportion of debt a company uses to finance its operations as compared with its equity. 6. Dividend pay-out ratio This is the ratio of dividends paid per share to basic earnings per common share. ABOUT SAGICOR Sagicor is a 178-year old financial services company focused on insurance operations in the Caribbean region mainly in Barbados, Jamaica, Trinidad and Tobago, and in the United States. Established in 1840 as The Barbados Mutual Life Assurance Society, Sagicor is one of the oldest providers of insurance in the Americas. Sagicor offers a wide range of products and services including life and health insurance, annuities, pension administration, property and casualty insurance, asset management, investment and merchant banking, securities brokerage, mutual funds and real estate development, and commercial banking. Sagicor’s business grew organically with little change in product lines until 1969, when Sagicor introduced two- unit trusts (a bond fund and an equity fund), to manage corporate pension funds, and in the 1970s, when Sagicor introduced group life insurance and health insurance products. Sagicor expanded its business through acquisitions between the 1980s and 2000s, transforming from a domestic to a regional and international company and from having a single line product to multiple line products. Sagicor demutualised in November 2002 and listed its shares on the Barbados Stock Exchange (BSE: SFC), with subsequent listings on the Trinidad and Tobago Stock Exchange (TTSE: SFC) and the London Stock Exchange (LSE: SFI). Sagicor Financial Corporation moved its corporate domicile from Barbados to Bermuda and continued as Sagicor Financial Corporation Limited, an exempted company, on July 20, 2016. 4. Debt to capital ratio The debt to capital ratio is the ratio of notes and loans payable (refer to note Sagicor currently operates in 22 countries and maintains a strong market position in most of the markets where it operates. Its primary business is SAGICOR FINANCIAL CORPORATION LIMITED 19 MANAGEMENT DISCUSSION AND ANALYSIS the provision of insurance (life, annuity, health and property and casualty) and financial services, including pension management, asset management and banking. Sagicor operates its business primarily through its three reporting operating segments. Sagicor’s objective is to be a leading insurance and financial services provider of world class products and services to better serve its customers and other stakeholders in its markets. Sagicor is expanding its banking and asset management business in the Caribbean, where it has strong brand recognition and market shares. REVENUE BY GEOGRAPHIC SEGMENTS 2018 Revenue US$ 1.5bn Barbados Jamaica Trinidad & Tobago Other Caribbean USA 12% 38% 11% 11% 28% REVENUE BY LINE OF BUSINESS 2018 Revenue US$ 1.5bn Individual Life, Health & Annuity 63% Group Life & Benefits Administration 19% P&C Banking & Investment Management Other 3% 12% 3% ECONOMIC ENVIRONMENT Global economic activity for 2018 has been moderate with growth for the year being 3.1% according to World Bank’s estimates. Weakening financial market sentiment, trade policy uncertainty and some large Emerging Markets and Developing Economies experiencing financial distress have all contributed to moderate economic growth. In the USA, GDP growth of 2.9% was estimated for 2018. The US economy continues to expand as fiscal stimulus is driving economic activity. The strengthening labour force has resulted in increased consumption. The unemployment rate stood at 3.9% in December 2018 down from December 2017 where it stood at 4.1%. The strengthening US economy coupled with the rising Fed funds rate resulted in a rising U.S dollar. The US Federal Reserve Bank continued to tighten monetary policy as short-term interest rates were increased four times during the year from a range of 1.25% to 1.50% as at December 2017 to a range of 2.25% – 2.50% as at December 2018. Oil prices continue to trend upwards up until September 2018 then there was a sharp decline as global demand softened amidst the continued geopolitical tensions. Europe and Japan experienced growth of 1.9% and 0.8%, respectively as their respective Central Banks generally continued accommodative fiscal and monetary policies throughout 2018. The Bank of England raised its interest rates incrementally during the period from 0.50% to 0.75% while Japan’s short-term rates remained unchanged. Global equity markets declined during 2018 with US equity markets outperforming international and emerging market equities. The Nasdaq composite was down 2.84% for the year, while the Dow Jones Industrial Average Index and the S&P 500 Index declined 3.48% and 4.38%, respectively. The MSCI Emerging Market Index was down 14.58% for the year. Interest rate hikes saw the yield on US 10 - year treasuries increase from 2.4% to 2.7%. Economic growth within the Caribbean trended upwards for most islands, with the exception of Anguilla, Dominica and Sint Maarten who continued to feel the impact of hurricanes Maria and Irma which caused major devastation to those territories in 2017. Barbados’ real gross domestic product also contracted due to fiscal consolidation and the fall in construction activity. Grenada was considered the fastest growing Caribbean economy in 2018 20 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS with growth of 5.2% according to the Caribbean Development Bank. Grenada’s upward growth was a result of continued improvement of the fiscal position which reflected strengthening expenditure management and tax compliance. The year 2018 proved to be a challenging one for the Barbados economy. The dwindling foreign reserves, the high government deficits and the decreased level of investor confidence following multiple credit downgrades resulted in the island entering into a four-year Extended Fund Facility arrangement with the International Monetary Fund (IMF) on October 1, 2018. The four-year economic adjustment programme with the IMF, the Barbados Economic Recovery and Transformation (BERT) plan aims to deepen fiscal adjustment, stimulate medium-term economic growth and maintain the fixed exchange rate anchor. With the BERT plan, Barbados is provided with phased access to US$290 million over the programme period. This is thought to have catalyzed funding from other multilateral financial institutions such as the Caribbean Development Bank and the Inter-American Development Bank. In November 2018, Standard and Poor’s (S&P) credit rating agency gave Barbados its first credit rating upgrade in several years. The completion of the domestic debt restructuring and the improved outlook for fiscal and debt sustainability would have contributed to S&P raising its credit ratings for domestic securities from Selective Default (SD) to B-. Unemployment for the four quarters ending September 2018 was 9.2%, slightly lower than in the prior year. However, layoffs in the public sector impacted unemployment in the fourth quarter of 2018. The Central Statistical Office estimates Trinidad and Tobago’s economy expanded by 1.9% for 2018, up from the 1.9% contraction in 2017. Trinidad recorded an average unemployment rate of 4.6% in 2017. Headline inflation declined to approximately 1.1% in December 2018. In December 2018, Central Bank of Trinidad and Tobago kept its main policy rate, the repo rate at 5% where it had been since a 25 basis points increase in July 2018. At the end of September 2018, gross official reserves were approximately US$7,465.3 million or 8.1 months of prospective imports of goods and services. The domestic stock market recorded an increase of 2.9% for the year. interest rate from 3.25% to 1.75% for the 2018 period. This monetary policy action supported greater credit expansion and job creation. The Bank was mandated to maintain inflation within the range of 4.0% to 6.0%; however, inflation fell below the lower bound on numerous occasions in 2018. The labour market also improved as the unemployment rate declined to 8.7% as at October 2018. Market interest rates also trended downwards, which was exhibited in the Government of Jamaica 180-day Treasury Bill declining to 2.07% at the end of 2018 from 4.63% at the end of 2017. At the end of 2018, the Jamaican Dollar depreciated by 2.2% on a year on year basis against the US dollar. This depreciation was primarily a consequence of the buoyant JMD liquidity and the periodic increases in demand. FINANCIAL SUMMARY The summary consolidated financial data is derived from the audited annual financial statements, for each of the periods indicated on the following table. (in US$ millions, unless otherwise noted) Profitability 2018 2017 Restated Net income (a) attributable to common shareholders 36.5 Basic earnings (a) per share Fully diluted earnings (a) per share Return (a) on shareholders’ equity Growth Revenue: Individual life, health and annuity Group life, health and annuity Property and casualty insurance Banking and investment management Farming and unallocated revenues 11.9¢ 11.7¢ 6.2% 940.1 284.0 45.6 179.6 35.0 62.3 20.5¢ 20.0¢ 11.3% 678.9 307.0 42.0 162.5 28.2 Total revenue 1,484.3 1,218.6 The Jamaica economy grew by approximately 1.7% in 2018. Moreover, S&P Global Ratings issued a revised outlook on Jamaica from stable to positive on September 25, 2018. The Bank of Jamaica reduced the policy (a) From continuing operations SAGICOR FINANCIAL CORPORATION LIMITED 21 MANAGEMENT DISCUSSION AND ANALYSIS (in US$ millions, unless otherwise noted) 2018 2017 Restated GROUP RESULTS: 2018 COMPARED TO 2017 Growth (continued) Net premium revenue: Life insurance Annuity Health insurance Property and casualty insurance Total net premium revenue Assets from continuing operations Total assets Operating liabilities Notes and loans payable Book value per common share Financial strength MCCSR ratio Debt to capital ratio Dividend pay-out ratio Dividends paid per common share Group net income for the year The table below summarises Sagicor’s net income for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated Change Group net income (in millions of US$) 412.0 440.0 168.1 33.9 1,054.0 389.2 178.4 149.1 28.9 745.6 7,308.2 6,804.5 7,325.4 6,814.6 From continuing operations From discontinued operation 5,699.7 5,463.6 Total 95.8 7.1 102.9 105.8 10.1 115.9 (9.5%) (29.7%) (11.2%) 490.3 413.8 $1.963 $2.041 234% 30.2% 42.0% 5.0¢ 258% 30.6% 24.4% 5.0¢ Net income totalled US$102.9 million in 2018, a decrease from US$115.9 million in 2017. This decrease, as explained in more detail below, was primarily driven by a moderate decline in net income from discontinued operations totalling US$7.1 million in 2018 compared with a net income of US$10.1 million in 2017 and a 9.5% decrease in net income from continuing operations to US$95.8 million in 2018 from US$105.8 million in 2017. Total capital 1,625.7 1,351.0 22 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS Group net income from continuing operations The table below summarises Sagicor’s net income from continuing operations for the years ended December 31, 2018 and 2017. Revenue The following table summarises the main items of Sagicor’s revenue for the periods ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated (in millions of US$) Change Revenue (in millions of US$) Year ended December 31 2018 2017 Change Group net income from continuing operations Revenue Benefits Expenses Other Income taxes Total Net insurance premiums: 1,484.3 1,218.6 (765.3) (659.4) 21.8% (16.1%) Life and annuity Health (590.7) (436.4) (35.4%) Property and casualty 18.2 (50.7) 95.8 2.3 (19.3) 105.8 691.3% (162.7%) (9.5%) 852.0 168.1 33.9 1,054.0 296.0 10.4 9.3 114.6 1,484.3 567.6 149.1 28.9 745.6 379.2 - - 93.8 1,218.6 50.1% 12.7% 17.3% 41.4% (21.9%) - - 22.2% 21.8% Net investment income (a) Gain on derecognition of amortised cost investments Gain reclassified to income from accumulated OCI Fees and other revenue Total (a)This includes US$2.1 million and US$9.8 million of operating income from associated companies in 2018 and 2017, respectively. Revenues from continuing operations reached US$1,484.3 million in 2018, an increase of US$265.7 million from US$1,218.6 million in 2017, for the reasons detailed as follows: Sagicor generated net insurance premiums that totalled US$1,054.0 million in 2018, a 41.4% increase from US$745.6 million in 2017. Net premium revenue from life insurance and annuity was US$852.0 million in 2018, a 50.1% increase from US$567.6 million in 2017. Life and annuity represented 80.8% of net premium revenue in 2018 and 76.1% in 2017. While premium income was solid in all business segments, the USA segment showed significant growth with net premium income increasing from US$86.7 million in 2017 to US$390.0 million in 2018; an increase of $303.3 million. Net income from continuing operations closed at US$95.8 million for the year ended December 31, 2018 compared to US$105.8 million for the same period ended December 31, 2017; a decrease of US$10.0 million or 9.5%. On September 7, 2018 the Government of Barbados (GoB) entered into a staff-level agreement with the IMF to provide financial and technical assistance. As part of the programme, the GoB launched a debt exchange offer for GoB domestic Barbados-dollar debt holders on September 7, 2018. The GoB announced on October 15, 2018 that its debt exchange offer received unanimous support from the domestic creditors. A restructuring plan has not yet been announced for external US dollar denominated debt. The Sagicor Group has made a gross provision of US$98.8 million and took a charge, net of off-setting adjustments, of US$48.8 million attributable to shareholders. Sagicor does not expect that there will be any incremental impact on the Group as it relates to the external US dollar denominated debt. SAGICOR FINANCIAL CORPORATION LIMITED 23 MANAGEMENT DISCUSSION AND ANALYSIS Net premium revenue from health insurance totalled US$168.1 million in 2018, an increase from US$149.1 million in 2017. Net premium revenue from property and casualty insurance totalled US$33.9 million in 2018, a 17.3% increase from US$28.9 million in 2017. The following table summarises the benefits provided by Sagicor to holders of insurance contracts, investment contracts and deposit and security liability contracts for the years ended December 31, 2018 and 2017. Net investment income was US$296.0 million in 2018 compared to US$379.2 million in 2017, a decrease of US$83.2 million primarily due to lower investment gains realised on the sale of securities and lower interest rates in the Jamaica segment. The interest yields and returns achieved on financial investments are disclosed in the following table. Benefits Net insurance benefits: Life and annuity Health Year ended December 31 Property and casualty 2018 2017 Year ended December 31 2018 2017 Restated (in millions of US$) Change 571.0 122.8 19.0 712.8 52.5 765.3 465.1 112.8 26.6 604.5 54.9 659.4 22.8% 8.9% (28.6%) 17.9% (4.4%) 16.1% Interest yields Debt securities Mortgage loans Policy loans Finance loans and leases Securities purchased for resale Deposits 5.8% 6.0% 7.2% 11.4% 7.5% 2.9% 6.1% 5.7% 7.2% 11.6% 5.1% 2.3% Income from fees and other revenues totalled US$114.6 million compared to US$93.8 million in the prior year, an increase of US$20.8 million. Fees and other revenue in our Jamaica segment increased by US$35.4 million relating largely to the expansion of the payments business. Benefits Benefits from continuing operations totalled US$765.3 million in 2018, a 16.1% increase from US$659.4 million in 2017. The growth in benefits (which include actuarial provisions for future benefits) reflects and is consistent with our revenue growth in our USA segment. This was partially offset by a decrease in property and casualty benefits. Interest cost Total Life and annuity benefits totalled US$571.0 million in 2018, of which US$392.7 million related to current benefits and US$178.3 million related to future benefits. The corresponding amounts for 2017 were a total of US$465.1 million, of which US$343.3 million related to current benefits and US$121.8 million related to future benefits. The change to future benefits from 2017 to 2018 represented a 46.4% increase. This increase in benefits occurred mainly as a result of strong growth in new business when compared to 2017. The impact of strong business growth was reduced however, by the actuarial liability releases associated with the GoB credit loss provisions. Total health insurance benefits were US$122.8 million representing an overall claim to premium ratio of 73.1%. The comparative 2017 amounts were US$112.8 million and an overall claim to premium ratio of 75.7%. Property and casualty claims amounted to US$19.0 million in 2018, a reduction of US$7.6 million from US$26.6 million in 2017. In 2017, Property and casualty claims included US$8.5 million relating to claims incurred from hurricane activity during that year. 24 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS Interest expense totalled US$52.5 million in 2018, a 4.4% decrease from US$54.9 million in 2017. The following table summarises the interest returns to holders of insurance contracts, investment contracts and deposit and security liability contracts. Expenses of administration represent the largest expense category and totalled US$303.1 million in 2018 compared to US$267.4 million in 2017, an increase of US$35.7 million. The Jamaica segment incurred higher administration costs relating to the expansion of its cards and payments business. The Group also incurred one-time costs related to its ongoing transaction with Alignvest Acquisition II Corporation. Interest yields Investment contracts Other funding instruments Customer deposits Securities sold for repurchase Year ended December 31 2018 2017 Restated 4.8% 2.3% 1.6% 3.4% 5.6% 2.1% 2.0% 3.6% Expenses and taxes Expenses and taxes totalled US$641.4 million for 2018, up from US$455.7 million for 2017. The table below summarises Sagicor’s expenses and taxes from continuing operations for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated Change Expenses and taxes (in millions of US$) Administrative expenses Commissions and related compensation Credit impairment losses (a) Finance costs, depreciation and amortisation Premium, asset and income taxes Total 303.1 117.3 95.5 60.8 64.7 641.4 267.4 98.7 - 56.6 33.0 455.7 13.3% 18.8% - 7.4% 96.1% 40.8% Commissions and related compensation grew by 18.8% to US$117.3 million, in line with growth in premiums. Credit impairment losses totalled US$95.5 million in 2018. Credit impairment losses have two components: (i) (ii) charges for ‘expected credit losses’, and charges for credit losses on impaired financial assets. IFRS 9 has introduced the concept of recognition of charges for expected credit losses for borrowers who are current or nearly current in their obligations. The recognition of such losses is new for 2018 and was not in effect in prior years when IAS 39 was in effect. IFRS 9 has also introduced some changes to the computation of charges for credit losses on impaired financial assets, and therefore these credit losses recognised are not necessarily consistent with how these charges were computed in prior years when IAS 39 was in effect. During 2018, the Government of Barbados defaulted on its domestic and external debt. For its domestic debt, replacement securities with lower interest coupon rates and longer maturities were issued. This significantly impacted the credit impairment loss. Sagicor also made an impairment provision on its external debt. The credit default of the Government of Barbados is discussed further in Additional Financial Disclosures 1. Default of Government of Barbados debt. The impairment charge for credit losses in 2017, computed in accordance with IAS 39, totalled US$8.4 million and has been offset in net investment income for that year. (a) Prior to the adoption of IFRS 9, credit impairment losses were netted against investment income. Sagicor 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 SAGICOR FINANCIAL CORPORATION LIMITED 25 MANAGEMENT DISCUSSION AND ANALYSIS 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. Sagicor is also subject to an asset tax in Jamaica and Barbados. In Jamaica, the asset tax is levied on insurance, securities dealers and deposit taking institutions at a percentage 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 at a percentage of adjusted assets held at the end of the period. Premium, asset and income taxes were US$64.7 million compared to US$33.0 million in the prior year, an increase of US$31.7 million. Of the total taxes, income taxes were US$50.7 million, compared to US$19.3 million in the prior year, an increase of US$31.4 million. This was principally related to our USA segment. During 2017 the Tax Cuts and Jobs Act was signed into law in the United States, which reduced the effective corporation tax rate from 35% to 21%. This contributed to a non-recurring decrease of US$19.4 million in income taxes in 2017. Income taxes now reflect the revised rates. Discontinued operation Sagicor’s discontinued operation comprised the Sagicor at Lloyd’s business, which consisted primarily of property and casualty insurance business written through Lloyd’s of London Syndicate 1206. The Lloyd’s of London franchise enabled the syndicate to write international business outside of the United Kingdom. In December 2012, Sagicor made the decision to dispose of the Sagicor Europe Limited (“SEL”) segment, which owns the Sagicor at Lloyd’s operations. The disposal of this segment occurred on December 23, 2013. In accordance with IFRS, the results of SEL have been separated from Sagicor’s continuing operations and presented as a discontinued operation. The following tables summarise Sagicor’s discontinued operation for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Change Net income - discontinued operation (in millions of US$) Currency translation gain realised on sale (0.7) Movement in price adjustment Total 7.8 7.1 - 10.1 10.1 - (22.8%) (29.7%) Financial position - discontinued operation Assets Net assets 2018 2017 Change (in millions of US$) 17.2 17.2 10.1 10.1 70.3% 70.3% Income from Sagicor’s discontinued operation was US$3.0 million lower for the year ended December 31, 2018, closing at US$7.1 million compared to US$10.1 million for the same period in 2017. This decline in net income earned, when compared to the same period in 2017, was due to lower income earned from the movement in the price adjustment of US$2.3 million coupled with marginal foreign exchange losses of US$ 0.7 million. Shareholder returns Sagicor’s net income and comprehensive income are allocated to the equity owners of Sagicor’s respective Group companies in accordance with their results. As some Group companies have minority shareholders, particularly in the Sagicor Jamaica operating segment, the net income is allocated accordingly between holders of Sagicor 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 demutualization of the Barbados Mutual Life Assurance Society (now Sagicor Life), and of its amalgamation with Life of Barbados Limited. For the 2018 financial year, US$36.5 million of net income from continuing operations was allocated to the holders of Sagicor common shares, which 26 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS corresponded to earnings per share for continuing operations of US$0.119. The comparative amounts for the 2017 fiscal year were US$62.3 million of net income from continuing operations allocated to the holders of common shares, which corresponded to earnings per share for continuing operations of US$0.205. The respective annual returns on average shareholders’ equity were 6.2% for 2018 and 11.3% for 2017. The dividends declared and paid in respect of Sagicor common shares in respect of 2018 totalled US$15.3 million and represented US$0.05 per common share. Dividends of US$0.05 per share were declared and paid in 2017. The table below summarises Sagicor’s profitability, dividends and returns in respect of common shareholders for the years ended December 31, 2018 and 2017. Comprehensive income The table below summarises Sagicor’s total comprehensive income for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated Change Total comprehensive income (in millions of US$) Group net income Other comprehensive income/(loss) Total 103.0 (64.0) 39.0 115.9 64.2 180.1 (11.1%) (199.7%) (78.3%) Common shareholder returns Net income (a) attributable to common shareholders Basic earnings (a) per share Fully diluted earnings (a) per share Return (a) on shareholders’ equity Dividend pay-out ratio Dividends paid Dividends paid per common share (a) From continuing operations. Year ended December 31 2018 2017 Restated $36.5m $62.3m 11.9¢ 11.7¢ 6.2% 42.0% $15.3m 5.0¢ 20.5¢ 20.0¢ 11.3% 24.4% $15.2m 5.0¢ Items recorded within other comprehensive income arise from gains and losses on employee defined benefit pension plans, from fair value changes of certain asset classes and from the related movements in actuarial liabilities, and from the retranslation of foreign currency operations. Total comprehensive income for 2018 totalled US$39.0 million, a significant decrease from US$180.1 million in 2017. This reduction was primarily due to a substantial decrease in other comprehensive income from a gain of US$64.2 million in 2017, to a loss of US$64.0 million in 2018, and a decline in net income to US$103.0 million in 2018 from US$115.9 million in 2017. Other comprehensive income from continuing operations totalled a loss of US$64.0 million in 2018, a substantial decrease from US$64.2 million income in 2017. The principal sources of the increase were a net loss on financial assets of US$82.9 million, resulting from fair value declines on financial assets in our international portfolios and foreign currency declines of US$25.2 million on retranslation of foreign currency operations, resulting from a decline in the Jamaica dollar when compared to the United States dollar. Sagicor’s revaluation of owner-occupied property totalled a net gain of US$6.9 million in 2018, compared to a net loss of US$1.8 million in 2017. SAGICOR FINANCIAL CORPORATION LIMITED 27 MANAGEMENT DISCUSSION AND ANALYSIS Statement of financial position The table below summarises Sagicor’s consolidated statement of financial position as at December 31, 2018 and 2017, respectively. Year ended December 31 Sagicor Group Financial investments Other assets Assets of discontinued operation 2018 2017 Restated (in millions of US$) 5,347.7 1,960.5 17.2 4,953.2 1,851.3 10.1 Total assets 7,325.4 6,814.6 Policy liabilities Other operating liabilities Borrowings Total liabilities Shareholders’ equity Participating accounts Non-controlling interests Total equity 3,662.4 2,037.2 490.3 6,189.9 600.9 4.1 530.5 1,135.5 3,547.9 1,915.7 413.8 5,877.4 624.6 0.9 311.7 937.2 Change 8.0% 5.9% 70.3% 7.5% 3.2% 6.3% 18.5% 5.3% (3.8%) 355.6% 70.2% 21.2% Financial Investments Each principal operating entity within the group has an investment policy that provides a framework of maximizing investment yield subject to the management of the ALM risks described above and the investment regulations of each country. As of December 31, 2018, Sagicor had US$5.3 billion of diversified financial assets and net investment income of US$296.0 million, a net investment return of 5.9%. Since becoming a public company in 2002, Sagicor has had positive and stable investment portfolio performance. Carrying Values The first table below shows the carrying value of Sagicor’s investment portfolio for the years ended December 31, 2018 and 2017. The second table below shows Sagicor’s net investment return for the years ended December 31, 2018 and 2017. On January 1, 2018, Sagicor adopted IFRS 9. Previously, investments were accounted for in accordance with IAS 39. Debt instruments, including hybrid contracts, are measured at fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) or amortized cost based on the nature of the cash flows of these assets and the Group’s business model. Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be made on initial recognition to measure them at FVOCI with no subsequent reclassification to profit or loss. Financial assets are measured on initial recognition at fair value and are classified as and subsequently measured either at amortised cost, at FVOCI or at FVTPL. Total liabilities and equity 7,325.4 6,814.6 7.5% Change in subsidiary interest Our subsidiary, Sagicor Group Jamaica, was deemed to have effective control of Sagicor X Fund Group from October 1, 2018 based on its shareholding and influence and from that date has accounted for Sagicor X Fund as a subsidiary as required by IFRS 10. This change has resulted in the operations, results and balance sheet of Sagicor X Fund Group being included within the financial statements. This has the effect of increasing assets and debt on our consolidated balance sheet, including a significant increase in non-controlling interests in subsidiaries. 28 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS 2018 IFRS 9 basis 2017 IAS 39 Basis Carrying value % of Total Carrying value % of Total (in millions of US$, except percentages) The pie charts below represent a breakdown of the carrying value and risk exposure of Sagicor’s consolidated investments portfolio as of December 31, 2018. INVESTMENTS PORTFOLIO AS OF DECEMBER 31, 2018 CARRYING VALUE (AS % OF TOTAL Investments at FVOCI (available for sale): Debt securities Equity securities Investments at FVTPL (fair value through income): Debt securities Equity securities Derivative financial instruments Mortgage loans Investments at amortised cost (loans and receivables): Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits 2,633.6 49.2% 2,266.3 45.8% 0.3 - 86.9 1.8% 2,633.9 49.3% 2,353.2 47.5% 198.8 267.2 7.7 30.1 503.8 3.7% 5.0% 0.1% 0.6% 9.4% 180.5 158.6 32.5 45.4 417.0 3.6% 3.2% 0.7% 0.9% 8.4% 1,097.2 20.5% 1,051.7 21.2% 337.0 147.0 514.5 7.2 107.1 6.3% 2.7% 9.6% 0.1% 2.0% 297.0 142.1 564.3 16.5 111.4 6.0% 2.9% 11.4% 0.3% 2.2% 2,210.0 41.3% 2,183.0 44.1% Investments at FVOCI Investments at FVTPL 49% 10% Investments at amortised cost 41% INVESTMENTS PORTFOLIO RISK EXPOSURE AAA/AA A BBB BB B Default 13% 11% 38% 3% 26% 6% 3% Total financial investments 5,347.7 100.0 4,953.2 100.0 Un-rated and other SAGICOR FINANCIAL CORPORATION LIMITED 29 MANAGEMENT DISCUSSION AND ANALYSIS NET INVESTMENT INCOME 2018 NET INVESTMENT INCOME (continued) (in millions of US$) Income from financial investments measured on an IFRS 9 basis Income from financial investments measured on an IFRS 9 basis Interest income: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale Deposits, cash and other items Interest Income (FVOCI): Debt securities FVTPL investments: Fair value changes and interest income from debt securities Fair value changes and dividend income from equity securities Fair value changes and interest income from mortgage securities Investment income Other income measured on an IFRS 9 basis Income from financial investments measured on an IAS 39 basis: Interest income Dividend income Net investment gains Investment property income and fair value gains / (losses) Share of operating income of associates and joint venture Other investment income Investment expenses: Allowances for impairment losses (IAS 39 basis) Direct operating expenses of investment property Other direct investment expenses 84.5 20.8 10.0 58.3 0.8 3.1 177.5 113.5 (0.9) 15.8 0.9 306.8 2018 2017 (in millions of US$) 306.8 (10.6) 5.5 2.1 0.5 294.7 3.8 78.3 3.9 9.8 0.4 304.3 390.9 6.0 2.3 8.3 8.4 1.9 1.4 11.7 Net investment income 296.0 379.2 OPERATING SEGMENT RESULTS: 2018 COMPARED TO 2017 Sagicor operates its business primarily through three reporting operating segments. These segments are: (i) (ii) Sagicor Life, which comprises Group subsidiaries conducting the life, health and annuity insurance business, pension administration services and asset management in Barbados, Trinidad and Tobago, Eastern Caribbean, Dutch Caribbean, Bahamas and Central America. Sagicor Jamaica, which comprises Group subsidiaries conducting the life, health, annuity, property and casualty insurance business, pension administration services, banking and financial services, hospitality and real estate investment services in Jamaica and Cayman Islands and Costa Rica. (iii) Sagicor Life USA, which comprises Sagicor’s life insurance operations, conducting life insurance and annuity business in the United States. 30 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS A summary analysis of revenue and net income by operating segment for 2018 and 2017 are set out in the following tables. (in millions of US$) Revenue Net premium revenue Net gain/(losses) on derecognition of financial assets measured at amortised cost Gains reclassified to income from accumulated OCI Interest income Other investment income Fees and other revenues Inter-segment revenues Segment revenue Benefits and expenses Inter-segment expenses Gain arising on business combinations, acquisitions and divestitures Segment income before tax Income taxes Segment net income/(loss) from continuing operations Net income attributable to shareholders Year ended December 31, 2018 Sagicor Life Sagicor Jamaica Sagicor Life USA Head office & other Adjustments Total 320.5 (0.3) 0.4 79.1 1.1 7.9 15.7 424.4 309.7 10.3 8.4 150.7 18.5 98.1 - 595.7 (372.1) (461.3) (2.9) 6.9 56.3 (9.6) 46.7 39.6 (2.2) 11.8 144.0 (33.2) 110.8 55.7 390.0 - 0.8 55.2 (15.8) (8.9) - 421.3 (397.5) (0.7) - 23.1 (4.8) 18.3 18.3 33.8 0.4 - 7.1 0.3 17.5 94.1 153.2 (89.1) (15.1) (0.5) 48.5 (3.2) 45.3 14.3 - - (0.3) 0.3 (0.5) - (109.8) (110.3) (36.0) 20.9 - (125.4) 0.1 (125.3) (91.4) 1,054.0 10.4 9.3 292.4 3.6 114.6 - 1,484.3 (1,356.0) - 18.2 146.5 (50.7) 95.8 36.5 SAGICOR FINANCIAL CORPORATION LIMITED 31 MANAGEMENT DISCUSSION AND ANALYSIS (in millions of US$) Revenue Net premium revenue Interest income Other investment income Fees and other revenues Inter-segment revenues Segment revenue Benefits and expenses Inter-segment expenses Gain arising on business combinations, acquisitions and divestitures Segment income/(loss) before tax Income taxes Segment net income/(loss) from continuing operations Net income attributable to shareholders Revenue Net premium revenue Interest income Other investment income Fees and other revenues Inter-segment revenues Segment revenue Benefits and expenses Inter-segment expenses Other Segment income before tax Income taxes Segment net income/(loss) from continuing operations Net income attributable to shareholders Year ended December 31, 2017 (Restated) Sagicor Life Sagicor Jamaica Sagicor Life USA Head office & other Adjustments Total 308.6 77.5 10.3 11.9 12.9 421.2 320.1 159.4 47.4 62.6 - 589.5 86.7 48.8 26.2 (2.5) - 159.2 (342.1) (472.0) (162.5) (5.6) - 73.5 (9.9) 63.6 64.8 (1.9) 2.3 117.9 (23.0) 94.9 46.6 3.0 - (0.3) 13.6 13.3 13.3 30.2 9.0 0.7 21.8 71.2 132.9 (83.7) (12.6) - 36.6 - 36.6 6.6 - - (0.1) - (84.1) (84.2) 745.6 294.7 84.5 93.8 - 1,218.6 (35.5) (1,095.8) 17.1 - (102.6) - (102.6) (69.0) - 2.3 125.1 (19.3) 105.8 62.3 Change December 31, 2018 vs December 31, 2017 Sagicor Life Sagicor Jamaica Sagicor Life USA Head office & other Adjustments Total 3.9% 2.1% (88.3%) (33.6%) 21.7% 0.8% (8.8%) 48.2% - (23.4%) (3.0%) (26.6%) (38.9%) (3.2%) (0.2%) (39.2%) 56.7% - 1.1% 2.3% (15.8%) 413.0% 22.1% 44.3% 16.8% 19.5% 349.8% 13.1% (160.3%) 256.0% - 164.6% (144.6%) (120.0%) - 7,800.0% (135.3%) 37.6% 37.6% 11.9% (21.1%) (57.1%) (19.7%) 32.2% 15.2% (6.5%) 19.8% - 32.5% - 23.8% 116.7% - - (400.0%) - 30.6% 31.0% (1.4%) 22.2% - 22.2% - 22.1% 32.5% 41.4% (0.8%) (83.4%) 22.2% - 21.8% (23.7%) - 691.3% 17.1% 162.7% (9.5%) (41.4%) 32 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS The Sagicor Life segment generated revenue that totalled US$424.4 million in 2018, a 0.8% increase from US$421.2 million reported in 2017. There was a 3.9% increase in net premium revenue to US$320.5 million in 2018 from US$308.6 million in 2017, due to a combination of rate increases and growth in the number of policies. Fees and other revenue totalled US$7.9 million in 2018, a 33.6% decrease from US$11.9 million in 2017. Other investment income realised a significant decline closing at US$1.2 million in 2018 from US$10.3 million in 2017 largely due to lower investment gains, when compared to 2017. Benefits incurred for the Sagicor Life segment totalled US$166.9 million in 2018, a decrease of US$54.9 million or 24.8% from US$221.8 million in 2017. The decline in benefits incurred was due to Net changes in actuarial liabilities which totalled negative US$62.1 million in 2018, down from an increase of US$16.6 million in 2017. This was partly due to the impact of actuarial offset relating to the Government of Barbados debt exchange. Total expenses and taxes for the Sagicor Life segment totalled US$198.4 million in 2018, a 74.2% increase from US$113.9 million in 2017. Expenses and taxes in 2018 include US$82.3 million in credit impairment losses primarily associated with the restructuring of the GoB securities. There was a slight decline in commissions and premium taxes which totaled US$43.1 million in 2018, down from US$45.6 million in 2017 while there was an increase of 7.3% in administrative expenses to US$73.1 million in 2018 from US$68.1 million in 2017. The Sagicor Life segment held net assets of US$488.1 million in 2018 compared to US$539.4 million in 2017, a decrease of 9.5%, which was largely as a result of the impact of the restructuring of the GoB securities during the year coupled with the impact of dividend distributions. The performance of these reporting segments in 2018 compared to 2017 is discussed in the following sections. Sagicor Life segment The net segment income for the Sagicor Life segment totalled US$46.7 million in 2018, a 26.6% decrease from US$63.6 million in 2017. This decrease is mainly a result of the factors discussed below. After accounting for the income allocated to policyholders, the net income attributable to shareholders for the Sagicor Life segment totalled US$39.6 million in 2018, 38.9% lower than the US$64.8 million in 2017. The following table summarises the results of the Sagicor Life segment for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Change Sagicor Life segment (in millions of US$) Net premium revenue 320.5 308.6 Interest income Other investment income Fees and other revenue Inter-segment revenues Total revenue Benefits Expenses and taxes Depreciation and amortisation Inter-segment expenses Other Segment income before taxes Income taxes Net segment income from continuing operations Income attributable to shareholders 79.1 1.2 7.9 15.7 424.4 (166.9) (198.4) (6.8) (2.9) 6.9 56.3 (9.6) 46.7 39.6 77.5 10.3 11.9 12.9 421.2 (221.8) (113.9) (6.4) (5.6) - 73.5 (9.9) 63.6 64.8 3.9% 2.1% (88.3%) (33.6%) 21.7% 0.8% 24.8% (74.2%) (6.3%) 48.2% - (23.4%) 3.0% (26.6%) (38.9%) SAGICOR FINANCIAL CORPORATION LIMITED 33 MANAGEMENT DISCUSSION AND ANALYSIS The following table summarises the financial position of the Sagicor Life segment as of December 31, 2018 and 2017. The following table summarises the results of the Sagicor Jamaica segment for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Change Sagicor Life segment (in millions of US$) Financial investments 1,418.0 1,386.2 Other assets Inter-segment assets Total assets Policy liabilities Other liabilities Inter-segment liabilities Total liabilities Net assets 324.4 266.1 2,008.5 1,297.3 160.9 62.2 1,520.4 488.1 351.8 214.8 1,952.8 1,296.5 89.6 27.3 1,413.4 539.4 2.3% 7.8% 23.8% 2.9% (0.1%) 79.6% 127.8% 7.6% (9.5%) Financial investments totalled US$1,418.0 million and comprised 70.6% of the segment’s total assets, and policy liabilities totalled US$1,297.3 million and comprised 85.3% of the segment’s total liabilities at the end of 2018. Segment income before taxes Income taxes Sagicor Jamaica segment The net segment income for the Sagicor Jamaica segment totalled US$110.8 million in 2018, a 16.8% increase from US$94.9 million in 2017. This increase is mainly a result of the factors discussed below. The net income attributable to shareholders for the Sagicor Jamaica segment totalled US$55.7 million in 2018, an increase of 19.5% from US$46.6 million in 2017. Year ended December 31 2018 2017 Restated Change Sagicor Jamaica segment (in millions of US$) Net premium revenue Interest income Other investment income Fees and other revenue Total revenue Benefits 309.7 159.1 28.8 98.1 595.7 320.1 159.4 47.4 62.6 589.5 (3.2%) (0.2%) (39.2%) 56.7% 1.1% (245.9) (290.9) (15.5%) Expenses and taxes (204.1) (171.9) Depreciation and amortisation Inter-segment expenses Other Net segment income from continuing operations Income attributable to shareholders (a) (11.3) (2.2) 11.8 144.0 (33.2) 110.8 55.7 (9.2) (1.9) 2.3 117.9 (23.0) 94.9 46.6 18.7% 22.8% (15.8%) 413.0% 22.1% 44.3% 16.8% 19.5% (a) Sagicor owned 49.1% of Sagicor Jamaica in 2018 and 2017. This segment generated revenue of US$595.7 million in 2018, an increase of US$6.2 million over the 2017 total. The main revenue component was premium income which totalled US$309.7 million compared to US$320.1 million in 2017, a decrease of US$10.4 million. The Jamaica segment benefited from the issuance of a significant single premium annuity during 2017. Investment income totalled US$187.9 million compared to US$206.8 million in the prior year. Investment income in Jamaica was impacted by lower interest rates and lower investment gains from the disposal of securities, when compared to 2017. 34 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS Financial investments totalled US$2,344.1 million and comprised 75.5% of the segment’s total assets at the end of 2018. Policy liabilities totalled US$753.8 million and other liabilities totalled US$1,526.2 million, comprising 33.0% and 66.8% of the segment’s total liabilities at the end of 2018, respectively. In comparison, financial investments totalled US$2,291.2 million and comprised 80.8% of the segment’s total assets at the end of 2017. Policy liabilities totalled US$757.5 million and other liabilities totalled US$1,506.6 million, comprising 33.4% and 66.4% of the segment’s total liabilities at the end of 2017, respectively. Fees and other revenue increased by 56.7% in 2018 to US$98.1 million due in part to growth in the investment banking business. Benefits totalled US$245.9 million and was lower than the prior year amount of US$290.9 million, a decrease of US$45.0 million. This is consistent with the decline in the single premium annuity activity compared to the prior year. Expenses and taxes incurred totalled US$204.1 million in 2018 compared to US$171.9 million in 2017, an increase of US$32.2 million over the prior year. The Jamaica segment incurred some higher administration costs relating to the expansion of cards and payments business and credit impairment losses on the GoB securities. The Sagicor Jamaica segment had net assets of US$818.8 million in 2018 compared to US$568.0 million in 2017, an increase of 44.2%. The significant increase in net assets of the segment was related to the fact that the Jamaica segment obtained control over Sagicor Real Estate X Fund Limited resulting in the consolidation of the X Funds in the financial statements. The consolidation resulted in the growth in the segment assets by US$201.6 million. The following table summarises the financial position of the Sagicor Jamaica segment as of December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated Change Sagicor Jamaica segment (in millions of US$) Financial investments 2,344.1 2,291.2 Other assets Inter-segment assets Total assets Policy liabilities Other liabilities Inter-segment liabilities Total liabilities Net assets 745.3 15.0 531.7 13.3 3,104.4 2,836.2 753.8 1,526.2 5.6 757.5 1,506.6 4.1 2,285.6 2,268.2 818.8 568.0 2.3% 40.2% 12.8% 9.4% (0.5%) 1.3% 36.6% 0.8% 44.2% SAGICOR FINANCIAL CORPORATION LIMITED 35 MANAGEMENT DISCUSSION AND ANALYSIS million in 2017. There was also a 14.8% increase in interest income to US$56.0 million in 2018 from US$48.8 million in 2017 due to to the overall higher investment balances. Other investment income closed with a loss of US$15.8 million, down US$42.0 million from the US$26.2 million in income reported in 2017. This is due to the negative impact of losses on index options and the change in fair value of investments through the income statement. The benefits incurred by the Sagicor Life USA segment totalled US$331.8 million in 2018, a 184.8% increase from US$116.5 million in 2017. This increase was primarily due to greater annuity business in 2018, which resulted in a 730.2% increase in net change in actuarial liabilities to US$222.5 million in 2018 from US$26.8 million in 2017. There was also a 18.4% increase in net policy benefits to US$103.7 million in 2018 from US$87.6 million in 2017. Total expenses and taxes for the Sagicor Life USA segment totalled US$62.8 million in 2018, a 44.4% increase from US$43.5 million in 2017. This increase was primarily due to higher commissions and premium taxes (US$14.7 million) associated with the new business growth. Other expenses increased to US$32.8 million, up from US$28.3 in 2017, an increase of US$4.5 million mainly related to interest expense on higher borrowings. Income tax expense of US$4.8 million in 2018 compared to the US$13.6 million tax benefit recognised in 2017 arising from the 2017 US Federal tax law changes. Sagicor Life USA segment The net segment income for the Sagicor Life USA segment totalled US$18.3 million in 2018, a 37.6% increase from US$13.3 million in 2017, mainly as a result of the factors described below. The following table summarises the results of the Sagicor Life USA segment for the years ended December 31, 2018 and 2017. Year ended December 31 2018 2017 Restated Change Sagicor Life USA segment (in millions of US$) Net premium revenue Interest income Other investment income Fees and other revenue Total revenue Benefits Expenses and taxes Depreciation and amortisation Inter-segment expenses Segment income/(loss) before taxes Income taxes Net segment income from continuing operations Income attributable to shareholders 390.0 56.0 (15.8) (8.9) 421.3 (331.8) (62.8) (3.0) (0.6) 23.1 (4.8) 18.3 18.3 86.7 48.8 26.2 (2.5) 159.2 (116.5) (43.5) (2.5) 3.0 349.8% 14.8% (160.3%) 256.0% 164.6% (184.8%) (44.4%) (20.0%) (120.0%) (0.3) 7,800.0% 13.6 13.3 13.3 (135.3%) 37.6% 37.6% The Sagicor Life USA segment generated revenue that totalled US$421.3 million in 2018, a 164.6% increase from US$159.2 million in 2017. The increase in revenue occurred mainly as a result of higher new annuity business written in the United States when compared to 2017, which resulted in a 349.8% increase in net premium revenue to US$390.0 million in 2018 from US$86.7 36 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS The Sagicor Life USA segment had net assets of US$246.5 million in 2018 compared to US$237.7 million in 2017, an increase of 3.7%. States) and product markets (in Jamaica) through portfolio and / or company acquisitions; Year ended December 31 2018 2017 Restated Change Sagicor Life USA segment (in millions of US$) Financial investments Other assets Inter-segment assets Total assets Policy liabilities Other liabilities Inter-segment liabilities Total liabilities Net assets 1,499.9 789.3 3.9 2,293.1 1,602.6 374.0 70.1 2,046.6 246.5 1,123.6 856.3 2.5 1,982.4 1,498.3 194.8 51.6 1,744.7 237.7 33.5% (7.8%) 56.0% 15.7% 7.0% 92.0% 35.9% 17.3% 3.7% Financial investments totalled US$1,499.9 million and comprised 65.4% of the segment’s total assets, and policy liabilities totalled US$1,602.6 million and comprised 78.3% of the segment’s total liabilities at the end of 2018. Financial investments totalled US$1,123.6 million and comprised 56.7% of the segment’s total assets, and policy liabilities totalled US$1,498.3 million and comprised 85.9% of the segment’s total liabilities at the end of 2017. KEY FACTORS AFFECTING RESULTS A variety of factors affect Sagicor’s results, including: sales of core products and services; life insurance and annuity policy lapse experience; insurance claims experience; investment yields; asset default; (i) (ii) (iii) (iv) (v) (vi) country inflation and taxes; (vii) Sagicor’s expansion into new geographic markets (in the United (viii) and the continuing availability of appropriately priced reinsurance treaties for life, health and property and casualty insurance. Sales of core products and services Growth in sales enables Sagicor to allocate its fixed operating expenses over larger revenues and subsequently increases its profitability. The impact is very significant for the Sagicor Life and Sagicor Jamaica operating segments which sell significant amounts of periodic premium life insurance and annuity policies. The pricing of such products is either fixed at the issue of each policy or may limit the extent of cost recovery over the duration of the policy which can extend over decades. Growth in sales enables Sagicor to contain the growth in unit policy operating expenses. Lapse experience With respect to periodic premium life insurance and annuity policies, lapse experience is a factor of profitability. Many of these polices have up-front commission, policy issue and medical underwriting costs which are only recovered in full if the policy is premium paying for the initial years of its duration. If the policy lapses during the initial years, Sagicor will not fully recover its up-front costs and incur a loss on that policy. For the same reasons that the quantum of sales of insurance policies is an important factor in maintaining insurance policy unit costs of administration, the rates of lapse or termination of inforce policies impacts the policy unit costs incurred. The lower the lapse or termination rate, the more policies are inforce, enabling Sagicor to contain growth in unit policy administrative costs. Insurance claims experience Across all lines of insurance, claims experience is a factor in profitability. In establishing rates of premium, Sagicor provides for appropriate levels of claims experience, be it rates of mortality for life insurance, rates of longevity for annuities, rates of morbidity for disability and health insurance, or rates of contingent losses for property and casualty insurance. Claims rates incurred in excess of pricing have adverse consequences for profitability, and conversely, claims rates incurred at levels below pricing impact profitability positively. SAGICOR FINANCIAL CORPORATION LIMITED 37 MANAGEMENT DISCUSSION AND ANALYSIS Investment yields Across applicable lines of insurance and across financial contracts issued by Sagicor, investment yield is important to the profitability of the Group. Higher investment yields enable Sagicor to achieve higher interest margins (defined as the difference between interest earned and payable) on applicable insurance contracts and financial contracts. With lower investment yields, the interest margins are generally lower and may be eliminated if Sagicor is not able to earn a guaranteed rate of interest which is payable under the insurance or financial contract. For long-term life insurance and annuity contracts, the Appointed Actuaries within the Group determine each segment’s actuarial liabilities at December 31 after factoring in rates of investment return on re-invested assets. These rates, including the ultimate rates of return, affect the quantum of actuarial liability determined, with higher re-investment rates resulting in a lower actuarial liability, and with lower re-investment rates resulting in a higher actuarial liability. Asset default The recognition of an un-anticipated default from an invested asset, may have immediate negative consequences for profitability. Sagicor maintains certain invested assets for which the full return (of capital and of interest) is borne by insurance and /or financial contract-holders. In such instances, Sagicor is generally not exposed to asset default risk. However, for other invested assets, for which Sagicor is exposed to default risk, the default risk may be entirely borne by Sagicor’s shareholders, or the risk is shared by Sagicor’s shareholders and insurance and /or financial contract-holders. In such instances, the impact on profitability will be negative. For long-term life insurance and annuity contracts, the Appointed Actuaries within the Group determine each segment’s actuarial liabilities at December 31 after factoring in the expected rates of asset default. Should asset default rates over time be lower than expected, profitability is impacted positively. Conversely, if asset default rates over time are higher than expected, profitability is impacted negatively. Country inflation and taxes As with other key factors affecting profitability, changes in the level of country inflation and taxes impact the operating costs of the Sagicor Group, immediately and in the longer term. Actuaries within the Group determine each segment’s actuarial liabilities as of December 31 after factoring in expected levels of operating expenses. Higher inflation and taxation levels result is adverse consequences for profitability and lower inflation and taxation levels result in positive consequences for profitability. Sensitivity arising from the valuation of actuarial liabilities The estimation of actuarial liabilities is sensitive to the assumptions made. 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 the margins for adverse deviations 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: Sensitivity Worsening rate of lapse High interest rate Sagicor Life Inc segment Scenario Sagicor Jamaica Segment Lapse rates were either doubled or halved, and the more adverse result was selected. Sagicor USA segment Lapse rates were increased or reduced by 30%, and the more adverse result was selected. Assumed increases in the investment portfolio yield rates of 0.25% per year for 5 years, with the rates remaining constant thereafter. Assumed increases in the investment portfolio yield rates of 0.5% for 10 years. A 1% increase was applied to the investment portfolio rate. 38 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS (in US$ millions) 2018 2017 Sagicor USA segment Sagicor Life Segment Sensitivity Low interest rate Sagicor Life Inc segment Assumed decreases in investment portfolio yield rates of 0.25% per year for 5 years, with the rates remaining constant thereafter. Scenario Sagicor Jamaica Segment Assumed decreases in investment portfolio yield rates of 0.5% per year for 10 years. Worsening mortality and morbidity 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, the mortality rates were decreased by 3% of the base rate for 5 years. A 1% decrease was applied to the investment portfolio rate. For life insurance and deferred annuity products, the base assumed rates were increased annually by 3% cumulatively over the next 5 years. For pay-out annuity products only, the mortality rates were decreased 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. To illustrate the potential impact of some of the foregoing key factors, the following table presents the estimated sensitivity using the economic scenarios outlined above, relating to (i) worsening rate of lapse, (ii) higher interest rate (on invested assets), (iii) lower interest rate (on invested assets), (iv) worsening rate of mortality and morbidity, and (v) higher operating expenses, to the net actuarial liabilities of each of operating segments of the Group, as of December 31, 2018 and 2017. Base net actuarial liability Scenario Worsening rate of lapse Higher interest rate Lower interest rate Worsening mortality / morbidity Higher expenses Sagicor Jamaica Segment Base net actuarial liability Scenario Worsening rate of lapse High interest rate Low interest rate Worsening mortality / morbidity Higher expenses Sagicor Life USA Segment Base net actuarial liability Scenario Worsening rate of lapse High interest rate Low interest rate Worsening mortality / morbidity Higher expenses 926.1 956.3 Increase (decrease) in actuarial liability 156.2 (97.6) 170.0 39.7 20.6 144.9 (89.3) 161.5 37.5 19.1 345.2 374.5 Increase (decrease) in actuarial liability 66.6 (115.8) 110.2 48.3 16.6 53.9 (111.1) 102.2 42.8 17.5 816.8 623.3 Increase (decrease) in actuarial liability 12.1 (49.7) 57.5 16.0 3.0 11.4 (37.1) 42.6 16.8 5.2 SAGICOR FINANCIAL CORPORATION LIMITED 39 MANAGEMENT DISCUSSION AND ANALYSIS Expansion into new markets and company acquisitions While Sagicor has endured for 178 years, its product offerings and geographic markets have evolved. Markets often have different preferences for certain products and any successful venture into new markets need to adapt to market tastes. Sagicor only ventures into new markets or offers new products after extensive research and appraisal. Company acquisitions has been a strategy employed by the Sagicor Group over the last twenty years. As a result of these acquisitions, Sagicor’s assets include goodwill and other intangibles acquired on company acquisitions. The goodwill carried by operating segments as of December 31, 2018 and 2017 respectively, is summarised in the following table. (in US$ millions) Goodwill Sagicor Life segment Sagicor Jamaica segment Sagicor General Insurance Total goodwill 2018 2017 26.5 24.2 5.7 56.4 26.5 13.4 4.3 44.2 Goodwill is subject to an annual impairment test, whereby the carrying value of the business unit including the associated goodwill is compared to the fair value of the business. As long as the fair value of the business exceeds the carrying value of the business and its associated goodwill, the goodwill is un-impaired. If it is not, the goodwill is impaired to the extent of the excess of the carrying value plus goodwill over its fair value, and the resulting impairment charge is recorded in the income statement. In this test, fair value is defined as the higher of ‘value in use’ and ’fair value less costs to sell’. The computation of fair value includes the use of management prepared income and cash flow forecasts, and independently determined market discount and residual growth rates. For some life insurance elements of the carrying value, the Group uses an actuarially determined ‘embedded value’ to determine fair value, as this is an appropriate methodology to determine fair value of long-term insurance business. As income and cash flow forecasts and market discount and residual factors vary from year to year, there is the possibility of a significant impairment charge. For the years ended December 31, 2018 and 2017 respectively, there was no goodwill impairment charge recorded in the income statement. Reinsurance treaties In order to offer useful insurance coverages to potential customers, the Group holds reinsurance coverages that allow potential policy benefits to exceed amounts which are prudent for Sagicor to undertake the claims risk. Reinsured amounts may be on a per policy basis, (i.e. in excess of a pre- determined insured amount) or may be based on the aggregation of the insured’s coverages (i.e. the insured has several policies and the amount reinsured is the aggregate exceeding a pre-determined amount). The tables below illustrate the gross and net (of reinsurance) total life insurance coverages and annuity liabilities for individual and group polices as of December 31, 2018 and 2017, respectively. (in US$ millions) Total life insurance coverage Individual contracts - gross Individual contracts - net Group contracts – gross Group contracts - net 2018 2017 31,820.2 29,738.2 25,655.5 23,561.9 11,667.0 10,942.4 11,240.1 10,566.6 (in US$ millions) 2018 2017 Total actuarial liability for annuity contracts Individual contracts - gross 1,542.9 1,452.2 Individual contracts - net Group contracts – gross Group contracts - net 862.0 414.3 399.4 676.8 411.3 394.8 40 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES The following discussion is qualified by reference to the consolidated statement of cash flows and note 36 of the annual financial statements. Liquidity sources immediately available to the Sagicor Group include: (i) existing cash and cash equivalents; (ii) the Group’s portfolio of highly rated, highly liquid investments; (iii) cash flow from operating activities which include net premiums receipts, fee income and investment income; and (iv) borrowing facilities. These funds are used primarily to pay current benefits and operating expenses, service the Group’s long-term debt, purchase investments to support future benefits and maturing obligations, and for distribution of dividends. Sagicor expects to have sufficient liquidity to fund its operations and to meet its current business plans. However, should the need arise, additional liquidity sources include further bank loans and new issuances of debt or shares in the private or public markets. Cash flow The following table summarises the Group’s cash flows for the years ended December 31, 2018 and 2017, respectively. Sagicor’s net cash used in investing activities was US$8.0 million compared to US$16.1 million for the year ended December 31, 2017, a decrease of US$8.1 million, or 50.3%. In 2018, investing activities associated with property, plant and equipment and intangible assets totalled US$5.1 million, closing US$14.5 million lower than the US$19.6 million spent in 2017. In addition, lower outflows (US$6.8 million) associated with Associates and Joint ventures, contributed overall to lower investing outflows. The impact of these however were reduced by net outflows of US$13.8 million following the sale of a subsidiary in 2018. Sagicor’s net cash used in financing activities was US$51.3 million for the year ended December 31, 2018, compared to US$24.3 million for the same period in 2017, an increase of US$27.0 million. In 2018, the Group acquired the 45% interest held in a subsidiary company for a cash payment. In addition, cash inflows from the issue of convertible preference shares of US$18.1 million during the year ended December 31, 2017 reduced the impact of net cash outflows associated with financing activities for that period, conversely for the year ended December 31, 2018, no preference shares were issued, which resulted in a decline in cash inflows. (in US$ millions) Net cash flows from continuing operations: Operating activities Investing activities Financing activities Effect of exchange rate changes Cash and cash equivalents: Beginning of year End of year 2018 46.3 (8.0) (51.3) (3.7) (16.7) 338.3 321.6 2017 Restated In the year ended December 31, 2018, the effect of exchange rate changes was a loss of US$3.7 million compared to a gain of US$1.8 million in the same period in 2017. (10.8) (16.1) (24.3) 1.8 (49.4) 387.7 338.3 Debt funding Sagicor classifies its debt capital as notes and loans payable in the consolidated statement of financial position. As of December 31, 2018, Sagicor had a debt to equity ratio of 43.2%, compared to 44.2% as of December 31, 2017, respectively. To determine the debt to equity ratio, loans and notes payable, as presented in note 16 to the annual financial statements, is divided by total equity. As of December 31, 2018, Sagicor had US$490.3 million in notes and loans payable compared to US$ 413.8 million as of December 31, 2017. For the year ended December 31, 2018, Sagicor’s net cash from operating activities was US$46.3 million compared to an outflow of US$10.8 million for the same period in 2017. This increase of US$57.1 million, or 528.7%, was primarily due to operating cash inflows generated in the Company’s Jamaica and USA segments in 2018. SAGICOR FINANCIAL CORPORATION LIMITED 41 MANAGEMENT DISCUSSION AND ANALYSIS Summary details of carrying values and fair values of notes and loans payable as of December 31, 2018 and 2017, respectively are set out in the following tables. Notes and loans payable 8.875% senior notes due 2022 i 8.25% convertible redeemable preference shares due 2020 ii 4.85% notes due 2019 iv Mortgage loans v Bank loans & other funding instruments Total Notes and loans payable 8.875% senior notes due 2022 i December 31, 2018 Carrying value Fair value (in millions of US$) 318.9 334.6 11.1 75.0 77.0 8.3 11.1 74.1 77.0 8.3 490.3 505.1 December 31, 2017 Carrying value Fair value (in millions of US$) 317.0 364.1 8.25% convertible redeemable preference shares due 2020 ii 7.75% convertible redeemable preference shares due 2018 iii 4.85% notes due 2019 iv Bank loans & other funding instruments v Total 11.3 5.2 74.9 5.4 413.8 11.9 5.4 76.2 5.4 463.0 i. On August 11, 2015, Sagicor issued seven-year senior notes in the amount of US$320.0 million which mature in 2022. The notes carry a fixed annual rate of interest of 8.875% payable semi-annually. Financial covenants in respect of these notes are summarised in note 46.3(a) of the annual financial statements. As of December 31, 2018, the senior notes outstanding totalled US$318.9 million compared to US$317.0 million as of December 31, 2017. On March 2, 2017, Sagicor Bank Jamaica Limited issued: ii. Cumulative redeemable preference shares with a tenor of three (3) years at 8.25% interest per annum. iii. Cumulative redeemable preference shares with a tenor of eighteen (18) months at 7.75% interest per annum, which were repaid on September 2, 2018. iv. On March 21, 2016, the Company issued fourteen-month notes with a par value of US$75.0 million which were due in 2017 and carried a 5.0% annual rate of interest. Effective December 20, 2016, the notes were extended at an annual rate of interest of 4.85% with a maturity date of August 14, 2019. Financial covenants in respect of these notes are summarised in note 46.3 (b) of the annual financial statements. v. Sagicor Group Jamaica, was deemed to have effective control of Sagicor X Fund Group from October 1, 2018 based on its shareholding and influence and from that date has accounted for Sagicor X Fund as a subsidiary as required by IFRS 10. These amounts represent mortgage loans acquired on that date. Capital adequacy Capital adequacy is managed at the operating company level. It is calculated by the company’s AA and reviewed by executive management, the audit committee and the board of directors of the company. 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 MCCSR standard. The minimum standard recommended by the Canadian regulators for companies is an MCCSR of 150.0%. A number of jurisdictions in the Caribbean region have no internationally recognised capital adequacy requirements, and in accordance with its objectives for managing capital, Sagicor has adopted the Canadian MCCSR standard. Jamaica and the United States have recognised capital adequacy standards. Sagicor’s consolidated MCCSR as of December 31, 2018 has been estimated at 234%, compared to 258% at December 31, 2017, respectively. This is the principal standard of capital adequacy used to assess Sagicor’s overall strength. However, because of the variations in capital adequacy standards 42 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS across jurisdictions, the consolidated result should be regarded as applicable to the life insurers of the Sagicor Group as a whole and not necessarily applicable to each individual segment, insurance subsidiary or insurance subsidiary branch. Sagicor Life Jamaica Limited Sagicor Life Jamaica is governed by the Jamaican MCCSR regime (based on Canadian standards in effect in 2001), which requires an insurer to maintain a minimum ratio of 150.0%. For the year ended December 31, 2017, this ratio was 186.0%. At December 31, 2018, the ratio was 183.8%. Sagicor Life Insurance Company (USA) A risk-based capital (RBC) formula and model have been 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 USA looks to maintain at least 300% of the risk-based capital amount and has maintained these ratios as of December 31, 2018 and December 31, 2017, respectively. Sagicor Investments Jamaica Limited and Sagicor Bank Jamaica Limited The 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 Bank of Jamaica 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 following table summarises the capital adequacy ratios. During 2018 and 2017, all applicable externally imposed capital requirements were complied with. Sagicor Investments Actual capital base to risk weighted assets Required capital base to risk weighted assets Sagicor Bank Actual capital base to risk weighted assets Required capital base to risk weighted assets 2018 2017 14% 10% 15% 10% 16% 10% 15% 10% SAGICOR FINANCIAL CORPORATION LIMITED 43 MANAGEMENT DISCUSSION AND ANALYSIS Ratings Sagicor Financial Corporation Limited, its principal operating subsidiaries, and its debt financing vehicle, have been rated by the rating agencies AM Best, Standards and Poor’s, or Fitch. The ratings as of the date of issue of the 2018 financial statements are as follows. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Certain accounting estimates and judgements are recognised as critical because they require us to make particularly subjective or complex judgments about matters that are inherently uncertain and significantly different amounts could be reported under different conditions or using different assumptions. Sagicor Life Inc Financial Strength Issuer Credit Rating Sagicor Life Jamaica Limited Financial Strength Issuer Credit Rating Sagicor Life Insurance Company (USA) Financial Strength Issuer Credit Rating Sagicor Financial Corporation Limited Issuer Credit Rating Sagicor Finance (2015) Limited Senior Unsecured Sagicor General Insurance Inc Financial Strength Issuer Credit Rating AM Best Rating (a) A- u (Developing) a- u (Developing) These accounting estimates and judgements are discussed in the sections below. The notes to the annual financial statements outline the relevant accounting policies or give specific relevant disclosure to the matters identified in these sections. These notes and are also referred to below. B++ u (Developing) bbb+ u (Developing) 1. Impairment of financial assets – IFRS 9 (note 2.9 of the financial statements) A- u (Developing) a- u (Developing) bbb- u (Developing) In determining ECL (Expected Credit Losses), management is required to exercise judgement in defining what is considered a significant increase in credit risk and in making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions. bbb u (Developing) a) Establishing staging for debt securities and deposits A- u (Developing) a- u (Developing) The Group’s internal credit rating model is a 10-point scale which allows for distinctions in risk characteristics and is referenced to the rating scale of international credit rating agencies. (a)Updated November 29, 2018. On November 29, 2018, A.M. Best placed all current ratings under review with developing implications following the announcement of the Alignvest transaction. S&P Rating (b) Fitch Rating (c) Sagicor Financial Corporation Limited Issuer Credit Rating BB- (Watch Dev) Long-term Issuer Default Rating Sagicor Finance (2015) Limited BB- (Stable) Senior Unsecured BB- (Watch Dev) (b) Updated November 29, 2018 (c) Updated February 20, 2019. 44 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS The scale is set out in the following table: Category SRR (a) Classifi-cation S&P Moody’s Fitch AM Best t n e m t s e v n I e d a r g t l u a f e d - n o N - n o N e d a r g t n e m t s e v n i h c t a W t l u a f e D 1 2 3 4 5 6 7 8 9 Minimal risk Low risk AAA, AA A Aaa, Aa A AAA, AA A Moderate risk BBB Baa BBB Acceptable risk BB Average risk B Higher risk CCC, CC Special mention Substandard Doubtful C D Ba B Caa, Ca C C BB B CCC, CC C DDD DD D 10 Loss aaa, aa a bbb bb b ccc, cc c d (a) Sagicor Risk Rating The Group uses its internal credit rating model to determine which of the three stages an asset is to be categorized for the purposes of ECL. Once the asset has experienced a significant increase in credit risk the investment will move from Stage 1 to Stage 2. Sagicor has assumed that the credit risk of a financial instruments has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial asset that is investment grade or Sagicor risk rating of 1-3 is considered low credit risk. Stage 1 investments are rated (i) investment grade, or (ii) below investment grade at origination and have not been downgraded more than 2 notches since origination. Stage 2 investments are assets which (i) have been downgraded from investment grade to below investment grade, or (ii) are rated below investment grade at origination and have been downgraded more than 2 notches since origination. Stage 3 investments are assets in default. b) Establishing staging for other assets measured at amortised cost, lease receivables, loan commitments and financial guarantee contracts. Exposures are considered to have resulted in a significant increase in credit risk and are moved to Stage 2 when: Qualitative test • accounts that meet the portfolio’s ‘high risk’ criteria and are subject to closer credit monitoring. Backstop Criteria • accounts that are 30 calendar days or more past due. The 30 days past due criteria is a backstop rather than a primary driver of moving exposures into stage 2. c) Forward looking information When management determines the macro-economic factors that impact the portfolios of financial assets, they first determine all readily available information within the relevant market. Portfolios of financial assets are segregated based on product type, historical performance and homogenous country exposures. There is often limited timely macro-economic data for Barbados, Eastern Caribbean, Trinidad and Jamaica. Management assesses data sources from local government, International Monetary Fund and other reliable data sources. A regression analysis is performed to determine which factors are most closely correlated with the credit losses for each portfolio. Where projections are available, these are used to look into the future up to three years and subsequently the expected performance is then used for the remaining life of the product. These projections are re-assessed on a quarterly basis. d) Impairment of Government of Barbados debt securities As further disclosed in note 41.3 (f) during the year, the Group participated in a debt exchange following the implementation of a debt restructuring programme by the Government of Barbados. The replacement debt securities are classified as purchased or originated credit-impaired assets (POCI) and have been valued using an internally generated yield curve SAGICOR FINANCIAL CORPORATION LIMITED 45 MANAGEMENT DISCUSSION AND ANALYSIS derived from the Central Bank of Barbados base-line yield curve to which management has applied a risk premium. If the risk premium at all durations was increased / decreased by 15 / 25 basis points, the value of the POCI debt instruments on exchange would decrease / increase by 2% / 4%. 2. Impairment of financial assets – IAS 39 (note 2.10 of the financial statements) An available for sale debt security or 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. The Sagicor Group invests in a number of sovereign financial instruments that are not quoted in an active market, these assets are classified as loans and receivables and are carried at amortised cost less provision for impairment in the financial statements. 3. Fair value of securities not quoted in an active market (note 41.8 of the financial statements) The fair value of securities not quoted in an active market may be determined using reputable pricing sources (such as pricing agencies), indicative prices from bond/debt market makers or other valuation techniques. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding. The Group exercises judgement on the quality of pricing sources used. Where no market data is available, the Group may value positions using its own models, which are usually based on valuation methods and techniques generally recognised as standard within the industry. The inputs into these models are primarily discounted cash flows. The models used to determine fair values are periodically reviewed by experienced personnel. The models used for debt securities are based on net present value of estimated future cash flows, adjusted as appropriate for liquidity, and credit and market risk factors. 4. Recognition and measurement of intangible assets (note 2.7 of the financial statements) 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. 5. Impairment of intangible assets (note 2.7 of the financial statements) a) Goodwill The assessment of goodwill impairment involves the determination of the value of the cash generating business units to which the goodwill has been allocated. Determination of the 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 the value in use methodology for testing goodwill impairment. For the Sagicor Jamaica operating segment, the Group uses the fair value less cost to sell methodology, and for Sagicor General Insurance Inc the value in use methodology. 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. 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 46 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS 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. 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. 6. Valuation of actuarial liabilities (note 2.15 of the financial statements) 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. 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 universal life and 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 Canadian standards of practice. 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, to which margins for adverse deviations are added. The principal assumptions and margins used in the determination of actuarial liabilities are summarised in sub-sections c) to i) which follow. 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. 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, 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 c.) Process used to set actuarial assumptions and margins for adverse deviations At each date for valuation of actuarial liabilities, the AA of each insurer reviews the assumptions made at the last valuation date. The AA reviews the validity of each assumption by referencing 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 changes in actuarial standards and practice are also incorporated in the current valuation. d.) 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 tables from the Canadian Institute of Actuaries (CIA). SAGICOR FINANCIAL CORPORATION LIMITED 47 MANAGEMENT DISCUSSION AND ANALYSIS 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. modelling of the cash flows. The provision is based on industry and Sagicor’s 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. Assumptions for morbidity are determined after taking into account insurer and industry experience. i) Margins for adverse deviations e) 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 moving averages. f) Assumptions for investment yields Returns on existing variable rate securities, shares, investment property and policy loans are linked to the current economic scenario. Yields on reinvested assets are also tied to the current economic scenario. Returns are, however, assumed to decrease and it is assumed that at the end of twenty years from the valuation date, all investments, except policy loans, are reinvested in long-term, default free government bonds. g) 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. For income taxes levied on net income, actuarial liabilities are adjusted for policy related recognised deferred tax assets and liabilities. 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: (in US$ millions) Provisions for adverse deviations Mortality and morbidity Lapse Investment yield and asset default Operating expenses and taxes Other Total 2018 2017 103.6 78.5 62.4 11.0 11.1 96.1 69.4 68.9 10.8 10.8 266.6 256.0 7. Investment in associate As at July 1, 2018 Sagicor Jamaica Group has a shareholding in Playa of 15%. From an accounting perspective, IAS 28 (Investments in Associate and Joint Ventures) paragraph 5, 6 and 8 guidance was considered as follows: Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence. h) Asset default The AA of each insurer includes a provision for asset default in the The existence of significant influence by an entity is usually evidenced in one or more of the following ways: 48 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS • representation on the board of directors or equivalent governing body of the investee; • participation in the policy-making process, including participation in decisions about dividends or other distributions; • material transactions between the entity and the investee; interchange of managerial personnel; or • • provision of essential technical information In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights, except the intentions of management and the financial ability to exercise or convert those potential rights. Management has two representatives out of twelve on the Board who are also members of two strategic Board committees. RISK MANAGEMENT Sagicor is in the business of taking risks and must manage those risks effectively to generate profitable growth, safeguard its reputation and protect its solvency. The Group’s activities are related principally to the use of financial instruments and insurance contracts. Therefore, in its daily activities it is exposed to significant risks which include credit, foreign exchange, interest rate, liquidity, insurance product design and pricing, insurance claims, reinsurance and fiduciary risks. These risks can result in direct financial loss, damage to reputation, inability to conduct business or service customers, each of which can impact shareholder value. The effective identification and management of these risks is critical to the Group’s profitability. In its management of risks, the Group seeks to optimize the relationship between risk and reward and to limit possible losses resulting from its risk exposure. Disclosure of the risks associated with these risk management techniques is included in notes 41, 42 and 43 of the annual financial statements. Management has concluded, given its participation in the policy-making decisions, significant involvement in, and influence over decision making of Playa, this allows them to clearly demonstrate influence over Playa’s financial and operating results even though Sagicor owns less than 20% of Playa’s shares - rebuttable presumption. Management has concluded after taking the above into consideration that it has significant influence over Playa through its holding and as such is of the view that its strategic investment in Playa should be treated as an investment in associate in accordance with IAS 28. An impairment review of Playa was performed at the end of the year as its value based on quoted market prices is lower that its carrying value. An impairment review involves estimating the recoverable amount of an asset and comparing it with its carrying value. The recoverable amount is the higher of the fair value less cost to sell (FVLCTS) and the value in use (VIU). Value in use is determined using discounted cash flow analysis and the FVLCTS was based on a market approach. The FVLCTS resulted in a higher value than VIU. The Group uses its judgement to make assumptions that are mainly based on market conditions existing at the end of each reporting period such as discount rates, EBITDA multiples, projected cash flows and other relevant inputs. The valuation conclusions under the FVLCTS approach were considered within the range derived by the discounted cash flow analysis under the VIU approach. 1. Credit risk The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Credit risks are primarily associated with financial investments and reinsurance contracts held. Credit risk is the possibility that counterparties may not be able to meet payment obligations when they become due. As premiums, deposits and other receivables are received, these funds are invested to pay for future policyholder and other obligations. The Group in most, but not all, instances bears the risk for investment performance, i.e. return of principal and interest. Any credit defaults or other reductions in the value of debt securities, loans, deposits and receivables could have a material adverse effect on Sagicor’s business, results of operations and financial condition. The investment committees of Group operating companies establish policies to manage credit risk. Specific limits are set for concentration by asset class and issuer, in addition to minimum standards for asset quality. Further, Sagicor deals only with highly rated reinsurers to contain counterparty risk. The Group minimises credit risk from financial investments through holding a diversified portfolio of investments, purchasing securities and advancing loans only after careful assessment of borrowers, and placing deposits with financial institutions that have a strong capital base. Sagicor’s policy is to not invest more than 10% of the debt of a single borrower, unless security is held for the debt. SAGICOR FINANCIAL CORPORATION LIMITED 49 MANAGEMENT DISCUSSION AND ANALYSIS However, many jurisdictions mandate that the operating companies invest a portion of the assets supporting the policy liabilities in government instruments such as treasury bills and bonds. The Group has significant concentrations of credit risk with respect to its holding of bonds and treasury bills issued by the governments of Jamaica, Barbados and Trinidad and Tobago. In the United States, Sagicor has significant exposure to United States Government issued and/or government-backed investments (including state and local governments) and Guggenheim Partners reinsurance assets. In Sagicor Jamaica’s banking business, the Group is exposed to credit risk in both its securities and lending activities. In connection with securities activities, Sagicor Investments trades on a “delivery versus payment” policy where Government of Jamaica securities are accepted on a mark- to-market basis with its counterparties. Exposure limits are also established and monitored. In its lending activities, Sagicor Bank seeks to adequately collateralise its loans, particularly where they exceed certain thresholds. Loan applicants undergo a thorough screening and credit analysis process. The following tables summarise credit exposure of the Group’s financial investments as of December 31, 2018. It shows the gross carrying value, the accumulated loss allowance and the net carrying value, analysed by expected credit loss (ECL) staging (see Critical Accounting Estimates and Judgements – 1. Impairment of financial assets). Credit exposure – December 31, 2018 ECL Staging Stage 1 Stage 2 Stage 3 (in US$ millions) 12-month life-time life-time POCI (c) Total ECL ECL ECL FVOCI (b) debt securities: Gross value Loss allowance Net value Debt securities (a) Gross value Loss allowance Net value 2,566.2 (1.6) 2,564.6 931.8 (1.8) 930.0 97.2 (8.0) 89.2 12.2 (1.2) 11.0 54.3 (19.6) 34.7 0.8 (0.2) 0.6 - - - 2,717.7 (29.2) 2,688.5 156.1 (0.6) 155.5 1,100.9 (3.8) 1,097.1 Credit exposure – December 31, 2018 ECL Staging Stage 1 Stage 2 Stage 3 (in US$ millions) 12-month life-time life-time POCI (c) Total ECL ECL ECL Policy loans (a) Gross value Loss allowance Net value Mortgage loans (a) Gross value Loss allowance Net value Finance loans and leases (a) Gross value Loss allowance Net value Securities purchased for re-sale (a) Gross value Loss allowance Net value Deposits (a) Gross value Loss allowance Net value 147.1 (0.1) 147.0 - - - 297.6 (0.6) 297.0 17.1 (0.3) 16.8 497.1 (4.4) 492.7 15.2 (1.2) 14.0 7.2 - 7.2 - - - 107.2 (0.4) 106.8 0.4 (0.1) 0.3 - - - 24.7 (1.5) 23.2 15.5 (7.7) 7.8 - - - - - - - - - - - - - - - - - - - - - 147.1 (0.1) 147.0 339.4 (2.4) 337.0 527.8 (13.3) 514.5 7.2 - 7.2 107.6 (0.5) 107.1 (a) Financial investments carried at amortised cost. (b) FVOCI – fair value through other comprehensive income classification. (c) POCI - purchased or originated credit impaired. 50 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS 2. Foreign exchange risk The Group is exposed to foreign exchange risk as a result of fluctuations in exchange rates since Sagicor’s 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, Sagicor seeks to maintain investments and cash in each operating currency sufficient to match liabilities denominated in the same currency. Sagicor also invests limited amounts in United States dollar assets, which are held to pay liabilities in operating currencies. Management believes that this strategy adequately meets Sagicor’s asset and liability management goals with respect to currencies and in the long-term is likely to either maintain capital value or provide satisfactory returns. The Sagicor Group operates and issues contracts in the currencies prevailing in the countries where it conducts business. Most of these currencies are pegged to the US dollar and their rates of conversion to the US dollar have been stable for many years. However, there are exceptions. The exchange rates to the US dollar of the currencies which float against the US dollar, and which are significant to Sagicor’s operations, are summarised in the following table for the periods indicated. Currency exchange rate of US$1.00: Jamaica $ Trinidad and Tobago $ United Kingdom £ Currency exchange rate of US$1.00: Jamaica $ Trinidad and Tobago $ United Kingdom £ 2018 closing rate 2017 closing rate 127.3996 124.5754 6.7804 6.7628 0.78310 0.74020 2018 average rate 2017 average rate 128.5468 128.0938 6.7460 6.7428 0.74846 0.77496 SAGICOR FINANCIAL CORPORATION LIMITED 51 MANAGEMENT DISCUSSION AND ANALYSIS The following tables shows the Group’s significant foreign exchange exposure as of December 31, 2018 and 2017 by presenting assets and liabilities by the currency in which they are denominated for its continuing operations. December 31, 2018 (in US$ millions) 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 Barbados $ Jamaica $ Trinidad $ Eastern Caribbean $ US $ Other Currencies Total US$ million equivalents of balances denominated in 335.1 1,017.5 424.5 6.6 12.1 9.1 362.9 194.2 557.1 393.7 78.0 32.9 2.7 2.2 29.3 40.7 579.5 17.7 597.2 (40.1) 3.2 50.2 84.5 1,155.4 360.4 1,515.8 362.2 26.1 63.6 42.8 560.5 24.1 92.2 1,171.5 17.3 1,188.8 327.0 6.1 8.9 51.3 490.8 76.1 566.9 318.8 33.3 162.3 - 1.2 12.4 20.5 548.5 23.0 571.5 (4.6) 145.7 4.1 9.0 10.0 168.8 21.0 189.8 59.3 12.5 48.7 - 15.1 (0.6) 27.2 162.2 4.3 166.5 23.3 3,026.1 679.1 14.8 159.6 3,879.6 419.5 4,299.1 1,791.9 40.3 75.6 444.7 1,078.4 2.2 55.8 3,488.9 28.0 3,516.9 782.2 131.2 0.7 4.7 44.2 180.8 (1.5) 179.3 98.6 13.0 7.3 - 16.6 6.8 4.3 146.6 2.3 148.9 30.4 5,080.1 699.8 99.7 358.7 6,238.3 1,069.7 7,308.0 3,024.5 203.2 390.4 490.2 1,674.0 74.2 240.7 6,097.2 92.6 6,189.8 1,118.2 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets 52 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS December 31, 2017 (restated) US$ million equivalents of balances denominated in (in US$ millions) 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 Barbados $ Jamaica $ Trinidad $ Eastern Caribbean $ US $ Other Currencies Total 444.5 5.0 16.3 30.5 496.3 203.7 700.0 401.4 69.2 34.3 - 82.3 29.4 43.0 659.6 14.8 674.4 25.6 942.7 0.3 124.2 103.3 1,170.5 360.6 1,531.1 342.8 23.1 71.6 16.5 547.8 28.4 133.3 1,163.5 3.0 1,166.5 364.6 430.7 7.6 7.9 28.5 474.7 72.8 547.5 337.7 30.4 149.4 - 1.3 12.9 16.9 548.6 15.7 564.3 (16.8) 140.7 2,598.4 8.5 16.9 16.0 182.1 20.2 202.3 54.4 19.8 44.7 - 15.7 0.7 4.6 139.9 4.1 144.0 58.3 762.7 15.3 122.9 3,499.3 108.9 3,608.2 1,713.1 38.6 70.1 397.3 895.4 1.8 42.9 3,159.2 22.2 3,181.4 426.8 150.8 1.7 6.0 58.9 217.4 (2.0) 215.4 95.2 10.5 8.9 - 16.8 6.8 6.4 144.6 2.2 146.8 68.6 4,707.8 785.8 186.6 360.1 6,040.3 764.2 6,804.5 2,944.6 191.6 379.0 413.8 1,559.3 80.0 247.1 5,815.4 62.0 5,877.4 927.1 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets SAGICOR FINANCIAL CORPORATION LIMITED 53 MANAGEMENT DISCUSSION AND ANALYSIS The tables following summarise the exposures to interest rates on the Group’s monetary insurance and financial liabilities (excluding actuarial liabilities), for the years ended December 31, 2018 and 2017. They set out liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. Insurance liabilities are categorised by their expected maturities. (in US$ millions) Interest exposure – December 31, 2018 Less than 1 year 1 to 5 years After 5 years Not exposed to interest Total Other insurance liabilities 9.3 4.0 50.9 138.8 203.0 Investment contract liabilities Notes and loans payable Other funding instruments Customer deposits Structured products Securities sold for re- purchase Derivative liabilities Bank overdrafts Accounts payable and accrued liabilities 333.0 96.0 439.7 691.3 48.0 422.8 0.2 2.2 0.3 44.3 338.2 10.9 27.5 16.7 - 0.1 - 1.0 13.1 56.1 10.4 - - - - - - Total 2,042.8 442.7 130.5 - (0.1) 0.6 2.8 - 390.4 490.2 461.6 721.6 64.7 1.0 423.8 - - 0.3 2.2 239.4 382.5 240.7 2,998.5 3. Interest rate risk Sagicor is exposed to interest rate risk, which arises when the returns earned from invested assets decrease. The return on investments may be variable, fixed for a term or fixed to maturity. Upon reinvestment of a matured investment, the returns available on new investments may be significantly different from the returns formerly achieved. Sagicor guarantees minimum returns on the cash values of certain types of policies, for example universal life and annuity contracts, and decreased investment returns may be insufficient to pay these guaranteed returns. Sagicor is thereby exposed to the effects of fluctuations in the prevailing levels of market interest rates on Sagicor’s 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. Movements in short-term and long-term interest rates affect the level and timing of recognition of gains and losses on securities Sagicor holds, and cause changes in realised and unrealised gains and losses. Generally, Sagicor’s investment income will be reduced during sustained periods of lower interest rates as higher yielding fixed income securities are called, mature, or are sold and the proceeds reinvested at lower rates. During periods of rising interest rates, the market value of Sagicor’s existing fixed income securities will generally decrease and Sagicor’s realised gains on fixed income securities will likely be reduced. Realised losses will be incurred following significant increases in interest rates only if the securities are sold; otherwise the losses will be unrealised as assets are fairly matched to similar duration liabilities and may be held to maturity. Conversely, declining interest rates result in unrealised gains in the value of fixed income securities Sagicor continues to hold, as well as realised gains to the extent the relevant securities are sold. Sagicor’s primary interest rate exposures relate to Sagicor’s long term insurance and annuities liabilities as well as funds on deposit. Sagicor may incur a loss on certain contracts where the investment return does not exceed the interest credited to the policyholder. 54 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS (in US$ millions) Interest exposure – December 31, 2017 (Restated) Less than 1 year 1 to 5 years After 5 years Not exposed to interest Total (in US$ millions) Interest exposure – December 31, 2018 Less than 1 year 1 to 5 years After 5 years Not exposed To interest Total Other insurance liabilities 7.9 4.8 52.1 126.8 191.6 Debt securities 621.3 632.0 2,618.9 57.3 3,929.5 Investment contract liabilities Notes and loans payable Other funding instruments Customer deposits Structured products Securities sold for re-purchase Derivative liabilities Bank overdrafts Accounts payable and accrued liabilities Total 319.5 7.6 211.6 679.6 40.6 474.6 - 2.6 1.9 1,745.9 50.2 406.1 49.8 69.5 6.7 - - - 70.9 658.0 9.3 - 18.0 - - - - - - - 0.1 0.4 1.9 0.3 1.5 2.2 - 379.0 413.8 279.8 751.0 47.6 476.1 2.2 2.6 174.1 246.9 79.4 307.3 2,790.6 Equity securities Mortgage loans Policy loans - 57.6 3.7 Finance loans and leases 489.9 Securities purchased for re-sale Deposits Derivative assets Reinsurance assets: other Premiums receivable Other assets and receivables Cash resources 7.2 104.7 - - - 2.2 152.7 - 39.7 13.5 17.0 - 1.1 - - - 1.1 - 267.7 125.3 5.4 - 1.0 - 0.2 - - - The tables following summarise the exposures to interest rate and reinvestment risks of the Group’s monetary insurance and financial assets, for the years ended December 31, 2018 and 2017. 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. Total 1,439.3 704.4 3,018.5 - 267.5 267.5 367.2 147.0 514.4 7.2 107.1 7.7 46.2 51.6 48.2 2.2 4.5 2.1 - 0.3 7.7 46.0 51.6 44.9 206.0 690.1 358.7 5,852.3 SAGICOR FINANCIAL CORPORATION LIMITED 55 MANAGEMENT DISCUSSION AND ANALYSIS Interest exposure – December 31, 2017 Less than 1 year 1 to 5 years After 5 years Not exposed To interest Total 626.2 472.7 2,350.8 48.7 3,498.4 The Group diversifies its liability portfolio by limiting concentrations of liabilities in each market segment. Where practical, given the Group’s operating environment, Sagicor seeks to match maturities of assets and liabilities while maintaining a portfolio of short-term, highly liquid securities to meet funding gaps. The Group monitors its daily, weekly and monthly liquidity risk and manages its maturing asset and liability portfolios. (in US$ millions) Debt securities Equity securities Mortgage loans Policy loans - 20.0 2.6 Finance loans and leases 486.9 Securities purchased for re-sale Deposits Derivative assets Reinsurance assets: other Premiums receivable Other assets and receivables Cash resources Total 16.4 108.9 - - 0.2 4.2 270.3 1,535.7 - 36.5 13.9 37.8 - 0.3 - - - 71.2 - - 245.5 284.7 120.9 38.2 - 1.7 - 0.2 - - - 1.2 4.8 1.6 0.1 0.4 32.5 49.0 53.3 57.8 89.8 245.5 342.4 142.2 564.5 16.5 111.3 32.5 49.2 53.5 133.2 360.1 632.4 2,796.5 584.7 5,549.3 4. Liquidity risk Liquidity risk is inherent in much of the Group’s business. Liquidity risk is risk stemming from a lack of marketability in Sagicor’s assets. Some liabilities may be surrendered at the call of the contract-holder, while some assets have low liquidity such as mortgage loans and real estate. In order to manage liquidity risks, the Group seeks to maintain levels of cash and short-term deposits in each of its operating currencies that can meet expected short- term obligations. The Group is exposed to daily demands on its available cash resources for payment of policy benefits and withdrawals, operating expenses and taxes, loan draw-downs, repayment of borrowings, maturing deposit liabilities and other security obligations. The Group maintains cash resources to meet what it predicts it will have to pay as policy benefits. Demands on its cash resources may exceed the Group’s projections. The Group purchases custom options (hedges) that are selected to materially replicate the policy benefits that are associated with the equity indexed components of certain of its products. These options are appropriate to reduce or minimise the risk of movements in the equity market (market risk). The hedging transactions are accounted for as call options and are originally valued at the premium paid, with the statement carrying value being adjusted to fair value. To minimise potential counterparty risk from the purchase of these customised contracts from broker dealers, the Group only transacts with banks and brokers carrying an unsecured debt rating of at least A or P-1 by either Standard and Poor’s or Moody’s. The Group’s monetary insurance liabilities mature in periods which are summarised in the following tables for the years ended December 31, 2018 and 2017. 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. December 31, 2018 (in US$ millions) Expected discounted cash flows Maturing within 1 year Maturing 1 to 5 Years Maturing after 5 years Total Actuarial liabilities Other insurance liabilities Total 201.4 107.0 308.4 769.8 44.2 814.0 2,053.3 3,024.5 51.9 203.1 2,105.2 3,227.6 56 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS December 31, 2017 (Restated) (in US$ millions) Expected discounted cash flows Maturing within 1 year Maturing 1 to 5 Years Maturing after 5 years Total Actuarial liabilities Other insurance liabilities Total 208.1 118.6 326.7 20.9 717.4 696.5 2,040.0 2,944.6 52.1 191.6 Other funding instruments 2,092.1 3,136.2 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. December 31, 2018 (in US$ millions) Financial liabilities: Investment contracts Notes / loans payable Customer deposits Structured products Securities sold for re-purchase Derivative liabilities Bank overdrafts Accounts payable & accrued liabilities Total liabilities Off balance sheet commitments: Loan commitments Non-cancellable operating lease and rental payments Capital commitments Customer guarantees and letters of credit Total commitments Contractual un-discounted cash flows On demand or within 1 year 1 to 5 years After 5 years Total 334.5 114.7 402.6 695.3 48.6 424.7 0.2 2.2 237.6 2,260.4 42.6 4.7 20.6 19.4 87.3 48.9 445.2 55.5 30.0 17.1 - 0.1 - 1.9 598.7 11.6 5.7 1.1 - 18.4 15.6 67.1 17.7 - - - - - 399.0 627.0 475.8 725.3 65.7 424.7 0.3 2.2 1.3 101.7 240.8 2,960.8 8.3 - 13.6 - 21.9 62.5 10.4 35.3 19.4 127.6 Total 2,347.7 617.1 123.6 3,088.4 SAGICOR FINANCIAL CORPORATION LIMITED 57 MANAGEMENT DISCUSSION AND ANALYSIS December 31, 2017 Contractual un-discounted cash flows December 31, 2018 Contractual discounted or expected cash flows On demand or within 1 year 1 to 5 years After 5 years Total (in US$ millions) Maturing within 1 year Maturing 1 to 5 Years Maturing after 5 years Total (in US$ millions) Financial liabilities: Investment contracts Notes / loans payable Other funding instruments Customer deposits Structured products Securities sold for re-purchase Derivative liabilities Bank overdrafts Accounts payable & accrued liabilities Total liabilities Off balance sheet commitments: 320.8 41.0 222.4 687.1 35.0 477.9 2.0 2.6 173.7 1,962.5 53.9 526.4 64.7 71.0 15.4 - 0.2 - 91.7 823.3 11.1 - 18.0 8.7 - - - - 2.2 2.6 1.0 38.8 266.4 2,824.6 385.8 567.4 305.1 766.8 50.4 Financial assets: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale 477.9 Deposits Derivative assets Reinsurance assets: share of actuarial liabilities Reinsurance assets: other Premiums receivable Other assets and receivables Cash resources Total 563.2 22.5 4.6 652.9 41.3 13.8 2,713.3 303.4 128.7 3,929.4 367.2 147.1 193.3 243.4 77.9 514.6 7.2 105.1 7.6 75.3 46.0 51.6 47.3 358.7 1,482.4 - 1.0 0.1 - 1.0 - 260.1 318.3 - - - - 0.2 - 0.6 - 7.2 107.1 7.7 653.7 46.2 51.6 47.9 358.7 1,212.6 3,543.4 6,238.4 Loan commitments 76.2 1.0 1.8 79.0 Non-cancellable operating lease and rental payments Capital commitments Customer guarantees and letters of credit Total commitments 5.0 17.8 17.8 116.8 8.3 - 1.8 11.1 - - 11.6 13.4 13.3 17.8 31.2 141.3 Total 2,079.3 834.4 52.2 2,965.9 The contractual maturity periods of monetary financial assets and the expected maturity periods of monetary insurance assets are summarised in the following tables for the years ended December 31, 2018 and 2017. Amounts are stated at their carrying values recognised in the financial statements. For this table, monetary insurance assets comprise policy loans and reinsurance assets. 58 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS December 31, 2017 Contractual discounted or expected cash flows (in US$ millions) Financial assets: Debt securities Mortgage loans Policy loans Finance loans and finance leases Maturing within 1 year Maturing 1 to 5 Years Maturing after 5 years Total 402.9 536.6 2,558.9 3,498.4 16.5 3.5 31.9 14.1 294.0 124.5 342.4 142.1 125.6 159.6 279.3 564.5 Securities purchased for re-sale Deposits Derivative assets Reinsurance assets: share of actuarial liabilities Reinsurance assets: other Premiums receivable Other assets and receivables Cash resources Total 16.5 103.2 32.3 95.1 49.1 53.4 61.3 352.0 1,311.4 - 6.1 0.2 - 2.1 - 284.6 356.8 - - 71.1 - 0.2 - 0.8 8.1 16.5 111.4 32.5 736.5 49.3 53.4 133.2 360.1 1,104.2 3,624.7 6,040.3 5. Insurance 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 Group. In the discussion below, the term insurer refers to the Group subsidiary issuing insurance contracts. Risks are priced to achieve an adequate return on capital on the insurer’s business. 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, from insurance market softening conditions, or from future changes in the economic environment. The underwriting process has established pricing guidelines; and may include specific enquiries which determine the insurer’s assessment of the risk. Insurers may also establish deductibles and coverage limits for property, casualty and health risks which will limit the potential claims incurred. The pricing of a contract therefore consists of establishing appropriate premium rates, deductibles and coverage limits. For long-term insurance contracts, Sagicor assesses the future cash flows attributable to the contract. Sagicor carries significant underwriting risks concentrated in certain countries within the Caribbean, namely Antigua, Barbados, Cayman Islands, Curacao, Jamaica, St. Lucia and Trinidad and Tobago. In these countries, Sagicor insures a substantial proportion of the insured population (life, annuity, health). 6. Insurance claims risk a) Life, annuity and health contracts The principal claims risks for these contracts are mortality, longevity and morbidity risk. For long-term contracts, principal risks affecting claims and benefits also include lapse, expense and investment risk. For long-term contracts in force, Sagicor invests in assets with cash flow characteristics that closely match the cash flow characteristics of the related policy liabilities. The primary purpose of this matching is to seek to ensure that cash flows from these assets are synchronised with the timing and the amounts of payments that must be paid to policyholders. Policy benefits payable under long-term contracts may be triggered by an insurable event (such as a death, disability or critical illness claim) a specified time (such as for an annuity settlement or a policy maturity) or on the exercise of a surrender or withdrawal request by the policyholder. While settlement of these benefits is therefore expected over the remaining lives of the insureds and annuitants, Sagicor remains subject to uncertainty related to the timing of future benefit cash outflows. For long-term insurance contracts, significant risks arise from mortality and morbidity experience. Worsening mortality and morbidity will increase the incidence of death and disability claims. Improving mortality (i.e. longevity) will lengthen the pay-out period of annuities. SAGICOR FINANCIAL CORPORATION LIMITED 59 MANAGEMENT DISCUSSION AND ANALYSIS Policy benefits payable under short-term contracts are generally triggered by an insurable event, i.e., a medical expense or a death claim. Settlement of these benefits is expected generally within a short period. reinsurance and excess of loss reinsurance. The Group takes reinsurance cover to mitigate the geographic concentrations of its property risks. For Sagicor’s health insurance contracts, significant risk exposures arise from mortality and morbidity experience. b. Property and casualty contracts Claims payable under property and casualty contracts are triggered by an insurable event and may be categorised as: • attritional losses, which are expected to be of reasonable frequency and are • less than established threshold amounts; 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 is refined over time until final settlement occurs. In addition, from the pricing methodology used for risks, it is assumed that at any 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 very many claims. Concentration of risk is mitigated through risk selection, line sizes, event limits, quota share 7. Reinsurance risk To limit Sagicor’s loss exposure on insurance policies, Sagicor may cede some risk to reinsurers that have well-established capability to meet their contractual obligations and that generally have high credit ratings, which ratings Sagicor monitors, or Sagicor requires that a trust account be maintained as collateral for the obligations. Under reinsurance contracts, the Group retains some part of the risk (amounts below the “retention limit”) and coverage in excess of these limits is ceded to reinsurers. The retention programs used are summarised in notes 42.3 and 43.3 of the annual financial statements. Sagicor also maintains catastrophic reinsurance coverage whereby reinsurance coverage is obtained for multiple claims arising from one event or occurring within a specified time period. 8. Fiduciary risk Sagicor provides investment management, insurance and pension administration, and corporate trust services to corporate customers. Investment management services requires the Group to make allocation, purchase and sale decisions in relation to a wide range of investments on behalf of these corporate customers. These services may expose Sagicor to claims for maladministration or underperformance of these investments. As of December 31, 2018, the Group administered US$3,427.7 million in assets on behalf of these corporate customers. ADDITIONAL FINANCIAL DISCLOSURES 1. Default of Government of Barbados (GOB) debt During the month of June 2018, the Government of Barbados (GOB) suspended all payments to creditors of its external commercial debt which is denominated primarily in US dollars. Interest payments due on June 5, 2018 and June 15, 2018 were not made. Principal payments on matured domestic debt which is denominated in Barbados dollars were suspended and debt holders were required to roll-over principal balances. The announcement of the suspended payments was evidence that GOB debt securities were credit-impaired and consequently, in June Sagicor 60 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS Credit impairment loss As a result of the debt restructure outlined above, a credit impairment loss has been recognised in the statement of income. In addition, the domestic debt securities were de-recognised since the maturity profile and interest rates of the replacement debt securities were materially different. In November 2018, management derived a yield curve from which the initial fair values of the replacement securities were determined. The yield curve was derived from the Central Bank of Barbados base-line yield curve to which management applied a further risk premium considering • the GOB credit rating relative to investment grade, • the potential for further default, • the lack of liquidity of the debt, and • the economic uncertainty as Barbados enters a period of severe economic reform and structural adjustment. The risk premium derived is summarised in the following table. Years 0-10 11-21 22-24 25-29 30-50 Spread 25 bps 50bps 75 bps 100 bps 150 bps re-classified its GOB debt security holdings to Stage 3 with a probability of default of 100% (see Critical Accounting Estimates and Judgements – 1. Impairment of financial assets). In September 2018, GOB announced its debt restructuring program which was done in conjunction with its economic recovery plan and an IMF programme. The IMF programme will allow Barbados to reduce its current debt service cost substantially and it is expected that the manageability of the restructured cash flows will improve the credit quality of the instrument offered in the debt exchange. Subsequently, negotiations for the terms of the replacement bonds for the domestic debt were completed. In exchange for its domestic debt, the Group accepted the following securities: Series G: A 50-year amortising bond which includes a 15-year grace period on principal payments. The interest rates on the bond range from 4% per annum for the first 15 years to 8% for years 26 through 50 with interest capitalisation of 100% for the first five years. Series C: A 15-year amortising bond with interest rates ranging from 1.0% for the first 3 years to 3.75% for years 5 through to maturity. Interest on these bonds is to be paid quarterly with the first payment due on December 31, 2018. The principal will be repaid in four equal quarterly instalments commencing one year prior to maturity. Series D: A 35-year amortising bond with interest rates ranging from 1.5% for the first 5 years to 7.5% for years 16 through to maturity. Interest on these bonds is paid quarterly with the first payment due on November 30, 2018. The principal will be repaid in three equal instalments commencing one year prior to maturity with the final payment on August 31, 2053. Most of the Group’s debt was exchanged for Series G bonds. External Debt The restructuring of the external debt is yet to be finalised. SAGICOR FINANCIAL CORPORATION LIMITED 61 MANAGEMENT DISCUSSION AND ANALYSIS The consequential movement in the carrying values of GOB debt for the period referred to above is summarised as follows: GOB securities Domestic debt External debt 275.8 (7.9) 267.9 50.7 (1.6) 49.1 Total 326.5 (9.5) 317.0 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. The contract or notional amounts of derivatives and their fair values are set out in the following table. (in US$ millions) December 31, 2018: Contract/ notional amount Fair Value Asset Liability Equity indexed options 768.3 7.7 2.7 8.0 10.7 December 31, 2017: Equity indexed options 713.5 32.5 (16.5) 40.6 (91.9) 235.8 The Group has purchased equity indexed options in respect of structured products and in respect of life and annuity insurance contracts. 0.2 2.2 (in US$ millions) Gross carrying value prior to default Loss allowance prior to default Net carrying value prior to default Accrued interest, ECL and other adjustments Credit impairment loss arising from the default Carrying value as of October 1, 2018 Other adjustments on recognition of replacement securities (75.4) 195.2 1.0 Domestic debt not included in restructure (49.8) Adjusted carrying value on restructure 146.4 Fair value on recognition of replacement securities Gain on de-recognition of original securities 147.2 0.8 2. Derivative Financial Instruments The Group’s derivative activities give rise to open positions in portfolios of derivatives. These positions are managed to seek 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. 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 For certain structured product contracts with customers (note 17 to the annual financial statements), equity indexed options give the holder the ability to participate in the upward movement of an equity index while being protected from downward risk. The Group is exposed to credit risk on purchased options only, and only to the extent of the carrying amount, which is their fair value. For certain universal life and annuity insurance contracts, a Group subsidiary 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. 3. Related Party Transactions Note 47 of the annual financial statements provide additional information on related party transactions. 62 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS 4. Breach of Insurance Regulations – Related Party Balances As at December 31, 2018, balances owed to Sagicor Life Jamaica Limited exceeded the regulated 5% maximum of related party balances to its total assets of the Company. Management is in discussion with the Regulator, Financial Services Commission of Jamaica, in relation to this matter. The Regulator has not imposed any penalty. PROPOSED TRANSACTION On November 27, 2018, Sagicor Financial Corporation Limited and Alignvest Acquisition II Corporation (Alignvest) announced that they had entered into an Arrangement Agreement, as amended on January 28, 2019. Pursuant to the Arrangement Agreement, Alignvest will acquire all of the outstanding Sagicor Common Shares by means of a scheme of arrangement under Section 99 of the Companies Act of Bermuda. Immediately following the implementation of the Alignvest Arrangement and Sagicor Arrangement, Alignvest shall, subject to certain conditions, discontinue as a corporation under the laws of Ontario and continue as an exempted company under the laws of Bermuda. Until such time that the transaction is either completed or the agreement terminated, Sagicor has agreed that it shall make all commercially reasonable efforts to present intact its current business organisation, key employees, material business relationships and operations. Alignvest is a special purpose acquisition corporation incorporated under the laws of the Province of Ontario, Canada. Alignvest was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving Alignvest that will qualify as its “qualifying acquisition”. Sagicor also announced that Sagicor and Alignvest will acquire Scotiabank’s life insurance operations in Jamaica and in Trinidad & Tobago and will also enter into a 20-year exclusive agreement where Sagicor will provide insurance solutions to Scotiabank’s clients in Jamaica and Trinidad & Tobago. The completion of the acquisition is dependent on the completion of the acquisition of Sagicor as outlined above. Closing is expected in late 2019 or early 2020, subject to regulatory approval and certain conditions being met. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This MD&A includes “forward-looking information” and “forward looking statements” (collectively “forward-looking information”) and assumptions about, among other things, Sagicor’s business, operations, and financial performance and condition, approved by the board of directors of Sagicor on the date of this MD&A. This forward-looking information and these assumptions include, but are not limited to, statements about Group’s objectives and strategies to achieve those objectives, and about its beliefs, plans, expectations, anticipations, estimates, or intentions. Information included in this MD&A that is not a statement of historical fact is forward-looking information. When used in this MD&A, words such as “believes,” “may,” “will,” “estimate,” “should,” “shall,” “plans,” “assumes,” “continue,” “outlook,” “could,” “anticipates,” “intends,” “expects,” and words of similar import, are intended to identify statements containing forward-looking statements. These statements appear throughout this MD&A. Such forward-looking statements are based on Sagicor’s estimates, assumptions, strategies and projections and subject to known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond its control and which may cause actual results, events or developments to be significantly different from any future results, events or developments expressed or implied by such forward- looking statements. These factors include, but are not limited to, the following: fluctuations in the fixed income markets may adversely affect Sagicor’s profitability and financial condition; the success of Sagicor’s operations in the United States depends on Sagicor’s ability to grow its business; Sagicor’s financial targets may prove materially inaccurate or incorrect; Sagicor’s exposure to the credit risk of its counterparties could adversely affect its profitability; differences between actual claims experience and estimated claims at the time the product was priced may result in increased losses, and so Sagicor’s policy reserves may be insufficient to cover actual policy benefits; Sagicor could be forced to sell investments at a loss to cover policyholder withdrawals; Sagicor’s risk management policies and procedures could leave Sagicor exposed to unidentified or unanticipated risk, which could negatively affect Sagicor’s business or result in losses; illiquidity of certain investment assets may prevent Sagicor from selling investments at fair prices in a timely manner; Sagicor’s fiduciary relationship with certain counterparties could SAGICOR FINANCIAL CORPORATION LIMITED 63 MANAGEMENT DISCUSSION AND ANALYSIS adversely affect its profitability; a prolonged labour dispute could hurt Sagicor’s business; a failure to successfully integrate Sagicor’s acquisitions could adversely affect Sagicor’s operations and profitability; a failure to successfully execute current and future strategic acquisitions could adversely affect Sagicor’s profitability; Sagicor may be required to make an offer to purchase all of the 2022 Notes and Short Term Notes, but may not be financially able to repurchase the notes; Sagicor’s business is highly regulated and subject to numerous laws and regulations; litigation and regulatory proceedings outcomes could adversely affect Sagicor’s business; companies in the financial services industry are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny; there may be adverse consequences if the status of Sagicor’s independent contractors is successfully challenged; failures to implement or comply with legally required anti-money laundering practices could subject Sagicor to sanctions and/or criminal and civil penalties; the amount of statutory capital that Sagicor’s insurance subsidiaries have and the amount of statutory capital that they must hold to maintain their financial strength and credit ratings and meet other requirements can vary significantly from time to time and are sensitive to factors outside of Sagicor’s control; a failure to maintain adequate levels of surplus capital may result in increased regulatory scrutiny or a downgrade by the private rating agencies; Sagicor’s financial condition may be adversely affected by geopolitical events; Sagicor operates in a highly competitive industry; Sagicor faces significant competition mainly from national and regional insurance companies and from self-insurance, and Sagicor also faces competition from global companies – this competition could limit Sagicor’s ability to gain or maintain its position in the industry and could materially adversely affect its business, financial condition and results of operations; brokers that sell Sagicor’s products may sell insurance products of Sagicor’s competitors and such brokers may choose not to sell Sagicor’s products; computer viruses, network security breaches, disasters or other unanticipated events could affect Sagicor’s data processing systems or those of its business partners and could damage Sagicor’s business and adversely affect its financial condition and results of operations; a financial strength downgrade in Sagicor’s A.M. Best ratings or any other negative action by a rating agency may increase policy surrenders and withdrawals, adversely affect relationships with advisors and negatively affect Sagicor’s financial condition and results of operations; the unpredictable nature of the property and casualty insurance industry may cause fluctuations in Sagicor’s results; Sagicor may be unable to reinsure risks on terms that are commercially reasonable or satisfactory to Sagicor, or Sagicor’s reinsurers may fail to meet assumed obligations, increase rates, or be subject to adverse developments, negatively affecting Sagicor’s business, financial condition and result of operations; Sagicor’s business model depends on the performance of various third parties including actuarial consultants and other service providers; negative publicity in the insurance industry could adversely affect Sagicor; Sagicor depends on key personnel, and if they were to leave Sagicor, Sagicor might have an insufficient number of qualified employees; Sagicor is highly dependent upon economic, political and other conditions and developments in Barbados, Jamaica, Trinidad and Tobago, the United States and the other jurisdictions in which it operates; Sagicor’s financial condition and operating results may be adversely affected by foreign exchange fluctuations; foreign exchange controls may restrict Sagicor’s ability to receive distributions from its subsidiaries and any such distributions may be subject to foreign withholding taxes; catastrophes and weather-related events, such as hurricanes, may adversely affect Sagicor; the performance of Sagicor’s group life insurance may be adversely affected by the characteristics of the employees insured or through unexpected catastrophic events such as natural disasters; Sagicor’s credit ratings may be reduced, which may adversely affect Sagicor; Sagicor may be subject to Bermuda tax; Bermuda’s compliance with the Organization for Economic Cooperation and Development international tax standards could subject Sagicor to additional taxes; legislation enacted in Bermuda in response to the European Union’s review of harmful tax competition could adversely affect Sagicor’s operations and financial condition; any additional taxes resulting from changes to tax regulations or the interpretation thereof in countries in which it does business could negatively impact Sagicor’s financial condition; Sagicor Financial Corporation Limited is a holding company that has no material assets other than its interests in its subsidiaries and, accordingly, it is dependent upon distributions from subsidiaries to pay taxes and other expenses. Additional information about material risk factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in this MD&A under “Risk Management”, “Key Factors Affecting Results,” and “Critical Accounting Estimates and Judgements” and in the “Financial Risk and Insurance Risk” notes to the consolidated financial statements. The forward-looking statements in this document are, unless otherwise indicated, stated as of the date hereof and are presented for the purpose of assisting investors and others in understanding our financial position and 64 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS results of operations, our future operations, as well as our objectives and strategic priorities, and may not be appropriate for other purposes. We do not undertake to update any forward-looking statements, except as required by law. HISTORICAL FINANCIAL DISCLOSURES The following table provides a summary of Sagicor’s results from continuing operations for the five most recently completed years. In US$ millions, unless otherwise noted Net premium revenue Net investment and other income Total revenue Benefits and expenses Other Income before tax Income tax Net income Net income attributable to common shareholders Basic EPS Diluted EPS Annualised return on common shareholders’ equity Dividends paid per common share Total assets Total equity attributable to common shareholders Net income attributable to common shareholders by operating segment: Sagicor Life Sagicor Jamaica Sagicor Life USA Head office, other & inter-segment eliminations Net income attributable to common shareholders 2018 1,054.0 430.3 1,484.3 2017 Restated 745.6 473.0 1,218.6 2016 2015 2014 664.0 470.1 1,134.1 673.9 431.3 1,105.2 625.6 390.5 1,016.1 (1,356.0) (1,095.8) (984.5) (980.6) (928.2) 18.2 146.5 (50.7) 95.8 36.5 11.9¢ 11.7¢ 6.2% 5.0 ¢ 7,308.2 600.9 39.6 55.7 18.3 (77.1) 36.5 2.3 125.1 (19.3) 105.8 62.3 20.5 ¢ 20.0 ¢ 11.3% 5.0 ¢ 6,804.5 624.6 64.7 46.6 13.3 (62.3) 62.3 - 149.6 (41.7) 107.9 60.3 19.5¢ 18.7¢ 12.3% 4.5 ¢ 6,531.9 536.1 64.8 44.3 10.5 (59.3) 60.3 (1.0) 123.6 (25.1) 98.5 56.3 18.2¢ 17.3¢ 11.7% 4.0 ¢ 29.1 117.0 (16.7) 100.3 53.7 17.3¢ 16.6¢ 11.2% 4.0 ¢ 6,399.9 506.0 6,180.4 531.7 69.5 39.3 6.6 (59.1) 56.3 44.0 38.1 11.9 (40.3) 53.7 SAGICOR FINANCIAL CORPORATION LIMITED 65 MANAGEMENT DISCUSSION AND ANALYSIS As discussed in the “Introduction”, the information above, in respect of the years 2016, 2015 and 2014, has not been restated to include certain prior year adjustments applied retrospectively to January 1, 2017. Management does not believe these adjustments are material to impact the ability of the users of the financial information, to assess the performance and/or the financial position of the Group. Further, as allowed, on adoption of IFRS 9 and IFRS 15, on January 1, 2018, comparative figures in prior years, have not been adjusted. 66 SAGICOR FINANCIAL CORPORATION LIMITED MANAGEMENT DISCUSSION AND ANALYSIS A loyal and experienced teamThis is what makes Sagicor the trusted financial institution it is today. Loyalty and experience extends to Sagicor’s Board of Directors, who collectively bring exceptional quality, skills and experience which enhances the Board’s effectiveness. BOARD OF DIRECTORS Proven Skills and Experience The Board of Directors’ key purpose is to ensure the prosperity of the Sagicor Group of Companies, through their collective direction of Sagicor’s affairs, redounding to the prosperity of all stakeholders. The Sagicor Board conducts it affairs with the same financial prudence which has become the hallmark of our heritage, as they overcome all challenges as they relate to corporate governance, corporate social responsibility and corporate ethics. SAGICOR FINANCIAL CORPORATION LIMITED 69 DR STEPHEN D R MCNAMARA, CBE, Barrister-at-law; LLD (Hon) Chairman Appointed as Chairman in January 2010. Appointed to the Board in December 2002. Citizen of St Lucia and Ireland Dr McNamara was called to the Bar at Lincoln’s Inn, and in St Lucia in 1972. He is the senior partner of McNamara & Company, Attorneys-at-Law of St. Lucia. The barrister/solicitor specialises in the representation of foreign investors in St Lucia in the Tourism, Manufacturing and Banking sectors. He served as Chairman of the St Lucia Tourist Board for nine years. Dr Mcnamara is the Chairman of the Group’s main operating subsidiaries, Sagicor Life Inc, Sagicor USA and Sagicor Finance Inc, and formerly served as Vice Chairman, Sagicor Financial Corporation Limited, between June 2007 and January 2010. He is a Director of Sagicor Group Jamaica Limited and a number of other subsidiaries within the Group. Dr McNamara’s St Lucia-based service includes the Board of St Lucia Electricity Services Ltd, where he was elected Chairman in December 2015, and served until his retirement at the end of 2017, and as President of the St Lucia Tennis Association. Dr McNamara was made a Commander of the Order of the British Empire (CBE) in the 2015 Queen’s Birthday Honours for public service and services to the legal profession. Also in 2015 he was awarded an honorary doctorate from the University of the West Indies for his outstanding achievements and contribution to the region in the areas of business, sport and general philanthropy for more than forty years. ANDREW ALEONG, MBA Appointed June 2005. Citizen of Trinidad and Tobago Mr Aleong holds an MBA from the Richard Ivey School of Business, University of Western Ontario, Canada. He is Group Managing Director of the Albrosco Group of Companies, Trinidad and Tobago, and has served the Trinidad and Tobago manufacturing industry for over 30 years. Mr Aleong is a former President of the Trinidad and Tobago Manufacturers’ Association. He also serves as a Director of a number of private companies. Mr Aleong was elected a Director of Sagicor Life Inc in 2005, and is also a Director of a number of other subsidiaries within the Group. 70 SAGICOR FINANCIAL CORPORATION LIMITED BOARD OF DIRECTORS PROFESSOR SIR HILARY MCD BECKLES, KA, BA, PhD Appointed June 2005. 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 is the Vice Chancellor of the University of the West Indies, and has previously served as the Head of the History Department and Dean of the Faculty of Humanities. 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. He is Chairman of the Caribbean Examinations Council. He is a member of the Secretary General of the UNs Advisory Board on Science and Sustainable Development, a member of UNDP’s Advisory Panel on the Caribbean Human Development Report, Vice President of UNESCO’s Slave Route Project, and also Vice President of the Commonwealth Ministers’ Advisory Board on Sport. PETER E CLARKE, Barrister-at-Law, BA (History), BA (Law) Appointed June 2010. Citizen of Trinidad and Tobago Mr Clarke 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. Mr Clarke is the Chairman of Guardian Media Ltd in Trinidad and Tobago, as well as a director of a number of companies including the Trinidad and Tobago Stock Exchange. He is also a member of 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. SAGICOR FINANCIAL CORPORATION LIMITED 71 BOARD OF DIRECTORS DR L JEANNINE COMMA, BA, MA, Ed.D Appointed June 2007 .Citizen of Trinidad and Tobago and Barbados Dr Comma is Chairman of the Human Resources Committee for Sagicor Financial Corporation Limited. She holds a Ed.D from George Washington University, Washington, DC, USA, and is also a graduate of the University of the Virgin Islands. Formerly the CEO/Director of the Sagicor Cave Hill School of Business and Management Inc of The University of the West Indies, Cave Hill Campus, Dr Comma has extensive experience in Leadership Development, Organisation Development, Strategic Planning, Transformation Management and Corporate Governance. She has made significant contributions to the development of human capital within the regional business community, as well as engaged in several consulting assignments with Caribbean Governments and public sector agencies throughout the region. She is an Executive, an Academic, a Consultant, a Leadership Development Expert and a Certified Executive Coach. Dr Comma serves on the Boards of the Barbados Entrepreneurship Foundation, as well as the Commonwealth Association of Public Administration and Management (CAPAM). She was elected a Director of Sagicor Life Inc in 2006. MONISH K DUTT, BA, MBA, FCA Appointed June 2012. Citizen of India and Permanent resident of the United States of America Mr Dutt holds an MBA 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. A Consultant on Emerging Markets, Mr Dutt is a seasoned investment professional who serves as a non-executive director on several Boards including Ecobank, a pan-African bank with assets of US$22 billion; Peak Reinsurance of Hong Kong, controlled by the Fosun Group of China together with Prudential of the US; and FINCA Microfinance USA, with operations in around 20 countries in emerging markets. Within the Sagicor Group, Mr Dutt serves as a Director of Sagicor Bank Jamaica Limited, and Sagicor Life Insurance Company USA. Prior to 2011, Mr Dutt was employed for 25 years 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, structuring and managing investments in financial institutions and private equity funds globally. Mr Dutt has also represented IFC on the boards of investee companies. 72 SAGICOR FINANCIAL CORPORATION LIMITED BOARD OF DIRECTORS DR MARJORIE M FYFFE-CAMPBELL, BSc, MSc, DBA Appointed June 2005. Citizen of Jamaica Dr Fyffe-Campbell is a Management Consultant with over 30 years’ experience in Finance, Accounting and Executive Management, and holds a Doctorate in Business Administration (DBA) from Mona School of Business and Management, with emphasis in Corporate Governance, an MSc in Accounting and a BSc (Hons) from the University of the West Indies. She is a Fellow of the Institute of Chartered Accountants of Jamaica, a member of the Hospitality, Financial and Technology Professionals, and is a Justice of the Peace/Lay Magistrate in Jamaica. She is a former President and Chief Executive Officer of the Urban Development Corporation, Jamaica. Dr Fyffe-Campbell possesses extensive experience in Finance and Accounting, Corporate Governance, Risk Management and Property Development and Management. She is a former Adjunct Lecturer in Financial and Managerial Accounting and Enterprise Risk Management Governance at the Mona School of Business and Management. She was elected a Director of Sagicor Life Jamaica in 2002, and is also a Director of other subsidiaries within the Group. RICHARD M KELLMAN, BSc Appointed June 2009. Citizen of Guyana Mr Kellman was appointed Group Chief Operating Officer in June 2009 and retired from this position on December 31, 2017. Mr Kellman holds a BSc degree in Statistics from University College, London University, and is a retired Fellow of the Institute of Actuaries. His career in the financial services industry spans 43 years, during which time, he has held senior actuarial and management positions with several leading regional insurance companies, and served on a number of industry boards. SAGICOR FINANCIAL CORPORATION LIMITED 73 BOARD OF DIRECTORS WILLIAM P LUCIE-SMITH, MA,FCA Appointed June 2005. Citizen of Trinidad and Tobago Mr Lucie-Smith holds an MA from Oxford University and is a Chartered Accountant. He is a retired Senior Partner of PricewaterhouseCoopers, Trinidad and Tobago, where he headed the Corporate Finance and Recoveries Divisions, specialising in all aspects of business valuations, privatisation, mergers and acquisitions and corporate taxation. Mr Lucie-Smith 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. DR DODRIDGE D MILLER, FCCA MBA, LLM, LLD (Hon) Appointed December 2002. Citizen of Barbados Dr Miller was appointed Group President and Chief Executive Officer of Sagicor Financial Corporation Limited in July 2002. He has been a Director since December 2002. He 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. Dr Miller has more than 30 years’ experience in the banking, insurance and financial services industries. Dr Miller joined the Group in 1989. 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. He is a Director of Sagicor Life Inc, Sagicor USA, Sagicor Group Jamaica Limited, Sagicor Life Jamaica, Sagicor Investments Jamaica Limited and a number of other subsidiaries within the Group. 74 SAGICOR FINANCIAL CORPORATION LIMITED BOARD OF DIRECTORS JOHN F SHETTLE, JR, BA, MBA Appointed June 2008. Citizen of the United States of America Mr Shettle 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 35 years’ experience in senior management positions in the property/casualty, health and insurance-related services industries. More recently, Mr Shettle has 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, 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, FCCA Appointed January 2014. Citizen of Trinidad and Tobago Mr Young 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 and 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 and Tobago Stock Exchange and Committee Member of the Association of Insurance Companies of Trinidad and Tobago. He is Chairman of the Trinidad and Tobago International Financial Centre. SAGICOR FINANCIAL CORPORATION LIMITED 75 BOARD OF DIRECTORS Transformational Leadership…which will create opportunities and value for all of our stakeholders, and bring us closer to our vision for the future. The guiding principle of Sagicor’s Leadership Team is to create value for all stakeholders. For 179 years, Sagicor and its stakeholders have enjoyed the rewards of Wise Financial Thinking for Life. EXECUTIVE MANAGEMENT One Team, One Vision Sagicor’s Leadership Team has the skill, the wisdom and the dedication to carry out our Vision – to be a great Company committed to improving the lives of people in the communities in which we operate. This leadership permeates the organisation and is manifested in the actions, beliefs, values, and goals of Sagicor’s leaders. This vision attracts and affects team members who are engaged in living this set of actions, beliefs, values, and goals and want to share our vision. SAGICOR FINANCIAL CORPORATION LIMITED 77 DR DODRIDGE D MILLER FCCA, MBA, LLM, LLD (Hon) Group President and Chief Executive Officer • Appointed Group President and Chief Executive Officer in 2002, and has been a Director since December 2002. • Fellow of the Association of Chartered Certified Accountants (FCCA), and obtained his MBA from the University of Wales and Manchester Business School. • 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. • 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 Executive Vice President – Finance and Investments, Deputy Chief Executive Officer and Chief Operating Officer. • 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 other subsidiaries within the Group. RAVI C RAMBARRAN BSc, MSc, FIA Group Chief Operating Officer with responsibility for Sagicor Life Inc, Southern Caribbean Operations • In January 2018 he was appointed Chief Operating Officer with responsibility for Sagicor Life Inc, Southern Caribbean Operation. • In January 2017 he assumed responsibility for group strategy, mergers and acquisitions, investor relations with rating agencies. • Appointed President and Chief Executive Officer of Sagicor International in 2007. • Joined the Group in 1997. • 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. • More than 20 years of experience, both regionally and internationally, in the pensions, insurance and asset management industries. • Director of Sagicor USA and Sagicor General. • Member of the Executive of the Caribbean Actuarial Association and represents the Caribbean on the International Actuarial Association. . 78 SAGICOR FINANCIAL CORPORATION LIMITED EXECUTIVE MANAGEMENT DONALD S AUSTIN BSc, MBA, FCCA Chief Executive Officer, Sagicor Life (Eastern Caribbean) lnc • Appointed Chief Executive Officer, Sagicor Life (Eastern Caribbean) Inc. in 2015. • Board Member of Sagicor Funds Incorporated and Sagicor Asset Management Inc. • Former Chairman of the Board of Directors of LIME Grenada and LIME Dominica and former Board Member of LIME Barbados. • Holds a Bachelor of Science degree (Honours) in Electronic Engineering from the University of Bristol, a Master of Business Administration from Manchester Business School and he is a Fellow of the Association of Chartered Certified Accountants. RONALD B BLITSTEIN BA, MBA Group Chief Information Officer • Joined Sagicor Financial Corporation in 2013. • Holds a BA in Political Science, MBA in Finance from Syracuse University. • IT professional, with knowledge in all areas of information technology and its application to driving improved business outcomes. • Previously served as Director, Business Technology and Strategies Practice for a global advisory firm, supporting Fortune 500 clients, national governments and United Nations agencies. • Held key executive leadership positions at Revlon, Pitney Bowes, BOC Group, and Xerox Corporation. • Served as a Six Sigma Champion for firms pursuing enterprise operational excellence.. SAGICOR FINANCIAL CORPORATION LIMITED 79 EXECUTIVE MANAGEMENT BART F CATMULL BSc, CPA President and Chief Operating Officer, Sagicor USA Inc • Appointed President and Chief Operating Officer of Sagicor USA in 2013. • Certified Public Accountant (CPA), and obtained his Bachelor of Science degree in Accounting from Brigham Young University. • 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 in the Company. • Joined the Group in 2005, with the predecessor Company since 1999. ANTHONY O CHANDLER CPA, CGA, MBA Group Chief Financial Controller • Appointed Group Chief Financial Controller in 2013. • Member of the Certified General Accountants Association of Canada, and holds an MBA from the University of Manchester. • Prior to this, he served as Executive Vice President and Chief Financial Officer of Sagicor Life Inc from 2011. • Joined Sagicor in 1995 as Financial Accountant, and was transferred to the Group subsidiary, Island Life Insurance Company Ltd in 2000. • Has over 20 years of experience in the insurance industry. • 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 of Sagicor Life Inc.. 80 SAGICOR FINANCIAL CORPORATION LIMITED EXECUTIVE MANAGEMENT SAMANTHA CHEUNG B.Sc.Eng, M.Sc.Eng, MBA, ICD.D Appointed Executive Vice President, Investor Relations in September, 2018. • Holds both a B.Sc. (Engineering) and M.Sc. (Engineering) from Queen’s University. • Holds an MBA and ICD.D. from the Rotman School of Management and Institute of Corporate Directors. • Member and former board member of the Canadian Investor relations Institute and Women in Capital Markets. • More than 20 years in banking, insurance and financial services industries in Canada. • Previously served as Head of Investor Relations at two Canadian companies. J EDWARD CLARKE FCCA, CIA Executive Vice President and General Manager, Barbados • Appointed Chief Operating Officer, Sagicor Life Inc and General Manager, Barbados in 2010. • Prior to 2010, he held the position of Group Internal Auditor. • Fellow of the Association of Chartered Certified Accountants and is a Certified Internal Auditor. • More than 30 years’ experience in auditing and finance in Barbados, Nigeria and the USA. • Prior to joining Sagicor, Chief Financial Officer of a major conglomerate in Barbados. • Director of Sagicor General Insurance Inc, Sagicor Funds Inc, Barbados Farms Limited, the Insurance Association of the Caribbean, past President of the Barbados Chamber of Commerse and Industry,Chairman of the Barbados Private Sector Associasion, and Co-Chair of The Barbados Economic Recovery and Transformation Programme. SAGICOR FINANCIAL CORPORATION LIMITED 81 EXECUTIVE MANAGEMENT J. ANDREW GALLAGHER FSA, FCIA, CERA Chief Risk Officer • Appointed Chief Risk Officer for the Group in 2007. • Joined Sagicor in 1997 as Resident Actuary. • Holds a Bachelor of Mathematics degree from the University of Waterloo. • Fellow of Canadian Institute of Actuaries, Fellow of the Society of Actuaries and a Chartered Enterprises Risk Analyst. • More than 30 years in the insurance industry. DR M PATRICIA DOWNES-GRANT CBE, MA, MBA, DBA, LLD (Hon) Group Executive Director, Corporate • Appointed President and Chief Executive Officer of Sagicor Life Inc in 2006, having served as Group Chief Operating Officer since 2002. • Joined Sagicor in 1991, and held several senior positions, including those of Vice President, Investments and Treasurer and Executive Vice President (Finance and Investments) before being appointed Chief Executive Officer. • Holds an MBA in Finance, an MA in Economics, a Doctorate in Business Administration (Finance) and an Honorary Doctor of Laws degree from the University of the West Indies. • Prior to joining Sagicor, Dr Downes-Grant was a Senior Manager with PricewaterhouseCoopers. • More than 20 years of experience in insurance, banking and asset management. • Former Chairman of the Barbados Stock Exchange and Barbados Central Securities Depository, and a Director of several companies within the Sagicor Group and private companies. 82 SAGICOR FINANCIAL CORPORATION LIMITED EXECUTIVE MANAGEMENT ALTHEA C HAZZARD LLM (Cantab), FCIS, FICA Executive Vice President, General Counsel and Corporate Secretary • Appointed Executive Vice President, General Counsel and Corporate Secretary of Sagicor Financial Corporation in 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. • 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 Sagicor Cave Hill School of Business and Management. • Fellow of the International Compliance Association and a Fellow of the Institute of Chartered Secretaries and Administrators in Canada. KESTON D HOWELL BSc, (Hon), MBA President and Chief Executive Officer, Sagicor General Insurance Inc • Joined Sagicor in July 2006 as Executive Vice-President - Merchant Banking, responsible for the establishment of Sagicor Merchant Bank and overall Banking Strategy of the Group. • In 2008, assumed the position of Executive Vice President - Sagicor Asset Management Limited. • Holds an MBA from the University of London. • More than 18 years in the insurance and banking industry. • Assumed executive responsibility for Dutch Caribbean and Central America operations and Sagicor Life Aruba N.V. and has executive oversight of Sagicor Life’s Mortgage Department and Mortgage Recovery Unit. SAGICOR FINANCIAL CORPORATION LIMITED 83 EXECUTIVE MANAGEMENT ANDRE MOUSSEAU • Group Chief Financial Officer • Appointed Group Chief Financial Officer in February 1, 2019, with oversight of and primary responsibility for the planning, implementation and management of the Group’s financial activities. • Serves as a Director of Edgewood Health Network. His prior directorships also spans the boards of Aurigen Reinsurance, a Bermuda-based life reinsurance provider, Impark Corp., one of North America’s largest parking management providers, and Premier Lotteries. Mr. Mousseau was also an alternate board member of Camelot Group PLC, the operator of the UK National Lottery. • Holds an MBA from the Richard Ivey School of Business, University of Western Ontario, and an undergraduate degree in Economics from McGill University. • Has 18 years of experience in the financial services industry. • Formerly a Partner with Alignvest Private Capital, Portfolio Manager for the Long-Term Equities Group at the Ontario Teachers’ Pension Plan (OTPP), and Principal at EdgeStone Capital Partners, a leading independent private equity manager in Canada.. NARI T PERSAD BSc Biochemistry, BSc Actuarial Science, FSA, FCIA Group Chief Actuary • Appointed Group Chief Actuary in August 2017. • Holds a BSc Specialist in Actuarial Science and Biochemistry from the University of Toronto. • Fellow of the Canadian Institute of Actuaries, Fellow of the Society of Actuaries. • Affiliate member of the Caribbean Actuarial Association. • Previously served as Partner – Canadian Life Actuarial Practice Leader with Ernst & Young and Principal of Eckler Ltd. • More than 25 years in the insurance industry including positions at Crown Life Insurance Company, Canada Life Assurance Company, Toronto Dominion Life Insurance Company, Swiss Re Life and Health and Dion Durrell + Associates. 84 SAGICOR FINANCIAL CORPORATION LIMITED EXECUTIVE MANAGEMENT ROBERT J L TRESTRAIL BA Executive Vice President and General Manager, Trinidad & Tobago and the Dutch Caribbean • Appointed Executive Vice President and General Manager, Trinidad & Tobago in 2007 • Assumed additional executive responsibility for Dutch Caribbean and Sagicor Life Aruba N.V. in 2017. • Graduate of the University of Toronto (Bachelor Arts - Economics). • More than 20 years in the Insurance and Financial Services Industry. • Board Member of RGM and several Board subsidiaries. • Trinidad & Tobago Insurance Institute (TTII): Presently serves as a Director on the Board of Governors having been appointed in 2007. • Former President of the Trinidad & Tobago Chamber of Industry and Commerce (TTCIC) 2015-2016, having served as a Board Member of the Trinidad & Tobago Chamber of Industry and Commerce (TTCIC) 2006-2018. • Former Board Membe CHRISTOPHER W ZACCA CD, BSc, MBA President and Chief Executive Officer, Sagicor Group Jamaica Limited • Appointed President and CEO of Sagicor Group Jamaica Limited in May 2017. • Holds a BSc in Engineering from the Massachusetts Institute of Technology and an MBA from the University of Florida. • More than 30 years of experience in public and private sector management, in particular, during the period 1982-2009 where he held various Senior Management positions in the private sector namely:- • Vice President, Engineering - Desnoes & Geddes Limited (t/a Red Stripe), Brewers of Red Stripe Beer and Manufacturers of Soft Drinks. • Managing Director - Caribrake Products Limited, Manufacturers and Distributors of Automotive Parts and Accessories. • Managing Director - Appliance Traders Limited, Dealers in Air Conditioning, Appliance and Commercial Equipment. • Chief Executive Officer - Air Jamaica Limited, former National Airline of Jamaica. • Served as President of the Private Sector Organisation of Jamaica from December 2006 to June 2009 and from June 2012 to December 2014. • Former Chairman of the Development Bank of Jamaica and the National Health Fund and has also served on numerous State boards, including the Factories Corporation, National Education Trust and JAMPRO. • Served as special advisor to the Prime Minister of Jamaica from 2009 to 2011. • In 2014, he was conferred with the National Honour of the Order of Distinction in the rank of Commander (CD) for his invaluable contribution to the private and public sectors in Jamaica. SAGICOR FINANCIAL CORPORATION LIMITED 85 EXECUTIVE MANAGEMENT Accountability to stakeholdersSagicor believes that the highest standards of financial management underpin the long-term success and sustainability of the company, creating trust between Sagicor and its stakeholders. Sagicor is one of the most highly regulated financial institutions in the Caribbean. It is upon the foundation of integrity, honesty and transparency that we are creating value for all stakeholders. FINANCIAL STATEMENTS Integrity, Honesty and Transparency Sagicor’s Financial Statements have been prepared in accordance with, and comply with, International Financial Reporting Standards (IFRS). SAGICOR FINANCIAL CORPORATION LIMITED 87 Independent Auditor’s Report Appointed Actuary’s Report Consolidated Statement of Financial Position Consolidated Statement of Income Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows 1 General Information 2 Accounting Policies 3 Critical Accounting Estimates and Judgements 4 Segments 5 Investment Property 6 Associates and Joint Ventures 7 Property, Plant and Equipment 8 Intangible Assets 9 Financial Investments 10 Reinsurance Assets 11 Income Tax Assets 12 Miscellaneous Assets and Receivables 13 Actuarial Liabilities 14 Other Insurance Liabilities 5 Investment Contract Liabilities 16 Notes and Loans Payable 17 Deposit and Security Liabilities 18 Provisions 19 Income Tax Liabilities 20 Accounts Payable and Accrued Liabilities 21 Common Shares 22 Reserves 23 Participating Accounts 24 Premium Revenue 25 Net Investment Income 26 Fees and Other Revenue 27 Policy Benefits & Change in Actuarial Liabilities 28 Interest Costs 29 Employee Costs 30 Equity Compensation Benefits 31 Employee Retirement Benefits 32 Income Taxes 33 Deferred Income Taxes 34 Earnings per Common Share 35 Other Comprehensive Income (OCI) 36 Cash Flows 37 Changes in Subsidiary and Associate Holdings 38 Discontinued Operation 39 Contingent Liabilities 40 Fair Value of Property 41 Financial Risk 42 Insurance Risk - Property & Casualty Contracts 43 Insurance Risk - Life, Annuity & Health Contracts 44 Fiduciary Risk 45 Statutory Restrictions on Assets 46 Capital Management 47 Related Party Transactions 48 Breach of Insurance Regulations – Related Party Balances 49 Alignvest Agreement 168 169 171 172 172 173 173 176 180 181 183 184 185 186 190 191 192 193 229 231 236 236 237 240 240 240 50 Restatement and Transition to IFRS 9 of Financial Statements 241 90 95 96 97 98 99 101 102 102 130 135 145 146 150 151 154 157 157 157 158 161 162 162 163 163 164 164 165 166 168 88 SAGICOR FINANCIAL CORPORATION LIMITED Certain acronyms have been used throughout the financial statements and notes thereto to substitute phrases. The more frequent acronyms and associated phrases are set out below. INDEX TO THE FINANCIAL STATEMENTS Appointed Actuary Exposure at Default Expected Credit Losses Fair Value through Other Comprehensive Income Fair Value through Profit and Loss International Accounting Standards International Accounting Standard No. 39 - Financial Instruments – Recognition and Measurement International Financial Reporting Standards International Financial Reporting Standard No.9 – Financial Instruments International Financial Reporting Standard No.15 – Revenue from Contracts with Customers Loss Given Default Acronym Phrase AA EAD ECL FVOC FVTPL IAS IAS 39 IFRS IFRS 9 IFRS 15 LGD MCCSR Minimum Continuing Capital and Surplus Requirement OCI PD POCI SICR SPPI Other Comprehensive Income Probability of Default Purchased or Originated Credit-Impaired Significant Increase in Credit Risk Solely Payments of Principal and Interest SAGICOR FINANCIAL CORPORATION LIMITED 89 90 SAGICOR FINANCIAL CORPORATION LIMITED AUDITOR’S REPORT SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED 91 91 AUDITOR’S REPORT 92 SAGICOR FINANCIAL CORPORATION LIMITED AUDITOR’S REPORT SAGICOR FINANCIAL CORPORATION LIMITED 93 AUDITOR’S REPORT 94 SAGICOR FINANCIAL CORPORATION LIMITED ACTUARY’S REPORT SAGICOR FINANCIAL CORPORATION LIMITED 95 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As of December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 Note 2018 2017 restated January 1, 2017 restated Note 2018 2017 restated January 1, 2017 restated 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 5 7 6 8 9 10 11 12 Assets of discontinued operation 38 93,494 262,288 236,132 97,312 80,816 165,560 97,223 81,714 80,662 167,723 87,293 83,487 LIABILITIES Actuarial liabilities Other insurance liabilities Investment contract liabilities Total policy liabilities 5,347,663 4,953,241 4,813,748 Notes and loans payable 714,597 797,391 54,365 143,647 358,687 17,239 39,980 228,543 360,064 10,110 777,344 59,575 183,018 279,070 - Total assets 7,325,424 6,814,642 6,531,920 These financial statements have been approved for issue by the Board of Directors on April 18, 2019. Deposit and security liabilities Provisions Income tax liabilities Accounts payable and accrued liabilities Total liabilities EQUITY Share capital Share premium Reserves Retained earnings Total shareholders’ equity 13 14 15 16 17 18 19 20 21 21 22 3,024,464 2,944,700 2,771,824 247,577 390,397 224,159 379,018 3,662,438 3,547,877 490,275 413,805 1,674,033 1,559,232 74,287 48,236 80,027 29,502 240,694 246,976 207,122 377,576 3,356,522 395,213 1,623,325 101,292 51,078 204,975 6,189,963 5,877,419 5,732,405 3,061 3,059 300,665 300,470 (76,995) (47,388) 374,138 368,451 600,869 624,592 3,029 297,050 (64,798) 301,799 537,080 1,291 261,144 799,515 Participating accounts 23 4,078 865 Non-controlling interests in subsidiaries 530,514 311,766 Total equity 1,135,461 937,223 ……………………………………………… Director ……………………………………………… Director Total liabilities and equity 7,325,424 6,814,642 6,531,920 4 96 SAGICOR FINANCIAL CORPORATION LIMITED CONSOLIDATED STATEMENT OF INCOME Year ended December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 1,484,261 1,218,608 Net income/(loss) is attributable to: Note 2018 Note 2018 REVENUE Premium revenue Reinsurance premium expense Net premium revenue Gain on derecognition of amortised cost investments Gain reclassified to income from accumulated OCI Net investment income Fees and other revenue Total revenue BENEFITS Policy benefits and change in actuarial liabilities Policy benefits and change in actuarial liabilities reinsured Net policy benefits and change in actuarial liabilities Interest costs Total benefits 24 24 25 26 27 27 28 EXPENSES Administrative expenses Commissions and related compensation Premium and asset taxes Finance costs Credit impairment losses Depreciation and amortisation Total expenses OTHER 2017 restated 898,354 (152,722) 745,632 - - 379,236 93,740 1,141,429 (87,388) 1,054,041 10,434 9,339 295,965 114,482 728,360 (15,555) 712,805 52,521 765,326 303,071 117,316 13,956 36,511 95,519 24,277 590,650 719,320 (114,839) 604,481 54,949 659,430 267,427 98,749 13,569 34,746 - 21,871 436,362 Gain arising on business combinations, acquisitions and divestitures (note 13.2, 37) 18,238 2,261 5 SAGICOR FINANCIAL CORPORATION LIMITED 2017 restated 125,077 (19,313) 105,764 10,110 115,874 62,313 10,110 72,423 (1,044) 44,495 INCOME BEFORE TAXES Income taxes NET INCOME FROM CONTINUING OPERATIONS 32 Net income from discontinued operation 38 NET INCOME FOR THE YEAR Common shareholders: From continuing operations From discontinued operation Participating policyholders Non-controlling interests 146,523 (50,702) 95,821 7,129 102,950 36,521 7,129 43,650 7,222 52,078 102,950 115,874 Basic earnings per common share: 34 From continuing operations From discontinued operation Fully diluted earnings per common share: 34 From continuing operations From discontinued operation 11.9 cents 2.3 cents 14.2 cents 11.7 cents 2.3 cents 14.0 cents 20.5 cents 3.3 cents 23.8 cents 20.0 cents 3.2 cents 23.2 cents 97 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Year ended December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 OTHER COMPREHENSIVE INCOME TOTAL COMPREHENSIVE INCOME Note 2018 2017 restated 2018 2017 restated Items net of tax that may be reclassified subsequently to income: 35 Financial assets measured at fair value through other comprehensive income (FVOCI): (Losses) on revaluation Losses / (gains) transferred to income Available for sale assets: Gains 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: 35 Gains / (losses) on revaluation of owner-occupied property Gains / (losses) on equity securities designated at fair value through other comprehensive income Gains / (losses) on defined benefit plans (82,864) (1,891) - - 41,614 (25,185) (68,326) 6,894 73 (2,685) 4,282 - - 62,577 (12,259) (18,152) 9,920 42,086 (1,759) - 23,914 22,155 OTHER COMPREHENSIVE INCOME / (LOSS) FROM CONTINUING OPERATIONS (64,044) 64,241 Net income Other comprehensive income / (loss) TOTAL COMPREHENSIVE INCOME FOR THE YEAR Total comprehensive income / (loss) is attributable to: Common shareholders: From continuing operations From discontinued operation Participating policyholders Non-controlling interests 102,950 (64,044) 38,906 2,917 7,129 10,046 6,356 22,504 38,906 115,874 64,241 180,115 96,436 10,110 106,546 (210) 73,779 180,115 6 98 SAGICOR FINANCIAL CORPORATION LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 Share Capital (note 21) Share Premium (note 21) Reserves (note 22) Retained Earnings Total Shareholders’ Equity Participating Accounts (note 23) Non-controlling Interests Total Equity 2018 Balance, December 31, 2017 as reported previously 3,059 300,470 (47,482) 367,327 Prior year adjustment to actuarial liabilities (note 50) - - 94 1,124 623,374 1,218 Balance, December 31, 2017 as restated 3,059 300,470 (47,388) 368,451 624,592 Transition adjustment on adoption of IFRS 9 (note 50) - - (217) (10,442) Balance, January 1, 2018 3,059 300,470 (47,605) 358,009 - - 2 - - - - - - - - 195 - - - - - - (29,634) - - (787) - - - (935) 1,966 32,551 7,129 - - - (3,092) 935 (6,094) 3,061 300,665 (76,995) 374,138 (15,300) (15,300) (10,659) 613,933 2,917 7,129 197 (787) - (3,092) - (4,128) 600,869 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) Acquisition/disposal of subsidiary and insurance business Changes in ownership interest in subsidiaries Disposal of interest in subsidiaries Transfers and other movements Balance, December 31, 2018 7 SAGICOR FINANCIAL CORPORATION LIMITED 865 - 865 (2,930) (2,065) 6,356 - - - - - - - (213) 4,078 308,089 932,328 3,677 4,895 311,766 937,223 (2,352) 309,414 22,504 - - (28) (18,554) 222,755 (9,581) (2,221) 6,225 (15,941) 921,282 31,777 7,129 197 (815) (33,854) 222,755 (12,673) (2,221) 1,884 530,514 1,135,461 99 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 Share Capital (note 21) Share Premium (note 21) Reserves (note 22) Retained Earnings Total Shareholders’ Equity Participating Accounts (note 23) Non-controlling Interests Total Equity 2017 Balance, December 31, 2016 as reported previously 3,029 297,050 (64,795) 300,865 Prior year adjustment to actuarial liabilities (note 50) - - (3) 934 Balance, December 31, 2016 as restated 3,029 297,050 (64,798) 301,799 Total comprehensive income from continuing operations Total comprehensive income from discontinued operation Transactions with holders of equity instruments: Allotments of common shares Movements in treasury shares Changes in reserve for equity compensation benefits Dividends declared (note 21) Transfers and other movements - - 21 9 - - - - - 2,021 1,399 - - - 21,537 - - - (6,270) 74,899 10,110 - - - - (15,216) 2,143 (3,141) 536,149 931 537,080 96,436 10,110 2,042 1,408 (6,270) (15,216) (998) Balance, December 31, 2017 as restated 3,059 300,470 (47,388) 368,451 624,592 1,291 - 1,291 (210) - - - - - (216) 865 257,974 795,414 3,170 261,144 73,779 - - - (75) (19,861) (3,221) 4,101 799,515 170,005 10,110 2,042 1,408 (6,345) (35,077) (4,435) 311,766 937,223 8 100 SAGICOR FINANCIAL CORPORATION LIMITED CONSOLIDATED STATEMENT OF CASH FLOWS Year ended December 31, 2018 Sagicor Financial Corporation Limited Amounts expressed in US $000 Note 2018 2017 restated Note 2018 OPERATING ACTIVITIES Income before taxes 146,523 125,077 Movement in treasury shares FINANCING ACTIVITIES Adjustments for non-cash items, interest and dividends 36.1 65,655 (111,849) Redemption of SFC preference shares Interest and dividends received Interest paid Income taxes paid Net increase in investments and operating assets Net increase in operating liabilities Net cash flows - operating activities 36.1 36.1 INVESTING ACTIVITIES Property, plant and equipment, net 36.2 Associates and joint ventures, net Dividends received from associates and joint ventures Purchase of intangible assets Changes in subsidiary and associate holdings, net of cash and cash equivalents Sale of subsidiaries, net Net cash flows - investing activities 303,371 (89,029) (31,720) 305,810 (83,627) (43,352) Shares issued to / (purchased from) non-controlling interests Changes in ownership of subsidiaries (580,553) (157,602) Notes and loans payable, net 36.3 232,016 46,263 (45,282) (10,825) Dividends paid to common shareholders Dividends paid to non-controlling interests Net cash flows - financing activities (326) (146) 600 (4,795) 10,422 (13,795) (8,040) (13,385) (6,908) 2,561 (6,182) 7,766 - (16,148) Effects of exchange rate changes (3,672) 1,875 NET CHANGE IN CASH AND CASH EQUIVALENTS - CONTINUING OPERATIONS (16,788) (49,434) Cash and cash equivalents, beginning of year 338,349 387,783 CASH AND CASH EQUIVALENTS, END OF YEAR 36.4 321,561 338,349 2017 restated (203) - (5,504) - 16,182 (14,950) (19,861) (24,336) (202) (1) 1,967 (12,673) (6,134) (14,959) (19,337) (51,339) 9 SAGICOR FINANCIAL CORPORATION LIMITED 101 1 GENERAL INFORMATION 2 ACCOUNTING POLICIES On July 20, 2016, Sagicor Financial Corporation continued as an exempted company under the laws of Bermuda under the name Sagicor Financial Corporation Limited and registered as an external company under the Companies Act of Barbados on July 20, 2016. The Company was originally incorporated on December 6, 2002 under the Companies Act of Barbados as a public limited liability holding company. The Company’s issued common shares are listed on Barbados, Trinidad & Tobago and London stock exchanges. Sagicor and its subsidiaries (‘the Group) operate across the Caribbean and in the United States of America (USA). There is a discontinued operation in the United Kingdom. Details of Sagicor’s holdings and operations are set out in notes 4 and 38. 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. These consolidated financial statements for the year ended December 31, 2018 have been approved by the Board of Directors on April 18, 2019. Neither the Company’s owners nor others have the power to amend the financial statements after issue. The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. 2.1 Basis of preparation These consolidated financial statements are prepared in accordance with and comply with International Financial Reporting Standards (IFRS). The Group has adopted accounting policies for the computation of actuarial liabilities of life insurance and annuity contracts using approaches consistent with Canadian standards of practice. As no specific guidance is provided by IFRS for computing actuarial liabilities, management has judged that the Canadian standards of practice 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, financial assets carried at fair value through other comprehensive income, financial asset 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. 10 102 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.1 Basis of preparation (continued) Adoption of IFRS 9 and IFRS 15 2.2 Basis of consolidation (a) Subsidiaries Effective January 1, 2018, the Group adopted IFRS 9 - Financial Instruments (IFRS 9). As a result of the application of this new standard, the Group has adopted new accounting policies for financial assets which are set out in note 2.9. As permitted by the transition provisions in IFRS 9, the Group has elected not to restate comparative period results. Accordingly, the 2017 comparative information on financial assets is presented in accordance with IAS 39 – Financial Instruments – Recognition and Measurement (note 2.10). Adjustments to the carrying amounts of financial instruments as of January 1, 2018 were recognised in the statement of changes in equity. Effective January 1, 2018, the Group adopted IFRS 15 – Revenue from Contracts with Customers (IFRS 15). This standard clarifies revenue recognition principles and provides a framework for recognising revenue and cash flows from service contracts from customers. IFRS 15 does not apply to the Group’s primary activities of insurance and banking which are governed by IFRS 4 – ‘Insurance Contracts’ and IFRS 9 – ‘Financial Instruments’. In accordance with the transition provisions in IFRS 15, the standard has been implemented using the modified-retrospective method with no restatement of comparative information. There was no significant impact on the Group resulting from the implementation of the standard and consequently no transition adjustment has been recorded in the statement of changes in equity. The standard introduces new disclosure requirements which are included in notes 4.8, 12, 20 and 26. There are new standards and amendments to standards and interpretations which are effective for annual periods beginning after January 1, 2018. These standards and amendments have not been adopted in preparing these consolidated financial statements (see note 2.28). Change in accounting policy for the measurement of actuarial liabilities This change in policy is set out in note 2.15(a). It is a voluntary change which is reflected as a prior period adjustment with retrospective application. The impact of this change in policy is summarized in note 50. 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 can affect those returns through its power over the entity. Subsidiaries are consolidated from the date on which control is transferred to the Group, and subsidiaries 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 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 interest. 11 SAGICOR FINANCIAL CORPORATION LIMITED 103 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.2 Basis of consolidation (continued) 2 .2 Basis of consolidation (continued) 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. (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. As of December 31, 2018, the future price adjustments relating to the discontinued operation are disclosed in the statement of financial position at their estimated undiscounted value. (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. Investments in associate and joint venture companies are originally recorded at cost and include intangible assets identified on acquisition. Accounting policies of associates and joint ventures have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Assets of certain associates include significant proportions of investment property and financial instruments invested in investment property which are carried at fair value in accordance with the valuation procedures outlined in note 2.5. 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. The Group recognises an impairment of its net investment in an associate or a joint venture when there is objective evidence that the carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the associate’s or joint venture’s fair value less costs to sell and its value in use. (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 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 either consolidates the assets, liabilities and activity of the fund and accounts for any non- controlling interest as a financial liability or accounts for the fund as an associate. (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. 12 104 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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. 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 of the foreign entity and 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: 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 FVOCI are reported as part of the fair value gain or loss in other comprehensive income. 2018 closing 2018 average 2017 closing 2017 average 2.4 Segments Barbados dollar Eastern Caribbean dollar 2.0000 2.7000 2.0000 2.7000 2.0000 2.7000 2.0000 2.7000 Jamaica dollar 127.3996 128.5468 124.5754 128.0938 Trinidad & Tobago dollar 6.7804 Pound sterling 0.78310 6.7460 0.74846 6.7628 0.74020 6.7428 0.77496 The The 13 SAGICOR FINANCIAL CORPORATION LIMITED Reportable operating segments have been defined in accordance with performance and resource allocation decisions of the Group’s Chief Executive Officer. 105 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 the valuation date. Fair values are derived using the market value approach and the income capitalisation approach, which reference market-based evidence, using comparable prices adjusted for specific factors such as nature, location and condition of property. 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. 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. 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. 14 106 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 Lands are not depreciated. SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 15 SAGICOR FINANCIAL CORPORATION LIMITED 107 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.9 Financial assets – policies under IFRS 9 (a) Classification of financial assets IFRS 9 introduces a principles-based approach to the classification of financial assets. Debt instruments, including hybrid contracts, are measured at fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) or amortized cost based on the nature of the cash flows of these assets and the Group’s business model. These categories replace the existing IAS 39 classifications of fair value through income, available for sale, loans and receivables and held-to- maturity. Equity instruments are measured at FVTPL, unless they are not held for trading purposes, in which case an irrevocable election can be made on initial recognition to measure them at FVOCI with no subsequent reclassification to profit or loss. Financial assets are measured on initial recognition at fair value and are classified as and subsequently measured either at amortised cost, at FVOCI or at FVTPL. Financial assets and liabilities are recognised when the Group becomes a party to the contractual provision of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the Group commits to purchase or sell the asset. (b) Classification of debt instruments Classification and subsequent measurement of debt instruments depend on: • • the Group’s business model for managing the asset; and the cash flow characteristics of the asset. Based on these factors, the Group classifies its debt instruments into one of the following three measurement categories. Measured at amortised cost Debt instruments that are held to collect the contractual cash flows and that contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest, such as most loans and advances to banks and customers and some debt securities, are measured at amortised cost. In addition, most financial liabilities are measured at amortised cost. The carrying value of these financial assets at initial recognition includes any directly attributable transactions costs. 2.9 Financial assets – policies under IFRS 9 (continued) Measured at fair value through other comprehensive income (FVOCI) Debt instruments held for a business model that is achieved by both collecting contractual cash flows and selling and that contain contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest are measured at FVOCI. These comprise primarily debt securities. Measured at fair value through profit and loss (FVTPL) Debt instruments are classified in this category if they meet one or more of the criteria set out below and are so designated irrevocably at inception: • • the use of the designation removes or significantly reduces an accounting mismatch; when the performance of group of financial assets is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; when the debt instruments are held for trading and 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. • Business model assessment Business models are determined at the level which best reflects how the Group manages portfolios of assets to achieve business objectives. Judgement is used in determining business models, which is supported by relevant, objective evidence including: • • • • The nature of liabilities, if any, funding a portfolio of assets; The nature of the market of the assets in the country of origination of a portfolio of assets; How the Group intends to generate profits from holding a portfolio of assets; The historical and future expectations of asset sales within a portfolio. 16 108 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.9 Financial assets – policies under IFRS 9 (continued) 2.9 Financial assets – policies under IFRS 9 (continued) Solely payments of principal and interest (“SPPI”) Where the business model is hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether the financial instruments’ cash flows represent solely payments of principal and interest. In making this assessment, the Group considers whether the contractual cash flows are consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial assets are classified and measured at FVTPL. (c) Unit linked funds fair value model The Group’s liabilities include unit linked funds which are components of insurance contracts issued or unit linked investment contracts issued with terms that the full investment return earned on the backing assets accrue to the contract-holders. Where these liabilities are accounted for at FVTPL, the financial investments backing these liabilities are consequently classified as and measured at FVTPL. This is to eliminate any accounting mismatch. (d) Impairment of financial assets measured at amortized cost and FVOCI IFRS 9 introduces an impairment model that requires the recognition of expected credit losses (“ECL”) on financial assets measured at amortised cost and FVOCI and off-balance sheet loan commitments and financial guarantees which were previously provided for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is required for ECL resulting from default events that are possible within the next 12 months (or less, where the remaining life is less than 12 months) (’12-month ECL’). In the event of a significant increase in credit risk (SICR), an allowance (or provision) is required for ECL resulting from all possible default events over the expected life of the financial instrument (‘lifetime ECL’). Financial assets where 12-month ECL are recognised are defined as ‘stage 1’; financial assets which are considered to have experienced a significant increase in credit risk are in ‘stage 2’; and financial assets for which there is objective evidence of impairment are defined as being in default or otherwise credit-impaired are in ‘stage 3’. Purchased or originated credit-impaired financial assets (“POCI”) are treated differently as set out below. To determine whether the life-time credit risk has increased significantly since initial recognition, the Group considers reasonable and supportable information that is available including information from the past and forward-looking information. Factors such as whether payments of principal and interest are in default, an adverse change in credit rating of the borrower and adverse changes in the borrower’s industry and economic environment are considered in determining whether there has been a significant increase in the credit risk of the borrower. (e) Purchased or originated credit-impaired assets (POCI) Financial assets that are purchased or originated at a deep discount that reflects the incurred credit losses are considered to be POCI. These financial assets are credit-impaired on initial recognition. The Group calculates the credit adjusted effective interest rate, which is calculated based on the fair value origination of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows. Their ECL is always measured on a life time basis. At each reporting date, the Group shall recognise in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. The Group will recognise favourable changes in lifetime expected credit losses as an impairment gain, the gain occurs when the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. 17 SAGICOR FINANCIAL CORPORATION LIMITED 109 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.9 Financial assets – policies under IFRS 9 (continued) 2.9 Financial assets – policies under IFRS 9 (continued) (f) Definition of default Measurement The Group determines that a financial instrument is credit-impaired and in stage 3 by considering relevant objective evidence, primarily whether: • • • contractual payments of either principal or interest are past due for 90 days or more; there are other indications that the borrower is unlikely to pay such as that a concession has been granted to the borrower for economic or legal reasons relating to the borrower’s financial condition; and the financial asset is otherwise considered to be in default. If such unlikeliness to pay is not identified at an earlier stage, it is deemed to occur when an exposure is 90 days past due. Expected credit losses are calculated by multiplying three main components, being the probability of default (“PD”), loss given default (“LGD”) and the exposure at default (“EAD”), discounted at the original effective interest rate. Management has calculated these inputs based on the historical experience of the portfolios adjusted for the current point in time. A simplified approach to calculating the ECL is applied to contract and other receivables which do not contain a significant financing component. Generally, these receivables are due within 12 months unless there are extenuating circumstances. Under this approach, an estimate is made of the life-time ECL on initial recognition (i.e. Stage 3). For ECL provisions modelled on a collective basis, a grouping of exposures is performed on the basis of shared risk characteristics, such that risk exposures within a group are homogeneous. (g) Write-off Financial assets (and the related impairment allowances) are normally written off, either partially or in full, when there is no realistic prospect of recovery. Where loans are secured, this is generally after receipt of any proceeds from the realisation of security. In circumstances where the net realisable value of any collateral has been determined and there is no reasonable expectation of further recovery, write- off may be earlier. (h) The general approach to recognising and measuring ECL The measurement of ECL reflects: • An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; • The time value of money; • Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. The PD, LGD and EAD models which support these determinations are reviewed regularly in light of differences between loss estimates and actual loss experience; but given that IFRS 9 requirements have only been applied since January 1, 2018, the Group has been unable to make these comparisons. Therefore, the underlying models and their calibration, including how they react to forward-looking economic conditions remain subject to review and refinement. This is particularly relevant for lifetime PDs, which have not been previously used in regulatory modelling and for the incorporation of ‘downside scenarios’ which have not generally been subject to experience gained through stress testing. The exercise of judgement in making estimations requires the use of assumptions which are highly subjective and sensitive to the risk factors, and particularly to changes in economic and credit conditions across wide geographical areas. Many of the factors have a high degree of interdependency and there is no single factor to which loan impairment allowances are sensitive. Therefore, sensitivities are considered in relation to key portfolios which are particularly sensitive to a few factors and the results should not be further extrapolated. The main difference between Stage 1 and Stage 2 expected credit losses is the respective PD horizon. Stage 1 estimates will use a maximum of a 12-month PD while Stage 2 estimates will use a lifetime PD. Stage 3 estimates will continue to leverage existing processes for estimating losses on impaired loans, however, these processes will be updated to reflect the requirements of IFRS 9, including the requirement to consider multiple forward-looking scenarios. An expected credit loss estimate will be produced for each individual exposure, including amounts which are subject to a more simplified model for estimating expected credit losses. 18 110 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.9 Financial assets – policies under IFRS 9 (continued) 2.9 Financial assets – policies under IFRS 9 (continued) The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk must consider information about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. The estimation and application of forward-looking information will require significant judgment. Scenario design, including the identification of additional downside scenarios will occur on at least an annual basis and more frequently if conditions warrant. Scenarios will be probability-weighted according to our best estimate of their relative likelihood based on historical frequency and current trends and conditions. Probability weights will be updated on a quarterly basis. The measurement of expected credit losses for each stage and the assessment of significant increases in credit risk must consider information about past events and current conditions as well as reasonable and supportable forecasts of future events and economic conditions. For a revolving commitment, the Group includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur. For defaulted financial assets, based on management’s assessment of the borrower, a specific provision of expected life-time losses which incorporates collateral recoveries, is calculated and recorded as the ECL. The resulting ECL is the difference between the carrying amount and the present value of expected cash flows discounted at the original effective interest rate. Forward looking information The estimation and application of forward-looking information will require significant judgment. PD, LGD and EAD inputs used to estimate Stage 1 and Stage 2 credit loss allowances are modelled based on the macroeconomic variables (or changes in macroeconomic variables) that are most closely correlated with credit losses in the relevant portfolio. Each macroeconomic scenario used in the expected credit loss calculation will have forecasts of the relevant macroeconomic variables – including, but not limited to, unemployment rates and gross domestic product, for a three-year period, subsequently reverting to long-run averages. Our estimation of expected credit losses in Stage 1 and Stage 2 will be a discounted probability-weighted estimate that considers a minimum of three future macroeconomic scenarios. Our base case scenario will be based on macroeconomic forecasts where available. Upside and downside scenarios will be set relative to our base case scenario based on reasonably possible alternative macroeconomic conditions. (i) Modification of loans The Group sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers and debt instruments. When this happens, the Group assesses whether or not the new terms are substantially different to the original terms. The Group does this by considering, among others, the following factors: • If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flow to amounts the borrower is expected to be able to pay. • Whether any substantial new terms are introduced, such as a profit share/equity-based return • • • • that substantially affects the risk profile of the loan. Significant extension of the loan term when the borrower is not in financial difficulty. Significant change in the interest rate. Change in the currency the loan is denominated in. Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan. If the terms are substantially different, the group derecognises the original financial asset and recognises a new asset at fair value and recalculates the new effective interest rate for the asset. The date of negotiation is consequently considered to the be the date of initial recognition for impairment calculation purposes and the purpose of determining if there has been a significant increase in credit risk. 19 SAGICOR FINANCIAL CORPORATION LIMITED 111 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.9 Financial assets – policies under IFRS 9 (continued) 2.9 Financial assets – policies under IFRS 9 (continued) (j) Re-classified balances Debt instruments measured at FVOCI The Group reclassifies debt instruments when and only where its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. Any re-classified balances of financial investment and impairment losses relating to the adoption of IFRS 9 are detailed in note 9.4. • • • • Interest income is included in net investment income. Credit impairment losses are presented in the income statement. Unrealised gains and losses arising from changes in fair value are presented in OCI. On de-recognition, the cumulative gain or loss in OCI is transferred from OCI on the consolidated statement of income. (k) Classification of equity instruments Equity instruments measured at FVOCI The Group classifies and subsequently measures all equity investments at FVTPL, except where the Group’s management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. The Group’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. (l) Embedded derivatives • • • Dividend income is included in net investment income. Unrealised changes in fair value presented in OCI. Any impairment losses are included with fair value changes. On de-recognition, the cumulative gain or loss in OCI remains in the fair value reserve for FVOCI assets. The Group may hold debt securities and preferred equity securities which may contain embedded derivatives. The embedded derivative of a financial asset is classified in the same manner as the host contract. 2.10 Financial assets – policies under IAS 39 (a) Classification (m) Presentation in the statements of income and other comprehensive income (OCI) The Group classifies its financial assets into four categories: Debt and equity instruments measured at FVTPL Realised changes in fair value, unrealised changes in fair value, interest income and dividend income are included in net investment income. Debt instruments measured at amortized cost • • • Interest income is included in net investment income. Credit impairment losses are presented in the income statement. Gain or loss on de-recognition is expected to be relatively infrequent and is included on the consolidated statement of income. • • • • 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. 20 112 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.10 Financial assets – policies under IAS 39 2.10 Financial assets – policies under IAS 39 (continued) Financial assets in the category at fair value through income comprise designated assets or held for trading assets. These are set out below. • Assets designated by management on acquisition form part of managed portfolios whose performance is evaluated on a fair value basis in accordance with documented investment strategies. They comprise investment portfolios backing deposit administration and unit linked policy contracts for which the full return on the portfolios accrue to the contract-holders. • Held for trading securities are acquired principally for the purpose of selling in the 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. (c) Fair value Fair value amounts represent the price (or estimates thereof) that would be agreed upon in an orderly transaction between market participants at the valuation date. (d) Impaired financial assets A financial asset is considered impaired if the carrying amount exceeds the estimated recoverable amount. Available for sale financial assets are non-derivative financial instruments intended to be held for an indefinite period and which may be sold in response to liquidity needs or changes in interest rates, exchange rates and equity prices. 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. (b) Recognition and measurement The recoverable amount for an available for sale security is its fair value. Purchases and sales of financial investments are recognised on the trade date. Interest income arising on investments is accrued using the effective yield method. Dividend income is recorded 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. Interest income on financial assets at fair value through income is calculated using the effective interest rate method. 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. 21 SAGICOR FINANCIAL CORPORATION LIMITED For an available for sale equity security, an impairment loss is recognised in income if there has been a significant or prolonged decline in its fair value below its cost. Determination of what is significant or prolonged requires judgement which includes consideration of the volatility of the fair value, and the financial condition and financial viability of the investee. In this context, management considers a 40% decline in fair value below cost to be significant 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. 113 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.10 Financial assets – policies under IAS 39 (continued) 2.11 Financial liabilities (e) Securities purchased for resale During the ordinary course of business, the Group issues investment contracts or otherwise assumes financial liabilities that expose the Group to financial risk. Securities purchased for resale are treated as collateralised financing transactions and are recorded at the amount at which they are acquired. 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. Classification (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. Financial liabilities are measured at initial recognition at fair value and are classified as and subsequently measured either at amortised cost, or at fair value through profit and loss (FVTPL). Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). The financial liabilities described under the unit linked fair value model (note 2.9 (c)) are classified and measured at FVTPL as the Group is obligated to provide investment returns to the unit holder in direct proportion to the investment returns on a specific portfolio of assets, which are also carried at FVTPL. Derivative financial liabilities are carried at FVTPL (note 2.12). All other financial liabilities are carried at amortised cost. It is noted that the financial liabilities measured at FVTPL do not have a cumulative own credit adjustment gain or loss. Financial liability balances which were accounted for at amortised cost under IAS 39 continue to be so accounted for under IFRS 9 and financial liability balances which were accounted for at fair value through income under IAS 39 are now accounted at FVTPL on the adoption of IFRS 9. Consequently, no financial liability balances have been restated as of January 1, 2018. 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. The recognition and measurement of the Group’s principal types of financial liabilities are disclosed in note 2.14(b) (vii) and in the following paragraphs. (a) Securities sold for re-purchase Securities sold for re-purchase are treated as collateralised financing transactions and are recorded at the amount at which the securities were sold. Securities sold subject to repurchase are not derecognised but are treated as pledged assets when the transferee has the right by contract or custom to sell or re-pledge the collateral. 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. 22 114 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.11 Financial liabilities (continued) 2.12 Derivative financial instruments and hedging activities The liability is extinguished when the obligation specified in the contract is discharged, assigned, cancelled or has expired. (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. (e) Presentation in the statement of income 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. For financial liabilities measured at amortised cost, the associated interest expense is included in interest expense or is presented as finance costs in the income statement. 2.13 Offsetting financial instruments For financial liabilities measured at FVTPL, the associated interest and fair value changes are included in interest expense. Financial assets and financial 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. 23 SAGICOR FINANCIAL CORPORATION LIMITED 115 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.14 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. 2.14 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 2.21). (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. 24 116 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.14 Policy contracts (continued) 2.14 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. Commissions and premium taxes payable are recognised on the same basis as premiums earned. At the date of the financial statements, commissions and premium taxes 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 individual contract basis and recognised when the reinsurance premium is recorded. (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 2.15. 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. 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 2.15. 25 SAGICOR FINANCIAL CORPORATION LIMITED 117 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.14 Policy contracts (continued) 2.14 Policy contracts (continued) 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. 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 afore-mentioned allowances, are debited to the investment accounts. Interest bearing investment accounts may include provisions for minimum guaranteed returns or returns based on specified investment indices. Allowances and expense charges are in respect of applicable commissions, cost of insurance, administrative expenses and premium taxes. Fund withdrawals may be permitted. Premium revenue is recognised when received and consists of all monies received from the policyholders. Typically, premiums are fixed at the inception of the contract or periodically thereafter, but additional non-recurring premiums may be paid. Policy benefits are recognised on the notification of death, disability or critical illness, on the receipt of a withdrawal request, on the termination or maturity date of the contract, or on the annuity payment date. Reserves for future policy liabilities are recorded as described in note 2.15. Reinsurance contracts assumed by an insurer are accounted for in a similar manner as if the insurer has assumed the risk directly from a policyholder. Reinsurance contracts assumed include blocks of life and annuity policies assumed from third party insurers. In some instances, the Group also administers these policies. (vi) Reinsurance contracts held As noted in sections (i) to (iv) above, an insurer may obtain reinsurance coverage for insurance risks underwritten. The Group cedes insurance premiums and risk in the normal course of business in order to limit the potential for losses arising from its exposures. Reinsurance does not relieve the originating insurer of its liability. Reinsurance contracts held by an insurer are recognised and measured in a similar manner to the originating insurance contracts and in accordance with the contract terms. Reinsurance premium ceded and reinsurance recoveries on claims are offset against premium revenue and policy benefits in the income statement. The benefits to which an insurer is entitled under its reinsurance contracts held are recognised as reinsurance assets or receivables. Reinsurance assets and receivables are assessed for impairment. If there is evidence that the asset or receivable is impaired, the impairment is recorded in the statement of income. The obligations of an insurer 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. 26 118 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.14 Policy contracts (continued) 2.14 Policy contracts (continued) (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 profit and loss (FVTPL) where the insurer is obligated to provide investment returns to the pension scheme in direct proportion to the investment returns on specified blocks of assets. Deposit administration contributions are recorded directly as liabilities. Withdrawals are deducted directly from the liability. The interest or investment return provided is recorded as an interest expense. In addition, the Group may provide pension administration services to the pension schemes. The Group earns fee income for both pension administration and investment services. 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 2.15. 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. 2.15 Actuarial liabilities (a) Life insurance and annuity contracts The determination of actuarial liabilities of long-term insurance contracts has been done using approaches consistent with Canadian standards of practice. 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. 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. 27 SAGICOR FINANCIAL CORPORATION LIMITED 119 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.15 Actuarial liabilities (continued) 2.15 Actuarial liabilities (continued) The improvement of mortality rates is an accepted trend that is occurring in developed and developing countries around the world. All segments within the Group had previously recognized this trend in their reserving assumptions with the exception of the Sagicor Jamaica operating segment. Effective January 1, 2018, Sagicor Jamaica incorporated mortality improvement into its reserve calculations. The foregoing is part of a wider initiative across the Group to harmonize reserving practices across the segments. Net insurance contract liabilities represent the amount which, together with estimated future premiums and net investment income, will be sufficient to pay projected future benefits, policyholder dividends and refunds, taxes (other than income taxes) and expenses on policies in-force net of reinsurance premiums and recoveries. The determination of net insurance liabilities is based on an explicit projection of cash flows using current assumptions plus a margin for adverse deviation for each material cash flow item. Investment returns are projected using the current asset portfolios and projected reinvestment yields. The period used for the projection of cash flows is the policy lifetime for most individual insurance contracts. The Group segments assets to support liabilities by major product segment and geographic market and establishes investment strategies for each liability segment. Projected net cash flows from these assets and the policy liabilities being supported by these assets are combined with projected cash flows from future asset purchases to determine expected rates of return on these assets for future years. Investment strategies are based on the target investment policies for each segment and the reinvestment returns are derived from current and projected market rates for fixed income investments. Investment return assumptions for each asset class make provision for expected future asset credit losses, expected investment management expenses and 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 financial investments, 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 changes in 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 FVOCI. 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 profit and loss 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. 2.16 Presentation of current and non-current assets and liabilities In note 41.5, 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 and 33 are non- current unless otherwise stated in those notes. 28 120 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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 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. Where a minimum funding requirement exists, the Group assesses the obligation, to determine whether the additional contributions would affect the measurement of the defined benefit asset or liability. (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 other comprehensive income and retained earnings or non-controlling interest in the period in which they arise. 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 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. 29 SAGICOR FINANCIAL CORPORATION LIMITED 121 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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 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 service. 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 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. 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. Premium tax rates Barbados Jamaica Trinidad and Tobago Life insurance and non-registered annuities Health insurance 3% - 6% Nil Nil 4% Nil Nil Nil Property and casualty insurance 3% - 5% Nil Nil Nil United States of America 0.75% - 3.5% Premium tax is recognised gross in the statement of income. (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 0.25% 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 0.35% of adjusted assets held at the end of a period. Taxes are accrued monthly. (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. 30 122 SAGICOR FINANCIAL CORPORATION LIMITED . Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.18 Taxes (continued) 2.19 Provisions Income tax rates Barbados Jamaica Trinidad and Tobago United States of America Life insurance and non-registered annuities 5% of gross investment income 25% of profit before tax 15% (deductions granted only in respect of expenses pertaining to long- term business investment income) 21% of net income (i) Current income taxes Registered annuities Other lines of business 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. Nil Nil Nil Nil 30% of net income 25% - 33.33 % of profit before tax 30% of net income Nil 2.20 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. 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. On the declaration by the Company’s directors of common share dividends payable, the total value of the dividend is recorded as an appropriation of retained earnings. (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 relate to the same entity. Deferred tax, related to fair value re-measurement of FVOCI 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. 2.21 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. 31 SAGICOR FINANCIAL CORPORATION LIMITED 123 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.21 Participating accounts (continued) 2.21 Participating accounts (continued) Distributable profits of the closed participating account are distributed to the participating policies in the form of declared bonuses and dividends. Undistributed profits remain in the participating account for the benefit of participating policyholders. The participating account also includes an ancillary fund comprising the required provisions for adverse deviations as determined in the computation of actuarial liabilities of the said policies. Changes in the ancillary fund are not recorded in the participating account, but are borne by the general operations of Sagicor Life Inc. (b) “Open” participating account Sagicor Life Inc also established an open participating account for participating policies it issues after de-mutualisation. The rules of this account require that premiums, benefits, actuarial reserve movements, investment returns, expenses and taxes, attributable to the said policies are recorded in an open participating account. The open participating account was established at de-mutualisation. On February 1, 2005, Sagicor Life Inc amalgamated with Life of Barbados Limited, and participating policies of the latter were transferred to the open participating account. Accordingly, the liabilities of these participating policies and matching assets were transferred to the open participating account. The liabilities transferred included an ancillary fund comprising the provisions for adverse deviations on the transferred policies. Changes in the ancillary fund are not recorded in the participating account, but are borne by the general operations of Sagicor Life Inc. Additional assets to support the profit distribution to shareholders (see below) were also transferred to the account. Distributable profits of the open participating account are shared between participating policies and shareholders in a ratio of 90:10. Profits are distributed to the participating policies in the form of declared bonuses and dividends. Profits which are distributed to shareholders are included in the allocation of Group net income to shareholders. Undistributed profits / (losses) remain in the participating account in equity. (c) Financial statement presentation The assets and liabilities of the participating accounts are included but not presented separately in the financial statements. The revenues, benefits and expenses of the participating accounts are also included but not presented separately in the financial statements. However, the overall surplus of assets held in the participating funds over the associated liabilities is presented in equity as the participating accounts. The overall net income and other comprehensive income that are attributable to the participating funds are disclosed as allocations. The initial allocation of additional assets to the participating funds is recognised in equity as a transfer from retained earnings to the participating accounts. Returns of additional assets from the participating funds are accounted for similarly. 2.22 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. 2.23 Interest income and interest expense Policies under IFRS 9 Interest income (expense) is computed by applying the effective interest rate based to the gross carrying amount of a financial asset (liability), except for financial assets that are purchased, originated or subsequently become credit-impaired. For credit-impaired financial assets, the effective interest rate is applied to the net carrying amount of the financial asset (i.e. after deduction of the loss allowance). Interest includes coupon interest and accrued discount and premium on financial instruments. Dividend income is recorded when declared. 32 124 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.23 Interest income an interest expense (continued) 2.25 Fees and other revenue – year ended December 31, 2017 Policies under IAS 39 Interest income and interest expense 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. 2.24 Revenue from service contracts with customers Revenues from service contracts with customers consist primarily of management and administration fees earned from third party investment funds, pension plans and insurance benefit plans (managed funds or administrative service only (ASO) benefit plans). These service contracts generally impose single performance obligations, each consisting of a series of similar related services to the unitholder or policyholder of each fund or plan. The Group’s performance obligations within these service arrangements are generally satisfied over time as the unitholders and policyholders simultaneously receive and consume contracted benefits over time. The Group also earns revenues for the provision of corporate finance, stockbroking, trust and related services to various customers. Revenue from service contracts with customers is recognised when (or as) the Group satisfies the performance obligation of the contract. For obligations satisfied over time, revenue is recognised monthly or over some other period. For performance obligations satisfied at a point in time, revenue is recognised at that point in time. 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-proportionate basis. Asset management fees related to investment funds are recognised rateably over the period in which the service is provided. Performance linked fees or fee components are recognised when the performance criteria are fulfilled. Other revenue is recognised on an accrual basis when the related service has been provided. 2.26 Hotel revenue Hotel revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of General Consumption Tax or applicable sales tax, returns, rebates and discounts and after eliminating sales within the Group. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. (a) Sales of services Sale of service generated from hotel and other operations are recognised in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. (b) Sale of goods Sale of goods, mainly from gift shops is recognised when products are sold to customers. Sales are usually in cash or by credit card. 33 SAGICOR FINANCIAL CORPORATION LIMITED 125 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.27 Cash flows 2.28 Future accounting developments and reporting changes 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, 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 3 – Definition of a business, effective January 1, 2020 Subject / Comments This amendment revises the definition of a business. According to feedback received by the IASB, application of the current guidance is commonly thought to be too complex, and it results in too many transactions qualifying as business combinations. • • • call deposits, This standard will have no material effect on the Group. other liquid balances with maturities of three months or less from the acquisition date, less bank overdrafts which are repayable on demand. Cash equivalents are subject to an insignificant risk of change in value and excluded restricted cash. ((( IFRS 9 – Financial instruments on prepayment features with negative compensation effective January 1, 2019 Subject / Comments The board has issued a narrow-scope amendment to IFRS 9 to enable companies to measure at amortised cost some prepayable financial assets with negative compensation. The assets affected, that include some loans and debt securities, would otherwise have been measured at fair value through profit or loss (FVTPL). Negative compensation arises where the contractual terms permit the borrower to repay the instrument before its contractual maturity, but the prepayment amount could be less than unpaid amounts of principal and interest. However, to qualify for amortised cost measurement, negative compensation must be reasonable compensation for early termination of the contract. This standard will have no material effect on the Group. 34 126 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.28 Future accounting developments and reporting changes (continued) 2.28 Future accounting developments and reporting changes (continued) IFRS 16 – Leases, effective January 1, 2019 IFRS 17 – Insurance Contracts, effective January 1, 2022 Subject / Comments Subject / Comments IFRS 16 will affect primarily the accounting by lessees and will result in the recognition of almost all leases on balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. An optional exemption exists for short-term and low-value leases. The income statement will also be affected because the total expense is higher typically in the earlier years of a lease and lower in later years. Additionally, operating expense will be replaced with interest and depreciation, so key metrics like Earnings before Interest, Tax, Depreciation and Amortization will change. Operating cash flows will be higher as cash payments for the principal portion of the lease liability are classified within financing activities. Only the part of the payments that reflects interest can continue to be presented as operating cash flows. The accounting by lessors will not significantly change. Some differences may arise as a result of the new guidance on the definition of a lease. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group has commenced the assessment of this standard and the impact will be disclosed in 2019. IFRS 17 was issued in May 2017 as replacement for IFRS 4 - Insurance Contracts. It requires a current measurement model where estimates are re-measured each reporting period. Contracts are measured using the building blocks of: • • • discounted probability-weighted cash flows an explicit risk adjustment, and a contractual service margin (“CSM”) representing the unearned profit of the contract which is recognised as revenue over the coverage period. The standard allows a choice between recognising changes in discount rates either in the income statement or directly in other comprehensive income. The choice is likely to reflect how insurers account for their financial assets under IFRS 9. An optional, simplified premium allocation approach is permitted for the liability for the remaining coverage for short duration contracts, which are often written by non-life insurers. There is a modification of the general measurement model called the ‘variable fee approach’ for certain contracts written by life insurers where policyholders share in the returns from underlying items. When applying the variable fee approach the entity’s share of the fair value changes of the underlying items is included in the contractual service margin. The results of insurers using this model are therefore likely to be less volatile than under the general model. The new rules will affect the financial statements and key performance indicators of all entities that issue insurance contracts or investment contracts with discretionary participation features. The Group has commenced the review of this standard. ((( 35 ((( SAGICOR FINANCIAL CORPORATION LIMITED 127 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.28 Future accounting developments and reporting changes (continued) 2.28 Future accounting developments and reporting changes (continued) Interpretation 23 – Uncertainty over income tax treatments, effective January 1, 2019 IAS 19 – Employee Benefits: amendments, effective January 1, 2019 Subject / Comments This interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 – Income Taxes. The interpretation specifically addresses: • • whether an entity considers uncertain tax treatments separately; the assumptions an entity makes about the examination of tax treatments by taxation authorities; how an entity determines taxable income, tax bases, unused tax losses, unused tax credits and tax rates; how an entity considers changes in facts and circumstances. • • An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that provides a more likely resolution of the uncertainty should be followed. This interpretation will have no material effect on the Group. IAS 1 and IAS 8 – The definition of material, effective January 1, 2020 Subject / Comments These amendments to IAS 1, ‘Presentation of financial statements’, and IAS 8, ‘Accounting policies, changes in accounting estimates and errors’, and consequential amendments to other IFRSs: i) use a consistent definition of materiality throughout IFRSs and the Conceptual Framework for Financial Reporting; ii) clarify the explanation of the definition of material; and iii) incorporate some of the guidance in IAS 1 about immaterial information. The Group is yet to assess the impact of this standard. Subject / Comments The amendments to IAS 19 - Employee Benefits address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to: • Determine current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event • Determine net interest for the remainder of the period after the plan amendment, curtailment or settlement using: the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event; and the discount rate used to remeasure that net defined benefit liability (asset) The amendments clarify that an entity first determines any past service cost, or a gain or loss on settlement, without considering the effect of the asset ceiling. This amount is recognised in profit or loss. An entity then determines the effect of the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in the net interest, is recognised in other comprehensive income. This clarification provides that entities might have to recognise a past service cost, or a gain or loss on settlement, that reduces a surplus that was not recognised before. Changes in the effect of the asset ceiling are not netted with such amounts. This standard change will have no material effect on the Group as we do not expect any significant change to our pension plans. 36 128 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 2.28 Future accounting developments and reporting changes (continued) IAS 28 – Investments in Associates and Joint Ventures: amendments, effective January 1, 2019 Subject / Comments ((( The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. In applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28. Entities must apply the amendments retrospectively, with certain exceptions. The Group does not expect the adoption of this standard to have any material impact. ((( Annual Improvements to IFRS, effective January 1, 2019 Standard Subject of amendment IFRS 3 – Business Combinations Previously held Interests in a joint operation IFRS 11 – Joint Arrangements Previously held Interests in a joint operation IAS 12 – Income Taxes Income tax consequences of payments on financial instruments classified as equity IAS 23 – Borrowing Costs Borrowing costs eligible for capitalisation The Group does not expect the adoption of these improvements to have any material impact. 37 SAGICOR FINANCIAL CORPORATION LIMITED 129 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 3.1 Impairment of financial assets – policies under IFRS 9 (continued) 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 – policies under IFRS 9 In determining ECL (defined in note 2.9(d)), management is required to exercise judgement in defining what is considered a significant increase in credit risk and in making assumptions and estimates to incorporate relevant information about past events, current conditions and forecasts of economic conditions. Further information about the judgements involved is included in note 2.9 under sections 'Measurement' and 'Forward-looking information'. (a) Establishing staging for debt securities and deposits The Group’s internal credit rating model is a 10-point scale which allows for distinctions in risk characteristics and is referenced to the rating scale of international credit rating agencies. The scale is set out in the following table: Category Sagicor Risk Rating Investment grade t l u a f e d - n o N Non- investment grade Watch Default 1 2 3 4 5 6 7 8 9 Classification S&P Moody’s Fitch AM Best Minimal risk AAA, AA Aaa, Aa AAA, AA aaa, aa Low risk A Moderate risk BBB Acceptable risk BB Average risk B A Baa Ba B A 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 The Group uses its internal credit rating model to determine which of the three stages an asset is to be categorized for the purposes of ECL. Once the asset has experienced a significant increase in credit risk the investment will move from Stage 1 to Stage 2. Sagicor has assumed that the credit risk of a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial asset that is investment grade or Sagicor risk rating of 1-3 is considered low credit risk. 38 130 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 3.1 Impairment of financial assets – policies under IFRS 9 (continued) 3.1 Impairment of financial assets – policies under IFRS 9 (continued) Stage 1 investments are rated (i) investment grade, or (ii) below investment grade at origination and have not been downgraded more than 2 notches since origination. Stage 2 investments are assets which (i) have been downgraded from investment grade to below investment grade, or (ii) are rated below investment grade at origination and have been downgraded more than 2 notches since origination. Stage 3 investments are assets in default. (b) Establishing staging for other assets measured at amortised cost, lease receivables, loan commitments and financial guarantee contracts (d) Impairment of Government of Barbados debt securities As further disclosed in note 41.3 (f) during the year, the Group participated in a debt exchange following the implementation of a debt restructuring programme by the Government of Barbados. The replacement debt securities are classified as purchased or originated credit-impaired assets (POCI) and have been valued using an internally generated yield curve derived from the Central Bank of Barbados base-line yield curve to which management has applied a risk premium. If the risk premium at all durations was increased / decreased by 15 / 25 basis points, the value of the POCI debt instruments on exchange would decrease / increase by 2% / 4%. Exposures are considered to have resulted in a significant increase in credit risk and are moved to stage 2 when: 3.2 Impairment/Fair Value of financial assets – policies under IAS 39 Qualitative test • accounts that meet the portfolio’s ‘high risk’ criteria and are subject to closer credit monitoring. Backstop criteria • accounts that are 30 calendar days or more past due. The 30 days past due criteria is a backstop rather than a primary driver of moving exposures into stage 2. (c) Forward looking information When management determines the macro-economic factors that impact the portfolios of financial assets, they first determine all readily available information within the relevant market. Portfolios of financial assets are segregated based on product type, historical performance and homogenous country exposures. There is often limited timely macro-economic data for Barbados, Eastern Caribbean, Trinidad and Jamaica. Management assesses data sources from local government, ((( International Monetary Fund and other reliable data sources. A regression analysis is performed to determine which factors are most closely correlated with the credit losses for each portfolio. Where projections are available, these are used to look into the future up to three years and subsequently the expected performance is then used for the remaining life of the product. These projections are re-assessed on a quarterly basis. An available for sale debt security, loan or 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. The Sagicor Group invests in a number of sovereign financial instruments that are not quoted in an active market, these assets are classified as loans and receivables and are carried at amortised cost less provision for impairment in the financial statements. At December 31, 2017 there were significant holdings in instruments of Government of Jamaica, Government of Trinidad and Tobago and Government of Barbados carried at amortised cost. The Group assessed these instruments for impairment and concluded that based on all information available, that no impairment existed at December 31, 2017 in accordance with the accounting policies of the Group. ((( 39 SAGICOR FINANCIAL CORPORATION LIMITED 131 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 3.3 Fair value of securities not quoted in an active market The fair value of securities not quoted in an active market may be determined using reputable pricing sources (such as pricing agencies), indicative prices from bond/debt market makers or other valuation techniques. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding. The Group exercises judgement on the quality of pricing sources used. Where no market data is available, the Group may value positions using its own models, which are usually based on valuation methods and techniques generally recognised as standard within the industry. The inputs into these models are primarily discounted cash flows. The models used to determine fair values are periodically reviewed by experienced personnel. The models used for debt securities are based on net present value of estimated future cash flows, adjusted as appropriate for liquidity, and credit and market risk factors. 3.4 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. 3.5 Impairment of intangible assets (a) Goodwill The assessment of goodwill impairment involves the determination of the value of the cash generating business units to which the goodwill has been allocated. Determination of the 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 the value in use methodology for testing goodwill impairment. For the Sagicor Jamaica operating segment, the Group uses the fair value less cost to sell methodology, and for Sagicor General Insurance Inc the value in use methodology. 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. 40 132 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 3.6 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 to which margins for adverse deviations are added. 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 and the distribution of the reserve by policy, and other individual components in the actuarial liabilities. Further details of the inputs used are set out in note 43. (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. 3.6 Valuation of actuarial liabilities (continued) (b) Best estimate reserve assumptions & provisions for adverse deviations (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 universal life and 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 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. 3.7 Investment in associate As at July 1, 2018 Sagicor Jamaica Group has a shareholding in Playa of 15%. From an accounting perspective, IAS 28 (Investments in Associate and Joint Ventures) paragraph 5, 6 and 8 guidance was considered as follows: Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case. If the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude an entity from having significant influence. The existence of significant influence by an entity is usually evidenced in one or more of the following ways: • • representation on the board of directors or equivalent governing body of the investee; participation in the policy-making process, including participation in decisions about dividends or other distributions; material transactions between the entity and the investee; interchange of managerial personnel; or provision of essential technical information • • • 41 SAGICOR FINANCIAL CORPORATION LIMITED 133 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 3.7 Investment in associate (continued) In assessing whether potential voting rights contribute to significant influence, the entity examines all facts and circumstances (including the terms of exercise of the potential voting rights and any other contractual arrangements whether considered individually or in combination) that affect potential rights, except the intentions of management and the financial ability to exercise or convert those potential rights. Management has two representatives out of twelve on the Board who are also members of two strategic Board committees. Management has concluded, given its participation in the policy-making decisions, significant involvement in, and influence over decision making of Playa, this allows them to clearly demonstrate influence over Playa’s financial and operating results even though Sagicor owns less than 20% of Playa’s shares - rebuttable presumption. Management has concluded after taking the above into consideration that it has significant influence over Playa through its holding and as such is of the view that its strategic investment in Playa should be treated as an investment in associate in accordance with IAS 28. An impairment review of Playa was performed at the end of the year as its value based on quoted market prices is lower that its carrying value. An impairment review involves estimating the recoverable amount of an asset and comparing it with its carrying value. The recoverable amount is the higher of the fair value less cost to sell (FVLCTS) and the value in use (VIU). Value in use is determined using discounted cash flow analysis and the FVLCTS was based on a market approach. The FVLCTS resulted in a higher value than VIU. The Group uses its judgement to make assumptions that are mainly based on market conditions existing at the end of each reporting period such as discount rates, EBITDA multiples, projected cash flows and other relevant inputs. The valuation conclusions under the FVLCTS approach were considered within the range derived by the discounted cash flow analysis under the VIU approach. 42 134 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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. Sagicor Life Aruba NV Capital Life Insurance Company Bahamas Limited Sagicor Life Segment Companies Principal Activities Sagicor Life Inc 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% Life insurance The Bahamas 100% 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 This group comprises Sagicor Life Inc, its branches and associates, and certain of its subsidiaries which conduct life, health, annuity insurance business, pension administration services and asset management in Barbados, Trinidad & Tobago, Eastern Caribbean, Dutch Caribbean, Bahamas and Central America. The companies comprising this segment are set out in the following table. Sagicor Panamá, SA Life and health insurance Panamá 100% Nationwide Insurance Company Limited Associates RGM Limited Life insurance Trinidad & Tobago 100% Property ownership and management Trinidad & Tobago 33% FamGuard Corporation Limited Investment holding company The Bahamas 20% Principal operating company: Family Guardian Insurance Company Limited Life and health insurance and annuities The Bahamas 20% Primo Holding Limited Property investment Barbados 38% 43 SAGICOR FINANCIAL CORPORATION LIMITED 135 . Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4 SEGMENTS (continued) (b) Sagicor Jamaica This segment comprises the Sagicor Jamaica Group of companies, which conduct life, health, annuity, property and casualty insurance business, pension administration services, banking and financial services, hospitality and real estate investment services in Jamaica, Cayman Islands and Costa Rica. 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% Sagicor Life Jamaica Limited Life and health insurance and annuities Sagicor Life of the Cayman Islands Limited Sagicor Pooled Investment Funds Limited Life insurance Jamaica 49.11% The Cayman Islands 49.11% Pension fund management Jamaica 49.11% Employee Benefits Administrator Limited Sagicor Re Insurance Limited Pension administration services Property and casualty insurance Jamaica 49.11% The Cayman Islands 49.11% Sagicor Insurance Brokers Limited Insurance brokerage Jamaica 49.11% Sagicor International Administrators Limited Group insurance administration Jamaica 49.11% Sagicor Insurance Managers Limited Captive insurance management services The Cayman Islands 49.11% 44 136 4 SEGMENTS (continued) Sagicor Jamaica Segment Companies (continued) Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor Property Services Limited Property management Jamaica 49.11% Sagicor Investments Jamaica Limited Investment banking Jamaica 49.11% Sagicor Bank Jamaica Limited Commercial banking Jamaica 49.11% Sagicor Costa Rica SCR, S.A. Life insurance Costa Rica 24.56% LOJ Holdings Limited Insurance holding company Jamaica 100% Sagicor Securities Jamaica Limited Securities trading Jamaica 49.11% Travel Cash Jamaica Limited (note 37) Microfinance Jamaica 25.05% Sagicor Real Estate X-Fund Limited (note 37) Investment in real estate activities X Fund Properties Limited (note 37) Hospitality and real estate investment St. Lucia 14.39% Jamaica 14.39% X Fund Properties LLC (note 37) Hospitality USA Jamziv Jamaica Limited (1) Holding Company Jamaica 14.39% 8.75% Associates Playa Hotel & Resorts N.V. (2) Hospitality Netherlands 1.31% (1) Control of Sagicor Group Jamaica Limited is established through the following: • • • The Group’s effective shareholder’s interest gives it the power to appoint the directors of the company and thereby direct relevant activities. The Group is exposed to the variable returns from its effective shareholder's interest. The Group has the ability to use the power to affect the amount of investor's returns This company became a subsidiary of Sagicor Real Estate X Fund Limited on July 1, 2018 and a subsidiary of the Group on October 1, 2018. The company became an associated company of Sagicor Real Estate X Fund Limited on July 1, 2018 and an associate of the Group on October 1, 2018. (1) (2) SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4 SEGMENTS (continued) (c) Sagicor Life USA 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% Sage Distribution, LLC Life insurance and annuities USA - Delaware 100% Sage Partners, LLC Life insurance and annuities USA - Delaware 100% Sagicor Benfell, LLC Life insurance and annuities USA - Delaware 90% Sagicor Financial Partners, LLC Life insurance and annuities USA - Delaware 51% Head office and other Group Companies Principal Activities Country of Incorporation Effective Shareholders’ Interest Sagicor Financial Corporation Limited Group parent company Bermuda 100% Sagicor General Insurance Inc (1) Property and casualty insurance Loan and lease financing, and deposit taking Barbados St. Lucia 98% 70% Investment management Trinidad & Tobago 100% Investment management Barbados Investment management Barbados 100% 100% Sagicor Finance Inc Sagicor Asset Management (T&T) Limited Sagicor Asset Management Inc. Sagicor Asset Management (Eastern Caribbean) Limited Barbados Farms Limited Sagicor Funds Incorporated Globe Finance Inc (2) Farming and real estate development Mutual fund holding company Loan and lease financing, and deposit taking Barbados 77% Barbados 100% Barbados Barbados 51% 73% 100% 100% The Mutual Financial Services Inc Financial services holding company Sagicor Finance Limited Group financing vehicle The Cayman Islands Sagicor Finance (2015) Limited Group financing vehicle The Cayman Islands 45 SAGICOR FINANCIAL CORPORATION LIMITED (1) (2) On November 16, 2018, the Group entered into an agreement to purchase an additional 45% of the issued and outstanding common shares of Sagicor General Insurance Inc. Sold on September 4, 2018 (see note 37). 137 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.1 Statement of income by segment 2018 Net premium revenue Net gain/(losses) on derecognition of financial assets measured at amortised cost Gains reclassified to income from accumulated OCI Interest income Other investment income Fees and other revenues Inter-segment revenues Total revenue Net policy benefits Net change in actuarial liabilities Interest expense Administrative expenses Commissions and premium and asset taxes Finance costs Credit impairment losses Depreciation and amortisation Inter-segment expenses Total benefits and expenses Gain arising on business combinations, acquisitions and divestitures Segment income / (loss) before taxes Income taxes Segment net income / (loss) from continuing operations Net income/(loss) attributable to shareholders - continuing operations Total comprehensive income/(loss) attributable to shareholders - continuing operations Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other Adjustments Total 320,517 (279) 430 79,075 1,092 7,925 15,675 424,435 217,732 (62,053) 11,152 73,052 43,140 - 82,266 6,811 2,863 (1) 374,963 6,876 56,348 (9,560) 46,788 39,567 33,592 309,729 10,279 8,436 150,643 18,554 97,985 - 595,626 198,171 13,941 33,820 141,476 49,941 2,399 10,245 11,266 2,226 463,485 11,833 143,974 (33,237) 110,737 55,742 39,945 389,974 33,821 (7) 774 55,263 (15,805) (8,894) - 421,305 103,710 222,537 5,514 32,783 29,167 181 571 3,024 681 (1) 398,168 - 23,137 (4,859) 18,278 18,278 6,969 441 (14) 7,083 214 17,504 94,129 153,178 18,767 - 2,035 53,698 9,024 (5) 2,437 3,176 15,090 104,222 (471) 48,485 (3,155) 45,330 14,310 11,034 - - (287) 287 (441) (38) (109,804) (110,283) - - - 2,062 - 33,936 - - (20,860) 15,138 - (125,421) 109 (125,312) (91,376) (88,623) 1,054,041 10,434 9,339 292,351 3,614 114,482 - 1,484,261 538,380 174,425 52,521 303,071 131,272 36,511 95,519 24,277 - 1,355,976 18,238 146,523 (50,702) 95,821 36,521 2,917 (1) During 2015, Sagicor Life USA entered into a reinsurance agreement with Sagicor Life; included in the inter-segment expenses is $1,867 relating to this transaction. 46 138 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.1 Statement of income by segment (continued) 2017 restated Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other Adjustments Total Net premium revenue Interest income Other investment income Fees and other revenues Inter-segment revenues Total revenue 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 Total benefits and expenses Gains arising on business combinations and acquisitions Segment income / (loss) before taxes Income taxes Segment net income / (loss) from continuing operations Net income/(loss) attributable to shareholders - continuing operations Total comprehensive income/(loss) attributable to shareholders - continuing operations 308,602 77,450 10,350 11,895 12,931 421,228 197,716 11,908 12,217 68,113 45,613 - 6,437 5,647(1) 347,651 - 73,577 (9,868) 63,709 64,753 59,864 320,067 159,462 47,459 62,580 - 589,568 171,038 82,334 37,501 127,855 42,967 1,089 9,219 1,858 473,861 2,261 117,968 (23,033) 94,935 46,625 76,371 86,719 48,842 26,160 (2,539) - 159,182 87,606 26,754 2,144 28,298 15,071 156 2,491 (3,031) (1) 159,489 - (307) 13,600 13,293 13,293 21,355 30,244 8,987 669 21,836 71,150 132,886 27,125 - 3,087 41,320 8,667 (251) 3,724 12,582 96,254 - 36,632 (12) 36,620 6,683 - - (143) (32) (84,081) (84,256) - - - 1,841 - 33,752 - (17,056) 18,537 - (102,793) - (102,793) (69,041) 745,632 294,741 84,495 93,740 - 1,218,608 483,485 120,996 54,949 267,427 112,318 34,746 21,871 - 1,095,792 2,261 125,077 (19,313) 105,764 62,313 6,564 (67,718) 96,436 (1) During 2015, Sagicor Life USA entered into a reinsurance agreement with Sagicor Life; included in the inter-segment expenses is $4,700 relating to this transaction. 47 SAGICOR FINANCIAL CORPORATION LIMITED 139 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.1 Statement of income by segment (continued) The principal non-controlling interests in the Group are in respect of Sagicor Group Jamaica Limited (Sagicor Jamaica). Out of the total net income attributable to non-controlling interests of $52,078 (2017 - $44,495), Sagicor Jamaica contributed $54,993 (2017 - $48,310). 4.2 Variations in segment income 4.2 Variations in segment income (continued) (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 recognized directly in the statement of income. Similarly, on sale if the consideration received exceeds the carrying value of the business or portfolio a gain is recognised in the statement of income. As acquisitions and disposals occur infrequently and with no consistent trend, the gain or loss recorded in the income statement may vary significantly from year to year. 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. (iv) Foreign exchange gains and losses Movements in foreign exchange rates may generate significant exchange gains or losses when the foreign currency denominated monetary assets and liabilities are re-translated to the relevant functional currency at the date of the financial statements. (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. (i) Credit loss allowances for impairment of financial investments The application of determining credit loss allowances in accordance with IFRS 9, brings additional judgement in the determination of credit losses. The determination of ECL involves establishing various assumptions based on economic conditions and historical trends. Changes in assumptions will impact the ECL allowances recorded in the income statement. Significant changes in borrowers classified as stage 3 (IAS 39 – borrowers exhibiting evidence of impairment) will be triggered by changes affecting individual borrowers or groups of borrowers, leading to significant variations in losses recorded in the income statement. (ii) Fair value gains / (losses) of financial investments Significant gains and losses may be triggered by changes in market prices of assets carried at fair value. For FVOCI (available for sale) investments, management may be able to time the disposal of such investments and consequently, impact the quantum of the realised gain or loss recognised in the statement of income. For FVTPL (fair value through income) investments, management may also able to time the disposal of such investments. However, since the majority of these assets fund unit linked liabilities, the impact to Group net income is mitigated by any increased return due to the holders of the unit linked liabilities. 48 140 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.2 Variations in segment income (continued) 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 Inc Sagicor Jamaica Sagicor Life USA Head Office and Other Total Sagicor Life Inc Sagicor Jamaica Sagicor Life USA Head Office and Other Total 2018 2017 restated Investment income measured on an IFRS 9 basis: Credit impairment losses (82,266) (10,245) (571) (2,437) (95,519) 454 8,436 774 (325) 9,339 Gain / loss reclassified to income for FVOCI financial investments Investment income measured on an IAS 39 basis: Impairment of financial investments Gain / loss reclassified to income for available for sale financial investments Foreign exchange gains / (losses) Gains on acquisitions/ divestitures Decrease / (increase) in actuarial liabilities from changes in assumptions - - - - 56 (8,251) - - - 6,116 6,639 (403) - - - - (2,129) 6,876 (1,384) 11,833 - - - - - - - - 476 (471) (3,037) 18,238 514 - (4,864) 2,261 - - 91,635 23,088 40,828 - 155,551 23,602 28,421 (11,120) - - - - (166) (8,361) (93) 172 - - 12,259 (4,178) 2,261 40,903 14,570 31,728 41,031 (2,757) 84,572 30,288 24,206 (11,523) (87) 42,884 49 SAGICOR FINANCIAL CORPORATION LIMITED 141 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.3 Other comprehensive income 4.3 Other comprehensive income (continued) Variations in other comprehensive income may arise also from non-recurring or other significant factors. The most common are as follows: (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. (i) Unrealised investment gains and losses Fair value investment gains and losses are recognised on the revaluation of debt and equity securities classified as FVOCI (available for sale). Therefore, significant gains and losses may be triggered by changes in market prices. (iv) Defined benefit plans’ gains and losses Experience adjustments and changes in actuarial assumptions gives rise to gains or losses on defined benefit plans. (ii) Changes in actuarial liabilities Changes in unrealised investment gains identified in (i) above may also generate significant, but off- setting, changes in actuarial liabilities as a result of the use of asset liability matching in the liability estimation process. The table below summarises by segment the individual line items within other comprehensive income from continuing operations which are impacted by the foregoing factors. 2018 Unrealised investment losses Changes in actuarial liabilities Retranslation of foreign currency operations Gains / (losses) on defined benefit plans 2017 restated Unrealised investment gains Changes in actuarial liabilities Retranslation of foreign currency operations Gains on defined benefit plans 50 142 Variations in other comprehensive income by segment Sagicor Life Sagicor Jamaica Sagicor Life USA Head Office and other Adjustments Total (12,163) 8,693 (585) (2,948) 6,873 (4,122) (444) 99 (36,316) 8,215 (24,170) 2,786 26,143 5,135 11,604 22,249 (33,133) 24,706 - - 22,147 (14,488) - - (1,252) - (873) (2,523) 194 - (1,139) 1,566 - - 443 - 2,543 - (101) - (82,864) 41,614 (25,185) (2,685) 57,900 (13,475) 9,920 23,914 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.4 Statement of financial position by segment 2018 Financial investments Other external assets Assets of discontinued operation Inter-segment assets Total assets Policy liabilities Other external liabilities Inter-segment liabilities Total liabilities Net assets 2017 restated Financial investments Other external assets Assets of discontinued operation Inter-segment assets Total assets Policy liabilities Other external liabilities Inter-segment liabilities Total liabilities Net assets Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other Adjustments Total 1,418,031 324,345 - 266,094 2,008,470 1,297,308 160,824 62,229 1,520,361 488,109 1,386,182 351,871 - 214,767 1,952,820 1,296,525 89,643 27,285 1,413,453 539,367 2,344,113 745,357 - 14,976 3,104,446 753,793 1,526,230 5,617 2,285,640 818,806 2,291,191 531,671 - 13,347 2,836,209 757,480 1,506,669 4,098 2,268,247 1,499,927 789,294 - 3,861 2,293,082 1,602,601 373,901 70,085 2,046,587 85,592 163,419 17,239 109,595 375,845 70,629 466,570 256,595 793,794 246,495 (417,949) 1,123,623 856,271 - 2,505 1,982,399 1,498,250 194,836 51,587 1,744,673 152,245 182,468 10,110 62,101 406,924 66,612 538,394 209,750 814,756 - (61,893) - (394,526) (456,419) (61,893) - (394,526) (456,419) - - (70,990) - (292,720) (363,710) (70,990) - (292,720) (363,710) 5,347,663 1,960,522 17,239 - 7,325,424 3,662,438 2,527,525 - 6,189,963 1,135,461 4,953,241 1,851,291 10,110 - 6,814,642 3,547,877 2,329,542 - 5,877,419 567,962 237,726 (407,832) - 937,223 51 SAGICOR FINANCIAL CORPORATION LIMITED 143 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 $530,514 (2017 restated - $311,766), Sagicor Jamaica contributed $515,260 (2017 restated - $283,869). 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: The Group operates in certain geographical areas which are determined by the location of the subsidiary or branch initiating the business. 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. External revenue Non-current assets 2018 2017 2018 2017 169,881 569,284 168,967 155,327 420,802 169,135 558,645 173,027 158,759 159,042 181,163 406,327 65,927 26,197 9,612 188,005 133,275 65,559 28,465 10,009 1,484,261 1,218,608 689,226 425,313 Sagicor Life Sagicor Jamaica Sagicor Life USA Head office and other 4.6 Products and services 2018 2017 7,858 208,072 2,571 1,283 9,822 17,297 3,175 1,649 219,784 31,943 Barbados Jamaica Trinidad & Tobago Other Caribbean USA Total external revenues relating to the Group’s products and services are summarised as follows: 2018 2017 Life, health and annuity insurance contracts issued to individuals 940,107 678,849 Life, health and annuity insurance and pension administration contracts issued to groups Property and casualty insurance 283,983 307,046 45,647 42,026 Banking, investment management and other financial services 179,639 162,497 Farming and unallocated revenues 34,886 28,190 1,484,261 1,218,608 52 144 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 4.8 Revenues from service contracts with customers 5 INVESTMENT PROPERTY The following table discloses service contract revenues from customers by reportable segment. The movement in investment property for the year is as follows: Year ended December 31, 2018 Sagicor Life Sagicor Jamaica Sagicor USA Head office and other companies Service contract revenues originated - at a point in time - over time Total - 42,082 219 - 7,578 36,839 - (13) 7,578 78,921 219 (13) 42,301 44,404 86,705 Balance, beginning of year Additions at cost Amounts assumed on acquisition (note 37) Transfer from real estate developed for resale (note 12) Disposals Change in fair values Effects of exchange rate changes Balance, end of year 2018 2017 80,816 80,662 50 16,444 (125) (2,613) (1,090) 12 - - - - 74 80 93,494 80,816 Investment property includes $25,597 (2017 - $9,971) which represents the Group’s proportionate interest in joint operations summarised in the following table. Country Description of property Barbados Freehold lands Freehold office buildings 25% -33% Percentage ownership 50% Trinidad & Tobago Freehold office building Jamaica Hotel 60% 18.11% 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. 53 SAGICOR FINANCIAL CORPORATION LIMITED 145 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 6 ASSOCIATES AND JOINT VENTURES 6.1 Interest in Associates and Joint Ventures Name of Entity Country of Incorporation % of ownership interest RGM Limited FamGuard Corporation Limited (1) Primo Holding Limited Sagicor Costa Rica SCR, S.A. Sagicor Real Estate X-Fund Limited (2)(3) Playa Hotels and Resort N.V. Trinidad & Tobago Bahamas Barbados Costa Rica St. Lucia United States 2018 33% 20% 38% 50% - 15% 2017 33% 20% 38% 50% 29% - Nature of relationship Measurement Method Associate Associate Associate Equity Method Equity Method Equity Method Joint Venture Equity Method Associate Associate Equity Method Equity Method Carrying Amount 2018 23,497 15,332 324 2,596 - 194,383 236,132 2017 22,348 15,088 330 2,860 56,597 - 97,223 (1) (2) (3) FamGuard Corporation Limited is listed on the Bahamas International Securities Exchange. The proportionate share of market value calculated on the basis of the year-end closing rate of $6.30 per share was $12,600 (2017 – $12,000). On October 1, 2018, Sagicor Group Jamaica obtained control over Sagicor X Fund, which resulted in the accounting treatment changing from investment in associate to a subsidiary as required by IFRS 3. Consequently, the results of Sagicor X Fund have been consolidated in these financial statements. The proportionate share of market value calculated on the basis of the year-end closing rate was $78,895 as at December 31, 2017. Sagicor X Fund controls 15.328% of the 130,478,993 shares issued by Playa, through its subsidiary company, Jamziv Jamaica Limited. Based on Sagicor X Fund’s levels of investment in, and significant influence over, Playa, Sagicor X Fund is accounting for it’s investment in Playa as an associated company from the date of acquisition as required by IAS 28. There are no contingent liabilities relating to the Group’s interest in the associated company. The proportionate share of market value calculated based on quoted prices on the National Association of Securities Dealers Automated Quotation (NASDAQ) was $143,129 (2017 - $Nil). 6.2 Commitments Commitments at the year-end if called are $969 (2017 –$374). 54 146 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 6.3 Summarised Financial Information RGM Limited FamGuard Corporation Limited Primo Holding Limited Sagicor Costa Rica SCR, S.A. Sagicor Real Estate X-Fund Limited 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Playa Hotels and Resort N.V. 2018 2017 ASSETS Financial investments Cash resources Other investments and assets Total assets - 4,686 125,992 - 4,077 126,423 130,678 130,500 LIABILITIES Policy liabilities Other liabilities Total liabilities - 60,183 60,183 - 63,457 63,457 297,970 8,091 62,817 368,878 232,328 13,206 245,534 283,967 15,402 62,678 362,047 225,334 13,216 238,550 Net Assets 70,495 67,043 123,344 123,497 - - 1,000 1,000 - 236 236 764 - - 1,000 1,000 - 219 219 781 10,372 1,415 13,810 25,597 11,747 8,656 20,403 8,581 3,612 11,357 23,550 1,067 16,761 17,828 5,194 5,722 - - - - - - - - 129,115 7,756 241,075 - 115,810 2,028,835 377,946 2,144,645 - 195,739 - 1,289,271 195,739 1,289,271 182,207 855,374 - - - - - - - - 55 SAGICOR FINANCIAL CORPORATION LIMITED 147 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 6.3 Summarised Financial Information (continued) Investment, beginning of year Additions Transfers/disposals Dividends received Share of income/(loss) Share of amortisation or impairment of intangible assets which were identified on acquisition Share of income taxes Share of other comprehensive income/(loss) Disposal of interest Effects of exchange rate changes RGM Limited FamGuard Corporation Limited Primo Holding Limited 2018 2017 22,348 - - - 1,591 22,346 - - (1,281) 1,531 - (375) - - (67) - (191) - - (57) 2018 15,088 - - (600) 1,047 (10) - (193) - - 2017 2018 2017 13,700 - - (480) 1,683 (72) - 257 - - 330 - - - (6) - - - - - 355 - - - (25) - - - - - Sagicor Costa Rica SCR, S.A. 2018 2017 Sagicor Real Estate X-Fund Limited 2018 2017 Playa Hotels and Resort N.V. 2018 2017 2,860 146 - - 140 3,107 152 - - (76) 56,597 - - - 1,609 47,785 6,756 (6,221) (800) 6,736 - 200,853 - - (2,236) - - - - - - - - - - (485) (400) 3,455 828 6,118 - (65) - 77 (59,914) (1,747) - 1,513 - (10,352) 194,383 - - - - - - - - - - - Investment, end of year 23,497 22,348 15,332 15,088 324 330 2,596 2,860 - 56,597 56 148 Sagicor Financial Corporation Limited SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 6.3 Summarised Financial Information (continued) RGM Limited FamGuard Corporation Limited Primo Holding Limited 2018 2017 2018 2017 2018 2017 Sagicor Costa Rica SCR, S.A. 2018 2017 Sagicor Real Estate X-Fund Limited 2018 2017 Playa Hotels and Resort N.V. 2018 2017 Summarised statement of comprehensive income REVENUE Net premium revenue Net investment and other income Total revenue BENEFITS AND EXPENSES Benefits Expenses Total benefits and expenses INCOME BEFORE TAXES Income taxes NET INCOME FOR THE PERIOD - 26,823 26,823 - 24,768 24,768 114,537 17,929 92,705 23,331 132,466 116,036 - 21,507 21,507 5,316 (1,126) 4,190 - 19,663 19,663 5,105 (572) 4,533 83,532 40,884 124,416 71,701 36,092 107,793 8,050 - 8,050 - 8,050 8,243 - 8,243 1,413 9,656 - - - - 17 17 (17) - (17) - (17) - - - - 66 66 (66) - (66) - (66) 12,444 12,735 1,231 13,675 1,029 13,764 - 64,081 64,081 - - 101,547 619,725 101,547 619,725 8,266 4,944 9,118 4,269 13,210 13,387 7,628 49,895 57,523 - 62,232 77,986 77,986 526,611 588,843 465 (185) 280 377 (529) (152) 6,558 (1,817) 4,741 23,561 (2,087) 21,474 30,882 (12,197) 18,685 (1,096) (816) (632) (784) 17,147 21,888 2,824 24,298 41,074 59,759 Other comprehensive income Total comprehensive income - - 4,190 4,533 Dividends received from associates and joint ventures - 1,281 600 480 - - - - - 800 - 57 SAGICOR FINANCIAL CORPORATION LIMITED - - - - - - - - - - - - 149 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 7 PROPERTY, PLANT AND EQUIPMENT 2018 Owner-occupied property Lands Land & buildings Office furnishings, equipment & vehicles Operating lease vehicles & equipment Net book value, beginning of year 35,232 Additions at cost Additions arising from acquisitions Transfer to intangible assets (note 8) Other transfers Transfers to real estate developed or held for sale (note 12) Disposals and divestures Change in fair values Depreciation charge Effects of exchange rate changes - - - - - - - - - 78,465 2,516 103,183 - - - (9,286) (226) (1,879) (4,402) Net book value, end of year 35,232 168,371 46,297 11,146 16,773 (3,527) (61) - (364) - (11,260) (1,076) 57,928 Total 165,560 13,941 119,956 (3,527) (61) - 5,566 279 - - - - 37,185 - - - - - - - (226) (1,953) (1,242) (14,381) - 757 (5,478) 262,288 - - 35,232 Represented by: Cost or valuation 35,232 176,012 157,960 1,642 370,846 35,232 Accumulated depreciation - (7,641) (100,032) (885) (108,558) - 35,232 168,371 57,928 757 262,288 35,232 Owner-occupied lands are largely utilised for farming operations. Owner-occupied land and buildings consist largely of commercial office buildings and hotels. Owner-occupied properties Land Land & buildings 2017 Office furnishings, equipment & vehicles Operating lease vehicles & equipment Total 77,855 3,175 - - (121) (1,575) 41,179 15,101 - (729) (50) - 11,504 167,723 577 18,853 - - (1,368) - (729) (1,539) - (1,575) - (9,211) 356 46,297 (3,631) (2,227) - (1,865) (12,174) - 859 5,566 165,560 134,103 11,897 262,929 (87,806) (6,331) (97,369) 46,297 5,566 165,560 (274) (1,098) 503 78,465 81,697 (3,232) 78,465 (3,846) (13,496) - (349) (3,282) 58 150 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 8 INTANGIBLE ASSETS 8.1 Analysis of intangible assets and changes for the year 2018 Goodwill Customer & broker relationships Trade Names Software Total Goodwill 2017 Customer & broker relationships Software Total 25,839 6,182 83,487 6,182 729 729 Net book value, beginning of year 44,234 12,391 Additions at cost Transfer from property, plant and equipment (note 7) Identified on acquisition (note 37): Harmony General Insurance Company Ltd Travel Cash Jamaica Limited Sagicor Real Estate X Fund Limited Subsidiary acquisitions and disposals Amortisation/impairment charges Effects of exchange rate changes Net book value, end of year Represented by: Cost or valuation Accumulated depreciation and impairments - - 1,396 1,478 9,584 - - (237) 56,455 56,455 - 56,455 - - 1,732 1,128 - - (1,795) (258) 13,198 38,634 (25,436) 13,198 - - - 25,089 4,795 81,714 4,795 3,527 3,527 - 31 2,560 - (1) 1 - - 120 (120) (8,090) (253) 3,128 2,637 12,264 (120) (9,886) (747) 2,591 25,068 97,312 43,911 13,737 - - - - - - - 323 44,234 - - - - - - - - - - (1,674) (7,951) 328 290 12,391 25,089 6,308 78,813 180,210 44,234 36,552 71,006 (3,717) (53,745) (82,898) - (24,161) (45,917) 2,591 25,068 97,312 44,234 12,391 25,089 - - - - (9,625) 941 81,714 151,792 (70,078) 81,714 59 SAGICOR FINANCIAL CORPORATION LIMITED 151 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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. For those CGU’s which the fair value less costs of disposal methodology is used, 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 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. As disclosed in note 2.7 (a) goodwill is allocated to the Group’s reportable operating segments. 8.2 Impairment of intangible assets (continued) (i) Years ended December 31, 2018 & 2017 An actuarial appraisal value technique was adopted to test goodwill impairment. The principal assumptions included the following: • • • • • Discount rates of 10% (2017, 10%) for individual life and annuity inforce business, New individual life and annuity business was included for the seven-year period 2019 to 2025, (seven-year period 2018 to 2024), Annual growth rate for new individual life and annuity business was 6.0% - 23.0% for 2019 and 5.0% – 17.0 % from 2020 to 2025 (2017 – 12.4% - 21.0% for the year 2018 and 5.0% to 16.8% from 2019 to 2024), Discount rates of 14% (2017, 14%) for new individual life and annuity business, Required Minimum Continuing Capital and Surplus Ratio (MCCSR) of 175% (2017 – 175%). The Group obtains independent professional advice in order to select the relevant discount factors, residual growth rates and earnings multiples. Sensitivity The carrying values of goodwill and the impairment test factors used are considered in the following sections. 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. Sagicor Life Inc Segment MCCSR target ratio (a) Sagicor Life operating segment 2018 2017 Discount rate Inforce New business Low 150% Mid 175% High 200% Carrying value of goodwill 26,526 26,552 Low Mid High 8% 10% 12% 12% 14% 16% 252,836 243,991 234,678 81,274 66,168 50,195 (43,976) (62,897) (82,828) 60 152 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 8.2 Impairment of intangible assets (continued) 8.2 Impairment of intangible assets (continued) (b) Sagicor Jamaica operating segment (c) Sagicor General Insurance Inc Carrying value of goodwill 24,248 13,398 Carrying value of goodwill 2018 2017 2018 2017 5,681 4,284 The fair value less costs of disposal methodology was adopted to test goodwill impairment in both years. The after-tax multiple used for the segment 9.9 (2017– 8.6) which was derived from a pre-tax factor of 7.7 (2017 – 6.9) 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. The Group recognised goodwill on the acquisition of its interest in Sagicor General Insurance Inc. Additional goodwill was recognised on the acquisition of Harmony General Insurance Company Ltd during the year (note 37.1). This company was amalgamated with Sagicor General Insurance prior to the end of the year. The value in use methodology has been used to test goodwill impairment in both years. The pre-tax discount factor was 19.9% (2017 –20.8%) which was derived from an after-tax factor of 16.0% (2017 – 15.0%) using an iterative method. The residual growth rate was 2.5% (2017 – 2.5%). 2018 test Scenario 1 Scenario 2 Scenario 3 The possible impairment of goodwill is sensitive to changes in the after tax discount factor and residual growth rate. This is illustrated in the following table. Sensitivity After tax earnings multiples Reduction in forecast earnings 9.9 n/a 8.4 10% Excess of recoverable amount (of 49.11% interest) 231,500 137,255 Impairment (of 49.11% interest) Nil Nil 5.9 10% 10,977 Nil 2018 test Scenario 1 Scenario 2 Scenario 3 After tax discount factor Residual growth rate Reduction in residual growth rate Increase in after tax discount factor 16.0 2.5 n/a n/a Excess of recoverable amount (of 98.0% interest) 3,218 Impairment (of 98.0% interest) Nil 17.0 2.5 n/a 6% 866 Nil 18.0 2.2 12% 13% Nil (1,241) 61 SAGICOR FINANCIAL CORPORATION LIMITED 153 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 9 FINANCIAL INVESTMENTS 9.1 Analysis of financial investments Investments at FVOCI (available for sale): Debt securities Equity securities Investments at FVTPL (fair value through income): Debt securities Equity securities 2018 2017 IFRS 9 basis IAS 39 basis Carrying value Fair value Carrying value Fair value 2,633,633 2,633,633 2,266,275 2,266,275 271 271 86,862 86,862 2,633,904 2,633,904 2,353,137 2,353,137 198,807 198,807 180,484 180,484 267,234 267,234 158,621 158,621 9.1 Analysis of financial investments (continued) Non-derivative investments at FVTPL (fair value through income) comprise: Equity securities Debt securities Mortgage loans Designated at fair value on initial recognition Assets held for trading 2018 - IFRS 9 basis 2017 Mandatory Designated designation by election Total IAS 39 basis 169,754 97,480 267,234 62,528 136,279 198,807 56 30,097 30,143 488,557 375,917 7,635 8,635 2018 2017 Derivative financial instruments 7,696 7,696 32,477 32,477 Debt securities comprise: Government & government-guaranteed debt securities 1,668,061 1,701,250 Mortgage loans Deposits Investments at amortised cost (loans and receivables): Debt securities Mortgage loans Policy loans 30,143 30,143 45,447 45,447 8 8 - - 503,888 503,888 417,029 417,029 Collateralised mortgage obligations Corporate debt securities Other securities 1,097,041 1,219,042 1,051,683 1,155,331 337,020 336,873 296,939 296,867 Included in financial investments are: Debt securities issued by an associated company 147,046 171,421 142,132 149,995 Mutual funds managed by the Group 438,382 240,363 1,717,041 1,444,086 105,997 112,743 3,929,481 3,498,442 26,587 180,249 28,496 166,899 Finance loans and finance leases 514,486 500,261 564,399 551,922 Securities purchased for re-sale 7,170 7,170 16,518 16,518 Deposits 107,108 107,108 111,404 111,404 9.2 Pledged assets Total financial investments 5,347,663 5,479,667 4,953,241 5,052,203 2,209,871 2,341,875 2,183,075 2,282,037 Debt and equity securities include $218,447 (2017 - $140,418) as collateral for loans payable and other funding instruments. 62 154 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 9.2 Pledged assets (continued) 9.4 Reconciliation of financial investment balances from IAS 39 to IFRS 9 (continued) 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 $13,361 (2017 - $6,520), and mortgages and mortgage backed securities having a total market value of $329,942 (2017 - $155,636). 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, 2018, these pledged assets totalled $495,470 (2017 - $514,674). Of these assets pledged as security, $494,280 (2017 – $513,468) 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. 9.3 Financial investments held under the unit linked fair value model Financial investments include the following amounts for which the full income and capital returns accrue to the holders of unit linked insurance and investment contracts. These investments are measured at FVTPL and amortised cost for mortgages (2017 - fair value through income). Debt securities Equity securities Mortgage loans Deposits 2018 2017 126,156 160,627 61,491 8 143,167 154,775 45,381 - 348,282 343,323 - Measurement basis FVOCI (available for sale): Debt securities Equity securities FVTPL (fair value through income): Debt securities Equity securities Mortgage loans Amortised cost (loans and receivables): Debt securities Mortgage loans Policy loans IAS 39 carrying value Reclass- ifications Remeasurements ECL Other IFRS 9 carrying value 2,266,275 (30,493) 86,862 (86,392) 2,353,137 (116,885) 180,484 30,493 158,621 86,392 45,447 (19,772) 417,029 97,113 - - - - - - - - - - - - - - - - 2,235,782 470 2,236,252 210,977 245,013 32,477 25,675 514,142 Derivative financial instruments 32,477 - 1,051,683 - (11,415) 23 1,040,291 Finance loans and finance leases 564,399 Securities purchased for re-sale 16,518 Deposits 111,404 296,939 19,772 (862) 142,132 - - - - - (3,411) - (512) - - - - - 315,849 142,132 560,988 16,518 110,892 9.4 Reconciliation of financial investment balances from IAS 39 to IFRS 9 The following table reconciles the carrying amounts of financial investments, from their previous measurement category in accordance with IAS 39 as of December 31, 2017 to their new measurement categories upon transition to IFRS 9 as of January 1, 2018. Total financial investments 4,953,241 - (16,200) 23 4,937,064 2,183,075 19,772 (16,200) 23 2,186,670 63 SAGICOR FINANCIAL CORPORATION LIMITED 155 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 9.4 Reconciliation of financial investment balances from IAS 39 to IFRS 9 (continued) 9.5 2008 reclassification of financial investments accounted for on an IAS 39 basis The Group holds a small portfolio of debt instruments which failed to meet the SPPI test requirement for the FVOCI classification under IFRS 9. These are hybrid securities with features of both debt and equity, with interest payments in shares and callable dates, but have no fixed maturity date. As a result, these instruments are classified as FVTPL under IFRS 9. The Group assessed its business model for equity securities within the Group’s portfolio and identified certain equity securities which are managed separately and actively traded for capital gains. These securities which were previously classified as available for sale are reclassified to FVTPL under IFRS 9. Floating rate mortgages being held to receive contractual cash flows, which were previously classified as fair value through income, have been reclassified as amortised cost as mandated by IFRS 9. During 2018, these assets generated interest revenue of $1,186 which approximates the interest revenue which would have been generated had they not been reclassified. 64 156 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. The reclassifications were made because the markets for these securities were considered by management to have become inactive. The following disclosures are in respect of these reclassified assets. 2017 Carrying value Fair value Government debt securities maturing after September 2018 26,344 35,367 Other debt securities 922 1,239 27,266 36,606 Cumulative net fair value gain, beginning of year Net fair value gains Disposals Effect of exchange rate changes Cumulative net fair value gain, end of year 2017 5,090 3,245 (778) 84 7,641 The net fair value gain or loss 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 gain/loss that would have been reclassified from other comprehensive income to income on disposal. SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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 2018 2017 653,722 736,547 39,085 14,727 7,063 41,571 11,561 7,712 714,597 797,391 Net defined benefit assets (note 31) Real estate developed or held for resale Prepaid and deferred expenses (ii) Premiums receivable Legal claim (note 20) Service contract receivables (i) Other assets and accounts receivable (i) 11 INCOME TAX ASSETS 2018 2017 real estate developed or held for resale Amounts due from managed funds included in receivables Amounts expected to be realised within one year included in 2018 3,538 13,850 26,495 51,633 963 1,245 45,923 143,647 6,052 8,779 2017 6,059 12,986 22,885 53,446 70,946 - 62,221 228,543 7,892 7,291 Deferred income tax assets (note 33) Income and withholding taxes recoverable 27,583 26,782 54,365 20,477 19,503 39,980 Income and withholding taxes recoverable are expected to be recovered within one year of the financial statements date. (i) Service contract receivables are presented separately in 2018 to conform with IFRS 15. (ii) Amounts are expected to be realised within one year. 65 SAGICOR FINANCIAL CORPORATION LIMITED 157 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 13 ACTUARIAL LIABILITIES 13.1 Analysis of actuarial liabilities Contracts issued to individuals: Gross liability Reinsurers’ share 2018 2017 restated 2018 2017 13.2 Movement in actuarial liabilities Gross liability Reinsurers’ share 2018 2017 2018 2017 Balance, beginning of year: As reported previously 2,950,820 2,776,362 736,547 713,252 Prior year adjustment (note 13.2a) (6,120) (4,538) - - Balance, beginning of year as restated 2,944,700 2,771,824 736,547 713,252 Life insurance - participating policies 205,566 238,695 65 51 Changes in actuarial liabilities: Life insurance and annuity - non-participating policies Health insurance Unit linked funds Contracts issued to groups: Life insurance Annuities Health insurance Reinsurance contracts held 34,699 30,121 2,057,098 1,965,774 638,201 719,494 Recorded in income (note 27) 91,568 144,325 (82,857) 23,329 14,760 13,189 350 433 241,690 219,533 - - - - Assumed on acquisition of portfolio (note 13.2 b) Other movements 2,553,813 2,467,312 638,616 719,978 Effect of exchange rate changes 42,865 3,153 (9,641) - (227) 9,565 Recorded in OCI (48,181) 19,213 - - 31 1 - - 2 (36) 26,406 32,057 111 79 Analysis of changes in actuarial liabilities Balance, end of year 3,024,464 2,944,700 653,722 736,547 414,253 411,259 14,854 16,418 29,992 34,072 141 72 470,651 477,388 15,106 16,569 Total actuarial liabilities 3,024,464 2,944,700 653,722 736,547 The following notes are in respect of the foregoing table: • • • Life insurance includes coverage for disability and critical illness. Actuarial liabilities include $71,840 (2017 - $83,277) 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. 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 and improvements 216,074 171,071 (85,599) 18,089 (155,551) (40,903) (6,323) (11,831) 1,917 - - - Other items Total (5,305) 31,453 9,065 5,240 43,387 163,538 (82,857) 23,329 66 158 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 13.2 Movement in actuarial liabilities (continued) (a) Change in Actuarial Reserving Practice Effective January 1, 2018 the Group implemented a policy to harmonise its actuarial reserving practices across operational segments for the purposes of group reporting. This voluntary change in policy was reflected as a prior period adjustment in accordance with IAS 8. In addition, a detailed review of Sagicor USA's actuarial model was completed which concluded that the model inputs were generally appropriate; however, certain items were identified which have been treated as errors and prior periods have been adjusted accordingly. The Sagicor Jamaica’s adjustment reduced actuarial liabilities by $7,815 and Sagicor USA’s adjustment increased the liability by $3,277 for the year ended December 31, 2016. For the year ended December 31, 2017, The Sagicor Jamaica’s adjustment reduced actuarial liabilities by $9,070 and Sagicor USA’s adjustment increased the liability by $2,950 (note 50). (b) Acquisition of insurance portfolio During the year, qualifying life insurance and annuity policies of British American Insurance Company (Barbados) Limited (BAICO) were transferred to Sagicor Life Inc. BAICO was under the management of a judicial manager and the transfer was approved by the Supreme Court of Barbados. The portfolio consisted of 11,259 of individual life and annuity insurance policies in Barbados. The acquisition has been accounted for as a portfolio acquisition and the effects of the transaction are summarized below. Given the distressed nature of the portfolio the Group was able to negotiate assets to be transferred in excess of the liabilities assumed. Accordingly, the excess assets has been treated as a gain in the income statement. Financial investments Other assets Total assets Actuarial liabilities Other policy liabilities Total liabilities Net assets acquired Consideration Gain on acquisition 67 Fair value 49,688 - 49,688 42,865 405 43,270 6,418 - 6,418 13.3 Assumptions – life insurance and annuity contracts (a) Process used to set actuarial assumptions and margins for adverse deviations At each date for valuation of actuarial liabilities, the Appointed Actuary (AA) of each insurer reviews the assumptions made at the last valuation date. The AA reviews the validity of each assumption by referencing 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 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 tables from the Canadian Institute of Actuaries. 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 reflecting insurer and industry experience. (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 moving averages. SAGICOR FINANCIAL CORPORATION LIMITED 159 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 13.3 Assumptions – life insurance and annuity contracts (continued) 13.3 Assumptions – life insurance and annuity contracts (continued) (d) Assumptions for investment yields (f) Margins for adverse deviations 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 over time, 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 2018 7.50% 6.00% 5.00% 2017 7.00% 6.00% 5.00% 4.50% - 7.00% 4.50% - 7.00% 0.85% - 3.60% 0.85% - 3.65% (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. For income taxes levied on net income, actuarial liabilities are adjusted for policy related recognised deferred tax assets and liabilities. 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 2018 2017 Mortality and morbidity Lapse Investment yields and asset default Operating expenses and taxes Other 103,650 78,453 62,363 11,042 11,093 96,090 69,365 68,930 10,807 10,765 266,601 255,957 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 significant claim settlements are anticipated after one year from the date of the financial statements. Asset defaults (f) 68 160 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, SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 2018 2017 62,979 140,163 44,435 247,577 63,744 127,801 32,614 224,159 14.2 Policy benefits payable Analysis of policy benefits payable: Life insurance and annuity benefits Health claims Property and casualty claims Gross liability Reinsurers’ share 2018 2017 2018 2017 99,332 4,677 36,154 86,562 4,280 36,959 140,163 127,801 24,526 1,552 13,007 39,085 22,809 2,122 16,640 41,571 Gross liability Reinsurers’ share 2018 2017 2018 2017 Movement for the year: Balance, beginning of year 127,801 107,219 41,571 35,994 Subsidiary and insurance portfolio acquisitions 6,122 - 2,331 - Policy benefits incurred 644,757 581,238 109,375 101,671 Policy benefits paid (637,981) (559,981) (115,144) (94,673) Effect of exchange rate changes (536) (675) 952 (1,421) Balance, end of year 140,163 127,801 39,085 41,571 14.3 Provision for unearned premiums Gross liability Reinsurers’ share 2018 2017 2018 2017 Analysis of the provision: Property and casualty insurance 36,115 32,177 14,727 11,561 Health insurance 8,320 437 - - 44,435 32,614 14,727 11,561 The provision for unearned premiums is expected to mature within a year of the financial statements’ date. 69 SAGICOR FINANCIAL CORPORATION LIMITED 161 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 14.3 Provision for unearned premiums (continued) 16 NOTES AND LOANS PAYABLE Gross liability Reinsurers’ share 2018 2017 2018 2017 Movement for the year: 2018 2017 Carrying value Fair value Carrying value Fair value Balance, beginning of year 32,614 34,184 11,561 21,775 8.875% senior notes due 2022 318,910 334,625 317,028 364,131 Subsidiary and insurance portfolio acquisitions Premiums written Premium revenue 3,489 - 1,502 - 87,102 74,305 36,844 29,676 (78,739) (74,619) (36,176) (38,388) Effect of exchange rate changes (31) (1,256) 996 (1,502) Balance, end of year 44,435 32,614 14,727 11,561 15 INVESTMENT CONTRACT LIABILITIES 8.25% convertible redeemable preference shares due 2020 (b) 7.75% convertible redeemable preference shares due 2018 (b) 4.85% notes due 2019 (a) Mortgage Loans (c) Bank loans & other funding instruments 11,115 11,105 11,310 11,887 - - 5,181 5,433 75,039 76,952 74,124 76,952 74,929 76,199 - - 8,259 8,259 5,357 5,357 490,275 505,065 413,805 463,007 At amortised cost: Deposit administration liabilities Other investment contracts At fair value through income: Unit linked deposit administration liabilities 2018 2017 Carrying value Fair value Carrying value Fair value (a) On March 21, 2016, the Company issued fourteen-month notes with a par value of $75 million which were repayable in 2017 and carried a 5.0% annual rate of interest. Effective December 20, 2016, the notes were extended at an annual rate of interest of 4.85% with a maturity date of August 14, 2019. Financial covenants in respect of these notes are summarised in Note 46.3 (b). 110,585 130,670 241,255 110,585 121,483 121,483 130,669 117,782 119,915 241,254 239,265 241,398 (b) On March 2, 2017, Sagicor Bank Jamaica Limited issued: i. ii. Cumulative redeemable preference shares with a tenor of three (3) years at 8.25% interest per annum. Cumulative redeemable preference shares with a tenor of eighteen (18) months at 7.75% interest per annum. 149,142 149,142 139,753 139,753 390,397 390,396 379,018 381,151 70 162 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 16 Notes and loans payable (continued) (c) Mortgage Loans 4.90% mortgage notes due 2025 3.75% mortgage notes due 2019 4.75% mortgage notes due 2021 5.00% mortgage notes due 2020 9.00% mortgage notes due 2048 8.75% mortgage notes due 2020 9.00% mortgage notes due 2021 9.00% mortgage notes due 2026 7.00% mortgage notes due 2026 17 DEPOSIT AND SECURITY LIABILITIES 17 Deposit and security liabilities (continued) Other funding instruments consist of loans from banks and other financial institutions and include balances of $315,250 (2017 - $148,583) 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. 18 PROVISIONS 2018 46,527 1,496 2,055 4,245 3,735 10,624 3,530 3,704 1,036 76,952 2018 2017 Carrying value Fair value Carrying value Fair value Net defined benefit liabilities (note 31) Cash settled share-based payment liabilities (1) Other provisions 2018 67,522 6,627 138 74,287 2017 77,110 2,823 94 80,027 (1) As of March 31, 2017, certain options are recorded using the cash-settled method of accounting. This resulted in a transfer of $4,873 from reserves to provisions at that date. At amortised cost: Other funding instruments Customer deposits Securities sold for re-purchase Bank overdrafts At fair value through income: 461,572 721,634 423,772 2,158 462,223 726,136 423,790 2,158 279,874 284,980 750,948 749,834 476,034 473,771 2,568 2,568 1,609,136 1,614,307 1,509,424 1,511,153 Structured products 64,650 64,650 47,576 47,576 Derivative financial instruments (note 41.6) 247 247 2,232 2,232 64,897 64,897 49,808 49,808 1,674,033 1,679,204 1,559,232 1,560,961 71 SAGICOR FINANCIAL CORPORATION LIMITED 163 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 19 INCOME TAX LIABILITIES 20 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES (continued) Deferred income tax liabilities (note 33) Income taxes payable 2018 28,958 19,278 48,236 2017 restated 24,472 5,030 29,502 Income taxes payable are expected to be settled within a year of the financial statements’ date. 20 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Amounts due to policyholders Amounts due to reinsurers Legal claim (i) Service contract payables (ii) Other accounts payable and accrued liabilities 2018 2017 54,470 9,364 963 1,254 174,643 240,694 22,385 22,590 70,946 - 131,055 246,976 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 against any loss the bank may suffer in this matter. As the current owner of Sagicor Bank Jamaica Limited, Sagicor Group, is the current beneficiary of the Indemnity. The Indemnity from Finsac is further supported by a Government of Jamaica Guarantee on a full indemnity basis. Sagicor appealed the Supreme Court decision and judgment was delivered on July 31, 2018 which ruled that the award previously awarded to the Claimant be reduced with costs to the Claimant subject to an accounting exercise to determine the apportionment of costs between the parties. This reduced award took into account lower interest rates applying simple interest rather than compounding interest. The issue of costs remains to be determined by the courts following a subsequent application to amend the judgment which was delivered in January 2019. An appeal to the Privy Council on this matter by the Claimant is pending. The amount previously awarded to the Claimant was recorded as payable to the claimant plus accrued interest and a corresponding receivable from Finsac/Government of Jamaica was recorded. (iii) (ii) Service contract payables are presented separately in 2018 totals in conformity with IFRS 15. (i) On March 17, 2014 the Supreme Court of Jamaica granted judgement in favour of a claimant in a case brought against Sagicor Bank Jamaica Limited (formerly RBC Royal Bank Jamaica Limited). This claim dated the acquisition of the Bank by Sagicor Group Jamaica Limited, and also pre-dated the pre acquisition of control of the Bank by RBTT from Finsac Limited (“Finsac”) in 2001. ‐ 72 164 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 21 COMMON SHARES The Company is authorised to issue 650,000,000 common shares and 320,000,000 convertible redeemable preference shares. In each case the shares have a par value of US$0.01. The common shares issued are as follows: Number in 000’s Share capital Share premium Total Number in 000’s Share capital Share premium Total 2018 2017 Issued and fully paid: Balance, beginning of year Allotments arising from LTI Balance, end of year Treasury shares: Shares held for LTI and ESOP, end of year (note 30.1) Total 306,556 - 306,556 (441) 306,115 3,066 - 3,066 (5) 3,061 301,132 304,198 - - 301,132 304,198 (467) (472) 300,665 303,726 304,494 2,062 306,556 (673) 305,883 3,045 21 3,066 (7) 3,059 299,111 302,156 2,021 2,042 301,132 304,198 (662) (669) 300,470 303,529 Common share dividends declared, paid and proposed are set out in the following table. Dividends declared and paid during the year Final dividend proposed for the current year and payable in the next year 2018 2017 Restrictions on common share dividends Per share Total Per share Total 5.0¢ 15,300 5.0¢ 15,216 2.5 ¢ 7,664 2.5 ¢ 7,664 The Company’s constitutive documents included the following limitation on the payment of common share dividends. 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. This requirement was repealed on June 16, 2017. 73 SAGICOR FINANCIAL CORPORATION LIMITED 165 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 22 RESERVES 2018 Balance, December 31, 2017 as reported previously Prior year adjustment to actuarial liabilities Balance, December 31, 2017 as restated Transition adjustment on adoption of IFRS 9 (note 50) Balance, January 1, 2018 Fair value reserves Owner occupied property FVOCI assets Available for sale assets Actuarial liabilities Currency translation reserves Other reserves Total reserves 25,153 - 25,153 - 25,153 29,737 (23,279) (109,830) 30,737 (47,482) 4,677 (4,680) 105 34,414 (27,959) (109,725) (34,577) 5,423 (105) (8) 30,729 (1,365) 94 (47,388) (217) (163) (22,536) (109,830) 29,364 (47,605) - - 30,407 30,407 Other comprehensive income from continuing operations allocated to reserves 3,655 (58,063) 31,897 (7,123) Transactions with holders of equity instruments: Allocated to reserve for equity compensation benefits Eliminated from reserve for equity compensation benefits Disposal of interest in subsidiaries Transfers to retained earnings and other movements Balance, December 31, 2018 - - - - - - - - (5,645) 131 23,163 (27,525) - - - - 163 - - - - - 1 - - - - - - - 4,428 (5,215) (935) 7,316 (29,634) - 4,428 (5,215) (935) 1,966 9,362 (116,953) 34,958 (76,995) 74 166 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 22 RESERVES (continued) 2017 Fair value reserves Owner occupied property Available for sale assets Actuarial liabilities Currency translation reserves Other reserves Total reserves Balance, December 31, 2016 as reported previously 27,184 (6,111) (6,735) (114,480) 35,347 (64,795) Prior year adjustment to actuarial liabilities Balance, December 31, 2016 as restated Other comprehensive income from continuing operations allocated to reserves 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, December 31, 2017 as restated - 27,184 (2,132) - - 101 - (3) - - (3) (6,111) 40,135 - - 390 (6,738) (114,480) 35,347 (64,798) (21,221) 4,755 - 21,537 - - - - - - 5,039 5,039 (11,309) (11,309) 1,652 2,143 25,153 34,414 (27,959) (109,725) 30,729 (47,388) 75 SAGICOR FINANCIAL CORPORATION LIMITED 167 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 2018 2017 2018 2017 Life insurance Annuity Health insurance Gross premium Ceded to reinsurers 2018 2017 2018 2017 442,629 419,085 455,927 257,940 172,830 154,015 30,580 15,874 4,758 29,833 79,567 4,934 Movement for the year: Balance, beginning of year (1,547) (1,281) 2,412 2,572 Property and casualty insurance 70,043 67,314 36,176 38,388 1,141,429 898,354 87,388 152,722 Transition adjustment on adoption of IFRS 9 (note 50) Balance, beginning of year as restated Total comprehensive income / (loss) 5,367 (266) (2,593) (1,281) 528 989 2,572 56 (1,046) - (1,884) - Return of transfer to support profit distribution, to shareholders - - (213) (216) Balance, end of year 2,774 (1,547) 1,304 2,412 Financial statement amounts: Assets Liabilities Revenues Benefits Expenses Income taxes 74,061 71,286 3,339 (2,272) 162 109 80,559 172,179 196,995 82,106 170,876 194,583 7,129 6,786 414 131 2,393 (108) 147 472 23,552 22,303 1,474 617 The Group has the ability to reduce future policy bonuses and dividends in order to eliminate a deficit in a participating account. 76 168 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 25 NET INVESTMENT INCOME 25 NET INVESTMENT INCOME (continued) Income from financial investments measured on an IFRS 9 basis Interest income: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale Deposits, cash and other items Interest Income (FVOCI): Debt Securities FVTPL investments: Fair value changes and interest income from debt securities Fair value changes and dividend income from equity securities Fair value changes and interest income from mortgage securities Other items 2018 84,477 20,780 10,003 58,308 853 3,089 177,510 113,478 (898) 15,869 930 8 306,897 Income from financial investments measured on an IFRS 9 basis 2018 2017 306,897 Investment income Other income measured on an IFRS 9 basis (10,594) Income from financial investments measured on an IAS 39 basis: Interest income Dividend income Net investment gains Investment property income and fair value gains / (losses) Share of operating income of associates and joint venture Other investment income 5,531 2,145 370 294,741 3,790 78,341 3,939 9,849 300 Investment expenses: Allowances for impairment losses (IAS 39 basis) Direct operating expenses of investment property Other direct investment expenses 304,349 390,960 8,361 1,964 1,399 11,724 6,042 2,342 8,384 Net investment income 295,965 379,236 77 SAGICOR FINANCIAL CORPORATION LIMITED 169 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 25 NET INVESTMENT INCOME (continued) 25 NET INVESTMENT INCOME (continued) Further details of interest income and investment gains are set out in the following table. Investments measured on an IAS 39 basis 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 return 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 the net income of the Group. Interest income: Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for re-sale Deposits Other balances Net investment gains / (losses): Debt securities Equity securities Other financial instruments 2017 204,037 18,675 9,678 58,686 542 2,865 258 294,741 28,741 27,939 21,661 78,341 78 170 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 26 FEES AND OTHER REVENUE Service contract revenue Fee income – assets under administration Fee income – deposit administration and policy funds Commission income on reinsurance contracts Other fees and commission income Foreign exchange losses Hotel revenue Other operating and miscellaneous income 79 SAGICOR FINANCIAL CORPORATION LIMITED Other Revenue Products transferred at a point in time Products and services transferred over time 2018 2017 2,851 3,045 - 91 5,471 (3,037) - 9,654 18,075 37,542 39,236 - - - 4,427 - 2,600 332 - - - 5,168 - 7,102 - 79,629 3,045 - 91 15,066 (3,037) 9,702 9,986 44,901 51,506 114,482 - 29,179 2,000 9,530 33,558 (4,178) - 23,651 93,740 171 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 27 POLICY BENEFITS AND CHANGE IN ACTUARIAL LIABILITIES 28 INTEREST COSTS (continued) Gross benefit Ceded to reinsurers Financial liabilities measured on an IAS 39 basis 2018 2017 restated Life insurance benefits 236,966 215,472 Annuity benefits 242,387 203,072 Health insurance claims 131,713 118,848 Property and casualty claims 25,726 37,603 2018 16,542 70,182 4,954 6,734 Total policy benefits 636,792 574,995 98,412 Change in actuarial liabilities (note 13.2) 91,568 144,325 (82,857) 2017 restated 13,976 61,327 5,254 10,953 91,510 23,329 Interest expense: Investment contracts Other funding instruments Customer deposits Securities sold for re-purchase Insurance contracts and other items Total interest expense Total policy benefits and change in actuarial liabilities 728,360 719,320 15,555 114,839 Financial liabilities measured on an IAS 39 basis 2017 15,796 6,514 16,535 14,245 1,859 54,949 28 INTEREST COSTS Financial liabilities measured on an IFRS 9 basis Interest expense for amortised cost financial liabilities: Investment contracts Other funding instruments Customer deposits Securities sold for re-purchase Insurance contracts and other items Fair value changes and interest expense for FVTPL financial liabilities Total interest costs 80 172 2018 9,567 8,561 11,805 12,019 1,715 43,667 8,854 52,521 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. The capital and income return 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. SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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: 2018 2017 115,911 107,431 10,342 6,404 5,104 9,317 9,553 10,302 (1,182) 13,561 147,078 139,665 Administrative staff salaries, directors’ fees and short-term benefits Social security and defined contribution retirement costs Equity-settled compensation benefits (note 30.1 to 30.2) Cash-settled compensation benefits (note 30.1) Defined benefit expense (note 31 (b)) 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. In 2017, the shareholders of the Company approved the increase in the number of the Company’s shares reserved for the LTI and ESOP from 26,555,274 common shares to 40,400,000 common shares. 2018 2017 Number of grants ‘000 Weighted average price Number of grants ‘000 Weighted average price 4,719 2,734 US$1.02 US$1.03 4,637 3,366 US$0.92 US$1.13 (4,520) US$1.01 (3,054) US$1.00 (95) US$0.97 (230) US$0.96 2,838 US$1.04 4,719 US$1.02 Balance, beginning of year Grants issued Grants vested Grants lapsed/forfeited Balance, end of year 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/or distributed during the year were as follows: 2018 2017 Number in 000’s $000 Number in 000’s $000 Balance, beginning of year Shares acquired Balance, end of year 171 - 171 206 - 206 1 170 171 3 203 206 (a) LTI plan – restricted share grants During 2018 a cash settlement was made in lieu of share issue. 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. 81 SAGICOR FINANCIAL CORPORATION LIMITED 173 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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 was 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: 2018 2017 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price Balance, beginning of year 18,687 US$1.25 Options granted Options exercised 4,382 US$1.13 (3,760) US$0.90 Options lapsed/forfeited (2,795) US$1.52 Balance, end of year 16,514 US$1.21 19,800 4,873 (4,555) (1,431) 18,687 US$1.30 US$1.00 US$1.04 US$1.81 US$1.25 Exercisable at the end of the year 8,154 US$1.37 8,354 US$1.59 Share price at grant date US$0.86 - 2.50 US $0.86 - 2.50 Fair value of options at grant date Expected volatility Expected life Expected dividend yield Risk-free interest rate US$0.16 – 0.69 US$ 0.16 - 0.69 18.3% - 35.8% 18.3% - 35.8% 7.0 years 2.6% - 4.7% 4.5% - 6.8% 7.0 years 2.6% - 4.7% 4.8% - 6.8% 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. As disclosed in Note 18, share options which were previously settled in the Company’s shares are now cash-settled. (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: 2018 2017 Number in 000’s $000 Number in 000’s $000 Balance, beginning of year Shares acquired Shares distributed Balance, end of year 502 76 (308) 270 463 84 (281) 266 1,645 2,074 - - (1,143) (1,611) 502 463 82 174 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 30.2 Sagicor Group Jamaica Limited (continued) Further details of share options and the assumptions used in determining their pricing are as follows: 2018 2017 Fair value of options outstanding J$24,080,000 J$30,963,000 Share price at grant date Exercise price J$7.11 - 34.10 J$6.51 – 23.65 J$7.11 - 34.10 J$6.51 – 23.65 Standard deviation of expected share price returns 26.0% 25.0% Remaining contractual term Risk-free interest rate 0.25 - 7 years 0.25 - 7 years 6.49% 8.70% The expected volatility is based on statistical analysis of daily share prices over seven years. (b) Employee share purchase plan Sagicor Group Jamaica Limited 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 $821 (2017 – $1,944). 30.2 Sagicor Group Jamaica Limited (a) Long-term incentive plan Sagicor Group Jamaica Limited offers stock grants and stock options to senior executives as part of its long-term incentive plan. The group has set aside 150,000,000 of its authorised but un-issued shares at no par value for the stock grants and stock options. In January 2007, the group introduced a new Long Term Incentive (LTI) plan which replaced the previous Stock Option plan. Under the LTI plan, executives are entitled but not obliged to purchase the group stock at a pre-specified price at some future date. The options are granted each year on the date of the Board of Directors Human Resources Committee meeting following the performance year at which the stock option awards are approved. Stock options vest in 4 equal installments beginning the first December 31 following the grant date and for the next three December 31 dates thereafter (25% per year). Options are not exercisable after the expiration of 7 years from the date of grant. The number of stock options in each stock option award is calculated based on the LTI opportunity via stock options (percentage of applicable salary) divided by the Black-Scholes value of a stock option of Sagicor Group Jamaica Limited stock on 31 March of the measurement year. The exercise price of the options is the closing bid price on 31 March of the measurement year. Details of the share options outstanding are set out in the following table. J$ represents Jamaica dollars. 2018 2017 Number of options ‘000 Weighted average exercise price Number of options ‘000 Weighted average exercise price 21,881 2,713 (8,321) (1,659) J$10.61 J$34.10 44,945 4,580 J$9.55 (24,872) J$8.83 J$23.65 J$9.66 J$15.75 (2,772) J$11.41 14,614 J$13.60 Balance, beginning of year Options granted Options exercised Options lapsed/forfeited Balance, end of year Exercisable at the end of the year 9,672 J$12.59 83 SAGICOR FINANCIAL CORPORATION LIMITED 21,881 13,820 J$10.61 J$9.72 175 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 31 EMPLOYEE RETIREMENT BENEFITS 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 administrative employees provide defined contribution benefits. The plans for administrative 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 benefit plans. 31 EMPLOYEE RETIREMENT BENEFITS (continued) (a) Amounts recognised in the statement of financial position 2018 2017 Present value of funded pension obligations 283,525 249,357 Fair value of retirement plan assets (285,172) (257,893) (1,647) (8,536) 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 43,847 21,784 63,984 66,179 1,343 67,522 (3,538) 63,984 51,656 27,931 71,051 48,921 28,189 77,110 (6,059) 71,051 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. 84 176 Sagicor Financial Corporation Limited SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 31 EMPLOYEE RETIREMENT BENEFITS (continued) (b) Movements in balances 2018 2017 Medical and life benefits Retirement obligations Retirement plan assets Total Medical and life benefits Retirement obligations Retirement plan assets Total Net liability / (asset), beginning of year 27,931 301,013 (257,893) 71,051 29,099 285,305 (214,502) 99,902 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 Change in asset ceiling excluding interest expense /(income) Net (gains) / losses recognised in other comprehensive income Contributions made by the Group Contributions made by employees and retirees Benefits paid Other items Effect of exchange rate movements Other movements 1,415 2,136 - 3,551 6,115 (14,399) - - 5,911 18,945 764 25,620 9,695 (4,700) - - - (19,854) - (19,854) (104) 638 4,480 7,326 1,227 764 9,317 15,706 (18,461) 4,480 (400) (400) 1,581 2,598 - 4,179 7,002 6,680 20,581 - 27,261 8,885 (12,479) (21,032) - - - - - (17,879) - 8,261 5,300 - (17,879) 13,561 (702) (14,928) 828 - 15,185 (48,439) 828 - (8,284) 4,995 4,614 1,325 (5,477) (12,147) (14,802) (32,426) - - (745) - (669) (1,414) - 6,322 (16,956) 9,917 (3,539) (4,256) (8,850) (6,322) 16,528 (17,056) 3,661 (8,850) - (1,173) (7,139) (547) (12,038) (17,709) - - (612) - 742 130 - 6,252 (16,371) 6,241 4,472 594 (9,971) (5,765) 14,896 (5,279) (4,591) (9,971) 487 (2,087) 962 623 (10,710) (9,986) Net liability / (asset), end of year 21,784 327,372 (285,172) 63,984 27,931 301,013 (257,893) 71,051 85 SAGICOR FINANCIAL CORPORATION LIMITED 177 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 31 EMPLOYEE RETIREMENT BENEFITS (continued) 31 EMPLOYEE RETIREMENT BENEFITS (continued) (c) Retirement plan assets (d) Significant actuarial assumptions 2018 2017 The significant actuarial assumptions for the principal geographic areas as of December 31, 2018 were as follows: Equity unit linked pension funds under Group management: Sagicor Equity Fund (Barbados) Sagicor Bonds Fund (Barbados) Sagicor Pooled Investment Funds (Jamaica): Equity Funds Mortgage & Real Estate Fund Fixed Income Fund Foreign Currency Funds Money Market Fund Other Funds Other assets Total plan assets (39,216) (23,113) (63,823) (35,757) (16,347) (23,030) (2,383) (13,196) (37,407) (27,028) (56,240) (29,969) (15,864) (23,576) (2,347) (15,697) (216,865) (208,128) (68,307) (49,765) (285,172) (257,893) The equity unit linked pension funds are funds domiciled in Barbados and Jamaica. Annual reports of these funds are available to the public. Pension plans Barbados & Eastern Caribbean Jamaica Trinidad Discount rate - local currency benefits 7.75% Discount rate - US$ indexed benefits Expected return on plan assets n/a 7.75% Future promotional salary increases 0 - 2.00% Future inflationary salary increases Future pension increases Future increases in National Insurance Scheme Ceilings 2.00% 2.00% 3.50% Mortality table Termination of active members Early retirement UP94 with projection scale AA 3% - 8.40% up to age 30, reducing to 1 - 2.1% at age 50, 0% at age 51 100% at the earliest possible age to receive unreduced benefits 7.00% 6.00% 6% - 7% 7.00% 3.00% 0.50% n/a American 1994 Group Annuitant Mortality (GAM 94) table with 5 year improvement 2% - 5.8% up to age 30, reducing to 3.8% - 5.8% at age 50, 2.7% - 3.8% at age 51 n/a 2.00% - 5.00% n/a 5.00% 0 - 2.00% 2.00% 0.00% 0.00% UP94 with projection scale AA 3% up to age 30, reducing to 1% at age 50, 0% at age 51 100% at the earliest possible age to receive unreduced benefits 86 178 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 31 EMPLOYEE RETIREMENT BENEFITS (continued) 31 EMPLOYEE RETIREMENT BENEFITS (continued) Group medical and life plans Barbados Jamaica (e) Sensitivity of actuarial assumptions Long term increase in health costs 4.25% 5.00% The sensitivity of the medical and life benefits obligations to individual changes in actuarial assumptions is summarised below: (e) Sensitivity of actuarial assumptions Jamaica The sensitivity of the pension retirement benefit obligations to individual changes in actuarial assumptions is summarised below: Base medical and life obligation 21,784 Barbados & Eastern Caribbean Jamaica Trinidad Base pension obligation 85,483 184,469 13,679 Change in absolute assumption Increase / (decrease) in pension obligations Decrease discount rate by 1.0% 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 6,063 (4,745) (299) 313 764 Decrease average life expectancy by 1 year (1,070) 11,638 (8,906) (1,821) 1,947 746 (962) 1,027 (704) (157) 196 292 (150) Change in absolute assumption Decrease discount rate by 1.0% 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 Decrease average life expectancy by 1 year Increase / (decrease) in medical and life obligations 4,147 (3,241) (95) 102 690 (690) (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. For the 2018 financial year, the total Group contributions to its defined benefits pension plans are estimated at $13,153. 87 SAGICOR FINANCIAL CORPORATION LIMITED 179 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 32 INCOME TAXES 32 INCOME TAXES (continued) Group companies are taxed according to the taxation rules of the countries where the operations are carried out. The principal rates of taxation are summarised in note 2.18(c). The income tax expense is 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: Current tax: Current tax on profits for the year Adjustments to current tax of prior periods Total current tax expense Deferred tax: Decrease/(increase) in deferred tax assets (Decrease)/increase in deferred tax liabilities Total deferred tax expense Share of tax of associated companies 2018 2017 restated 42,213 (77) 42,136 2,417 5,774 8,191 375 50,702 32,321 152 32,473 523 (13,874) (13,351) 191 19,313 2018 2017 restated Income before income tax expense 146,523 125,077 Taxation at the applicable rates on income subject to tax 61,406 42,436 Adjustments to current tax for items not subject to / allowed for tax (29,630) (29,878) Other current tax adjustments Adjustments for current tax of prior periods Movement in unrecognised deferred tax asset 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 Tax on distribution of profits from policyholder funds Other taxes (95) 162 15,207 (84) 1,252 32 (478) 15,965 (91) (14,171) (524) (86) 1,341 1,667 50,702 1,666 3,918 19,313 In addition to the above, the income tax on items in other comprehensive income is set out in note 35. 88 180 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 33 DEFERRED INCOME TAXES 33. DEFERRED INCOME TAXES (continued) The analysis and movement for the year of deferred tax asset balances are set out in the following table. Unrecognised tax losses and potential deferred income tax assets are as follows. Defined benefit liabilities Unrealised losses on financial investments Unused tax losses Other items Total Expiry period for unrecognised tax losses: 2018 2019 2020 2021 2022 2023 2024 2025 2026 After 2026 2018 Balance, beginning of year 7,100 (574) 13,541 410 20,477 Subsidiary acquisitions and disposals (Charged)/credited to: Income Other comprehensive income Directly to equity Amounts assumed on acquisition of exchange rate Effect changes 622 (1,394) - 34 (1,893) 13,056 - - (155) 111 Balance, end of year 6,207 10,700 Balance to be recovered within one year (6,120) - - - (316) 7,105 4,974 (2,019) 191 - 15 (2,417) 9,643 191 34 (345) 3,571 27,583 1,984 2017 Balance, beginning of year 13,581 6,918 14,993 787 36,279 (Charged)/credited to: Income Other comprehensive income of exchange rate Effect changes Balance, end of year 1,769 (8,426) 176 7,100 (268) (7,203) (21) (574) (1,746) (31) 325 13,541 (278) (110) 11 410 Balance to be recovered within one year 89 SAGICOR FINANCIAL CORPORATION LIMITED (523) (15,770) 491 20,477 2,516 Total unrecognised tax losses 341,380 302,051 Potential deferred income tax assets 19,514 75,517 181 2018 2017 - 27,571 24,863 20,164 37,435 30,506 34,316 49,116 55,039 62,370 23,551 27,571 24,863 20,165 37,441 30,579 33,727 49,116 55,038 - Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 33 DEFERRED INCOME TAXES (continued) The analysis and movement for the year of deferred tax liability balances are set out in the following table. 2018 Balance, beginning of year as reported previously Prior year adjustment to actuarial liabilities Balance, beginning of year as restated Charged/(credited) to: Income Other comprehensive income Amounts assumed on acquisition Effect of exchange rate changes Balance, end of year Balance to be settled within one year 2017 Balance, beginning of year as reported previously Prior year adjustment to actuarial liabilities Balance, beginning of year as restated Charged/(credited) to: Profit or Loss Other comprehensive income Effect of exchange rate changes Balance, end of year as restated Balance to be settled within one year 90 182 Accelerated tax depreciation Policy liabilities taxable in the future Defined benefit assets Accrued interest Unrealised gains on financial investments Off-settable tax assets relating to unused tax losses and other items Other Items Total 1,666 - 1,666 104 - 1,704 (368) 3,106 1,640 - 1,640 26 - - 33,464 (1,033) 32,431 9,048 6,567 - - 48,046 62,738 (1,147) 61,591 (28,099) (1,061) - 1,666 32,431 334 - 334 - 37 (46) - 325 343 - 343 (65) 56 - 334 1,111 - 1,111 123 - (106) - 15,323 (4,677) 10,646 126 (9,471) - 1 1,128 1,302 1,000 - 1,000 109 2 - 6,398 - 6,398 (10) 4,256 2 (27,205) 5,090 (22,115) (3,642) (67) 373 - (25,451) (36,280) - (36,280) 14,165 - - 399 - 399 15 - - 88 502 399 - 399 - - - 25,092 (620) 24,472 5,774 (2,934) 1,925 (279) 28,958 7,618 36,238 (1,147) 35,091 (13,874) 3,253 2 1,111 10,646 (22,115) 399 24,472 6,680 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 34 EARNINGS PER COMMON SHARE 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. 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). In computing diluted earnings per share, the weighted average number of common shares is adjusted by the dilutive impacts of the afore-mentioned share grants and options. 2018 2017 restated 2017 as reported previously Income attributable to common shareholders 43,650 72,423 72,233 Weighted average number of shares in issue (in thousands) LTI restricted share grants (in thousands) ESOP shares (in thousands) Adjusted weighted average number of shares in issue (in thousands) Basic earnings per common share Attributable to continuing operations Attributable to discontinued operation Fully diluted earnings per common share Attributable to continuing operations Attributable to discontinued operation 306,494 304,732 304,732 3,190 2,141 5,492 2,395 5,492 2,395 311,825 312,619 312,619 14.2¢ 11.9¢ 2.3¢ 14.0¢ 11.7¢ 2.3¢ 23.8¢ 20.5¢ 3.3¢ 23.2¢ 20.0¢ 3.2¢ 23.7¢ 20.4¢ 3.3¢ 23.1¢ 19.9¢ 3.2¢ 91 SAGICOR FINANCIAL CORPORATION LIMITED 183 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 35 OTHER COMPREHENSIVE INCOME (OCI) Schedule to OCI from continuing operations 2018 After tax OCI is attributable to 2017 restated After tax OCI is attributable to OCI tax impact Shareholders Participating policyholders Non- controlling interests Total OCI tax impact Shareholders Participating policyholders Non- controlling interests Total Items that may be reclassified subsequently to income: FVOCI assets (2018) / Available for sale assets (2017): Gains / (losses) arising on revaluation 22,325 (57,961) (6,436) (18,467) (82,864) (11,327) 48,916 (Gains) / losses transferred to income Net change in actuarial liabilities Retranslation of foreign currency operations Other (1,702) (6,567) - 5 (138) 31,897 (7,123) - - (1,753) 5,536 4,181 34 - (18,096) - (1,891) 41,614 (25,185) - (141) 1,061 - - (8,781) (21,221) 4,755 - 14,061 (33,325) (866) (34,135) (68,326) (10,407) 23,669 Items that will not be reclassified subsequently to income: Gains / (losses) arising on revaluation of owner-occupied property 695 3,655 Defined benefit gains / (losses) (1,360) (3,970) Other items - (665) 36 (279) - - - - 3,239 1,285 37 4,561 Total OCI movements 13,396 (33,604) (866) (29,574) (64,044) (19,167) Allocated to equity reserves Allocated to retained earnings 92 184 (29,634) (3,970) (33,604) 6,894 (248) (2,685) (8,512) - 73 4,282 (8,760) 10,454 (2,132) 12,586 - 34,123 21,537 12,586 34,123 380 - 456 (2) - 834 - - - - 13,281 (3,478) 2,613 5,167 - 17,583 373 11,328 - 11,701 834 29,284 62,577 (12,259) (18,152) 9,920 - 42,086 (1,759) 23,914 - 22,155 64,241 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 36.1 Operating activities (continued) The gross changes in investment property, debt securities and equity securities are as follows. 36 CASH FLOWS 36.1 Operating activities 2018 2017 restated Adjustments for non-cash items, interest and dividends: Income from financial investments - IFRS 9 basis (305,642) - Income from financial investments - IAS 39 basis - (376,872) Gain / loss from disposal of interests in subsidiaries and associates (11,820) (2,261) Net increase in actuarial liabilities 174,425 120,996 Gain on acquisition of insurance portfolio Interest cost and finance cost Credit impairment losses 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 (6,418) 89,032 95,519 24,277 8,655 (2,373) 65,655 2,563 (644,838) (6,396) 147 (3,704) (62,818) (5,974) 9,506 130,961 Investment property: Disbursements Disposal proceeds Debt securities: Disbursements Disposal proceeds Equity securities: Disbursements - 89,695 - 21,871 8,644 26,078 (111,849) Disposal proceeds - 7,272 4,324 (11,538) (4,386) (34,822) 13 (93,917) (24,548) Net increase/(decrease) in operating liabilities: Insurance liabilities Investment contract liabilities Other funding instruments Deposits Securities sold for re-purchase Other liabilities and payables 2018 (50) 2,613 2,563 2017 restated - - - (1,679,517) (1,789,622) 1,034,679 1,796,894 (644,838) 7,272 (56,378) 49,982 (6,396) 15,716 14,429 186,063 81,371 (48,606) (16,957) 232,016 (36,335) 40,659 4,324 13,544 (8) (70,493) (169,229) 153,100 27,804 (45,282) 93 SAGICOR FINANCIAL CORPORATION LIMITED (580,553) (157,602) 185 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 36.2 Investing activities Property, plant and equipment: Purchases Disposal proceeds 36.3 Financing activities Notes and loans payable: Proceeds Repayments 36.4 Cash and cash equivalents Cash resources Call deposits and other liquid balances Bank overdrafts 2018 2017 (13,941) (18,853) 13,615 (326) 5,468 (13,385) 2018 2017 1,380 (7,514) (6,134) 18,146 (1,964) 16,182 2018 261,899 61,820 (2,158) 321,561 2017 restated 268,402 72,515 (2,568) 338,349 37 CHANGES IN SUBSIDIARY AND ASSOCIATE HOLDINGS 37.1 Harmony General Insurance Company Ltd. (HG) On September 1, 2018 the Sagicor General Insurance Inc. acquired 100% of the shareholding of HG, a property and casualty insurer incorporated and operating in Barbados. The acquisition was by way of legal amalgamation, and the amalgamated entity continuing as Sagicor General Insurance Inc. The summary net assets acquired were as follows: Net assets acquired: Property, plant and equipment Intangible assets Financial investments Reinsurance assets Income tax assets Miscellaneous assets and receivables Cash resources Other insurance liabilities Provisions Income taxes Accounts payable and accrued liabilities Total net assets Share of net assets acquired Purchase consideration Goodwill arising on acquisition (note 8) Fair Value 16 1,732 4,377 3,833 34 2,584 2,051 (9,611) (117) 150 (1,695) 3,354 3,354 4,750 1,396 94 186 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 37.1 Harmony General Insurance Company Ltd. (HG) (continued) 37.2 Globe Finance Inc. (continued) The acquisition has been recorded using provisional values which could be subject to adjustment up to September 1, 2019. The acquiree’s net income and total revenue are as follows: For the eight months January 1, 2018 to August 31, 2018 4,846 (5,854) Total Revenue Net Income / (Loss) 37.2 Globe Finance Inc. On September 4, 2018 the Sagicor Group divested its 51% holding in Globe Finance Inc. The carrying amount of its net assets at sale and the consideration receivable was as follows: Financial investments Other assets Total assets Total liabilities Carrying amount of net assets sold Total consideration Loss on sale As of September 4, 2018 71,742 23,806 95,548 89,997 5,551 (5,538) 13 The net (loss) / income of Globe Finance Inc. for the period to sale in 2018 and for the year ended December 2017 were as follows: 37.3 Sagicor Real Estate X Fund Limited Period to September 4, 2018 Year to December 31, 2017 Total net (loss) / income from Globe Finance Inc Income attributable to shareholders (2,953) (1,772) 190 114 In May 2017, the Group acquired an additional 74,100,770 shares in Sagicor Real Estate X Fund Limited, a 3.3% interest. In August 2017, a further 2,500,000 shares, 0.11% holdings, were obtained on settlement of an annuity contract. These acquisitions increased the Sagicor Group Jamaica Limited’s holdings to 32.72%. In October 2017, the Sagicor Group Jamaica Limited reduced its holdings in Sagicor Real Estate X Fund Limited by 3.41% to 29.31% when it sold 76,470,770 shares. This resulted in a $2,261 gain on disposal. 95 SAGICOR FINANCIAL CORPORATION LIMITED 187 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 37.3 Sagicor Real Estate X Fund Limited (continued) 37.3 Sagicor Real Estate X Fund Limited (continued) Certain events took place on October 1, 2018 which deemed the Group to have taken effective control of Sagicor Real Estate X Fund Limited and its subsidiaries (Sagicor X Fund Group) with its 29.31% interest. As required by IFRS 10 – Consolidation of Financial Statements, the events triggered the accounting for Sagicor X Fund Group to be changed from an associate to a subsidiary, using Step-Acquisition for full consolidation. Step 1 - The carrying value of the investment in Sagicor X Fund Group on the Group’s balance sheet as at September 30, 2018 was compared to the Group’s share of the market value of Sagicor X Fund Group using the listed share price (deemed proceeds) along with recycling of accumulated unrealized foreign exchange gains in OCI of the Group relating to Sagicor X Fund Group as an associate. The accumulated unrealized fair value amount for revaluation of the owner-occupied property of the associate in the Group’s books was also transferred from OCI to retained earnings. Step 2 – The Group then recorded the net identifiable assets and liabilities, at fair value, of Sagicor X Fund Group as a subsidiary and compared its share (new deemed proceeds) to the new carrying value of the investment in subsidiary. The non-controlling interest amount was adjusted accordingly. These transactions gave rise to a net gain on disposal of the associate of $11,832, an identifiable intangible asset of $2, and a goodwill amount of $9,584 on acquisition of the subsidiary in SGJ’s books. Computations for the two steps are set out below: Step 1: Deemed disposal of associate Net realized gain on the step acquisition: Fair value of SGJ’s holding in Sagicor X Fund Group as at September 30, 2018 Carrying value of investment in X Fund as an Associate on Balance Sheet of SGJ as at September 30, 2018 Recycle of accumulated unrealized gains from investment in Sagicor X Fund Group as an associate: Currency translation reserves Total gain on deemed disposal of associate Accumulated unrealised revaluation gain for the associate being transferred to retained earnings 68,684 (59,914) 8,770 3,062 11,832 5,645 The summary net assets acquired were as follows: Net assets acquired: Investment property (note 5) Property, plant and equipment Investment in associated companies (note 6) Intangible assets (note 8) Financial investments Miscellaneous assets and receivables Cash resources Notes and loans payable Income tax liabilities Accounts payable and accrued liabilities Minority interest Total net assets Share of net assets acquired Purchase consideration Goodwill arising on acquisition (note 8) For the year ended December 31, 2018 Consolidated from September 1, 2018 to December 31, 2018 Total Revenue 56,453 17,541 Fair Value 16,444 119,939 200,853 2,680 10,005 17,821 16,153 (81,228) (8,439) (13,867) (78,719) 201,642 59,100 68,684 9,584 Net Income / (Loss) 2,878 7,404 96 188 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 37.4 Travel Cash Jamaica Limited 37.5 Ownership Changes – Sagicor General Inc (a) Effective December 1, 2018, the Sagicor Jamaica group acquired 51% of the share capital of Travel Cash Jamaica Limited. The summary net assets acquired were as follows: Effective November 23, 2018 Sagicor Life Inc acquired the 45% interest held by Goddard Enterprises Ltd in Sagicor General Inc for a cash payment. The payment made by the company amounted to $12,673 resulting in a transfer to retained earnings of $3,092. The net loss and other movements in equity are disclosed in the consolidation statement of equity. Net assets acquired: Property, plant and equipment Intangible assets (note 8) Financial investments Deposit and security liabilities Total net assets Share of net assets acquired Purchase consideration Goodwill arising on acquisition (note 8) Fair Value As a consequence of the transaction the Group increased its total interest in Sagicor General Inc from 53% to 98%. 5 1,159 3,054 (1,167) 3,051 1,556 3,034 1,478 The acquiree’s net income and total revenue are as follows: For the year ended December 31, 2018 Consolidated from December 1, 2018 to December 31, 2018 Total Revenue Net Income / (Loss) 147 147 88 88 97 SAGICOR FINANCIAL CORPORATION LIMITED 189 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 38 DISCONTINUED OPERATION 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. The terms of the sale required the Company to take certain actions and provide certain commitments which included future price adjustments to the consideration up to December 31, 2018, 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. 38 DISCONTINUED OPERATION (continued) Movement in Price Adjustments Balance receivable, beginning of year Experience gain Net currency movements Receivable end of year 2018 (10,110) (7,801) 672 (17,239) 2017 - (10,110) - (10,110) The price adjustments were subject to a limit based on the terms of the agreement. These results were subject to further underwriting, investment and foreign currency adjustments constrained by the limit as the experience develops. The net gain / (loss) recognised in the statement of income is as follows. Currency translation loss Movement in price adjustment Net gain and total comprehensive gain 2018 2017 (672) 7,801 7,129 - 10,110 10,110 On February 12, 2019, Sagicor Financial Corporation Limited completed a review of the consideration, related to the price adjustments to December 31, 2018, and entered into a Deed of Release with AmTrust to close this exposure. The final settlement amount of £13.5 million was received on February 26, 2019. 98 190 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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: CONTINGENT LIABILITIES (continued) (a) Legal proceedings (continued) (ii) Suit has been filed by an independent contractor against one of the Group’s subsidiaries for breach of contract arising from alleged contractual agreement. The Claimant alleges that the company failed to pursue initiatives contemplated by the contract with a third party and that by not doing so, it caused the Claimant company significant losses which they have estimated at over US$300,000,000. No provision was made in these financial statements for this claim as the claim has been stayed to accommodate arbitration as required under the Agreement between the parties coupled with the assessment by the Group of a probable favorable outcome. (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. 2018 2017 Customer guarantees and letters of credit (1) 35,297 31,235 (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 The Group is subject to various claims, disputes and legal proceedings, as part of the normal course of business. Provision is made for such matters when, in the opinion of management and its professional advisors, it is probable that a payment will be made by the Group, and the amount can be reasonably estimated. In respect of claims asserted against the Group which, according to the principles outlined above, have not been provided for, management is of the opinion that such claims are either without merit, can be successfully defended, cannot be reasonably estimated or will result in exposure to the Group which is immaterial to both the financial position and results of operations. Significant matters are outlined below: (i) Suit has been filed by a customer against one of the Group’s, subsidiaries for breach of contract, and breach of trust in the amount of US$8,928,500, being loss allegedly suffered as a result of what the claimants say is the unlawful withholding of insurance proceeds by the subsidiary. No provision was made in these financial statements for this claim as the outcome of this matter cannot be properly assessed until it has been heard. 99 SAGICOR FINANCIAL CORPORATION LIMITED 191 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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, 2018 follows: are as Investment property Owner-occupied lands Owner-occupied land and buildings Level 1 Level 2 Level 3 Total - - - - - - - - 93,494 35,232 93,494 35,232 168,371 168,371 297,097 297,097 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 80,816 35,232 78,465 194,513 Additions Assumed on acquisition Transfers in / (out) Disposals and divestures Fair value changes recorded in net investment income Fair value changes recorded in other comprehensive income Depreciation Effect of exchange rate changes 50 16,444 (125) (2,613) (1,090) - - 12 - - - - - - - - 2,516 2,566 103,183 119,627 - (125) (9,286) (11,899) - (1,090) (226) (226) (1,879) (1,879) (4,402) (4,390) Balance, end of year 93,494 35,232 168,371 297,097 100 192 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41 FINANCIAL RISK 41.1 Credit risk (continued) 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. For mortgage loans, the collateral is real estate property, and the approved loan limit is 75% to 95% of collateral value. For finance loans and finance leases, the collateral often comprises a vehicle or other form of security and the approved loan / lease limit is 50% to 100% of the collateral value. Unsecured finance loans and finance leases are only granted when the initial amount is less than $4,900. The Group may foreclose on overdue mortgage loans and finance loans and finance leases by repossessing the pledged asset. The Group will seek to dispose of the pledged asset by sale. In some instances, the Group may provide re-financing to a new purchaser on customary terms. Policy loans are advanced on the security of the underlying insurance policy cash values. Cash loans are advanced to a maximum of 80% to 100% of the cash surrender value. Automatic premium loans may be advanced to the extent of available cash surrender value. Disclosures in this note, notes 42 and 43, exclude amounts of the discontinued operation. Renegotiated assets 41.1 Credit risk Credit risk is the exposure that the counterparty to a financial instrument is unable to meet an obligation, thereby causing a financial loss to the Group. Credit risks are associated primarily with financial investments and reinsurance assets. Credit risk from financial investments is minimised through • • • • • holding a diversified portfolio of investments, purchasing quality securities advancing loans only after careful assessment of the borrower and obtaining collateral, placing deposits with financial institutions with a strong capital base. placing limits on the amount of exposure in relation to any one borrower. 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. Exposure to credit risk is also managed in part by obtaining collateral and guarantees. 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. Rating of financial assets The Group’s credit rating model (note 3.1) applies a rating scale to three categories of exposures: • Investment portfolios, comprising debt securities, deposits, securities purchased for re-sale, and cash; • 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). For lending portfolios, the three default ratings of 8, 9 and 10 are utilised, while for investment portfolios and reinsurance assets, one default rating (8) is utilised. In sections 41.2 and 41.3 below, we set out various credit risks and exposures in accordance of assets measured in accordance with IFRS 9. In section 41.4, we set out risks and exposures of assets measured in accordance with IAS 39. 101 SAGICOR FINANCIAL CORPORATION LIMITED 193 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) The total credit risk exposure by operating segment is as follows: The total credit risk exposure of the Group at year end is summarised in the following table. For assets measured at FVOCI or amortised cost, credit risk exposure is the gross carrying amount. For assets measured at FVTPL, the Group’s credit risk exposure is the carrying amount. 2018 Investment portfolios: Debt securities at FVOCI Debt securities at amortised cost Securities purchased for resale Deposits at amortised cost Debt securities at FVTPL Lending portfolios: Mortgage loans at amortised cost Finance loans and leases at amortised cost Policy loans at amortised cost Mortgage loans at FVTPL Cash Reinsurance assets Receivables (premium, accounts and miscellaneous) Derivative financial assets Total financial statement exposures Lending commitments Customer guarantees and letters of credit Other items Total off financial statement exposures 2,717,688 1,100,897 7,170 107,527 198,807 339,400 527,854 147,156 30,143 358,687 699,870 99,764 7,696 62,496 35,297 24,580 Total 102 194 Investment portfolios Lending portfolios: Cash Reinsurance assets Receivables Derivative financial assets 4,132,089 Sagicor Life Sagicor Jamaica Sagicor USA 1,069,108 1,620,107 1,379,293 368,026 589,819 102,506 187,471 68,322 36,208 5,351 4,611 738,970 20,354 59,474 - 247 4,100 7,449 Head office & other 63,581 18,386 32,502 12,831 33,081 0 Total financial statement exposures 1,565,345 2,461,729 2,234,342 160,381 Lending commitments Customer guarantees and letters of credit Other items Total off financial statement exposures 7,867 54,629 - 1,500 9,367 35,297 23,080 113,006 - - - - - - - - 1,044,553 Total 1,574,712 2,574,735 2,234,342 160,381 The principal individual credit exposures which are included in the foregoing tables are as follows: 6,342,659 Gov’t of Jamaica debt securities Gov’t of Trinidad & Tobago debt securities Gov’t of Barbados debt securities (see 41.3(f)) Federal National Mortgage Association (USA) debt securities Guggenheim Partners reinsurance asset (see 41.3(e)) 122,373 6,465,032 Sagicor Risk Rating 5 3 8 1 2 2018 913,520 189,829 231,521 127,430 464,231 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) Credit risk exposure – financial investments subject to impairment Financial assets carried at amortised cost or FVOCI are subject to credit impairment losses which are recognised in the statement of income. The following tables analyse the credit risk exposure of financial investments for which an ECL allowance is recognised. Debt securities – amortised cost 2018 Debt securities – FVOCI 2018 Amounts in US $000 ECL Staging Amounts in US $000 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 December 31: Credit grade: December 31: Credit grade: Investment 2,110,188 Non-investment 455,988 Watch Default Unrated - - - 18,447 78,786 - - - - 30,812 - 23,467 - Gross carrying amount 2,566,176 97,233 54,279 Loss allowance (1,646) (8,011) (19,555) Carrying amount 2,564,530 89,222 34,724 - - - - - - - - 2,128,635 1,665,004 565,586 561,448 - 46,824 23,467 - - 102 2,717,688 2,273,378 (29,212) (6,707) 2,688,476 2,266,671 Investment 213,244 - - 577 213,821 Non-investment 717,965 8,369 10 149,594 875,938 Watch Default Unrated 639 3,783 - 5,928 10,350 - - - - 788 - - - 788 - 201,894 662,657 187,097 - 35 Gross carrying amount 931,848 12,152 798 156,099 1,100,897 1,051,683 Loss allowance (1,855) (1,228) (161) (612) (3,856) - Carrying amount 929,993 10,924 637 155,487 1,097,041 1,051,683 103 SAGICOR FINANCIAL CORPORATION LIMITED 195 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) Mortgage loans – amortised cost 2018 Policy loans – amortised cost 2018 Amounts in US $000 ECL Staging Amounts in US $000 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 December 31: Credit grade: December 31: Credit grade: Investment 210,885 9,673 Non-investment 86,713 6,861 28 811 Watch Default 48 - 545 12,597 - 11,239 Gross carrying amount 297,646 17,079 24,675 Loss allowance (625) (283) (1,472) Carrying amount 297,021 16,796 23,203 - - - - - - - 220,586 209,675 Investment 94,385 68,156 Non-investment 13,190 13,191 Watch 11,239 8,533 Default 79,658 67,498 - - 339,400 299,555 Gross carrying amount 147,156 (2,380) (2,616) Loss allowance (110) 337,020 296,939 Carrying amount 147,046 - - - - - - - - - - - - - - - - - - - - - 79,658 80,945 67,498 61,187 - - - - 147,156 142,132 (110) - 147,046 142,132 104 196 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) Finance loans and finance leases – amortised cost Securities purchases for resale – amortised cost 2018 2018 Amounts in US $000 ECL Staging Amounts in US $000 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 December 31: Credit grade: Investment 1,519 - Non-investment 495,580 12,291 Watch Default - - 2,942 - 15,522 Gross carrying amount 497,099 15,233 15,522 Loss allowance (4,441) (1,196) (7,731) Carrying amount 492,658 14,037 7,791 - - - December 31: Credit grade: - - - - - - - 1,519 2,079 Investment 507,871 559,384 Non-investment 2,942 1,758 Watch 15,522 13,726 Default - 7,170 - - 527,854 576,947 Gross carrying amount 7,170 (13,368) (12,548) Loss allowance 514,486 564,399 Carrying amount - 7,170 - - - - - - - - - - - - - - - - - - - - - - - 7,170 16,518 - - - - 7,170 16,518 - - 7,170 16,518 105 SAGICOR FINANCIAL CORPORATION LIMITED Sagicor Financial Corporation Limited 197 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.2 Credit risk exposure – financial assets subject to impairment (IFRS 9 basis) (continued) 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) The allowance for ECL is recognised in each reporting period and is impacted by a variety of factors, as described below: • • • • • Transfers between stages due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired during the period; Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments de-recognised in the period; Impact on the measurement of ECL due to inputs used in the calculation including the effect of ‘step-up’ (or ‘step down’) between 12-month and life-time ECL; Impacts on the measurement of ECL due to changes made to models and assumptions; and Foreign exchange retranslations for assets denominated in foreign currencies and other movements; Deposits – amortised cost 2018 Amounts in US $000 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2017 December 31: Credit grade: Investment Non-investment Watch Unrated 72,335 34,169 - 1 222 370 430 - Gross carrying amount 107,156 371 Loss allowance (355) (64) Carrying amount 106,801 307 - - - - - - - - - - - - - - 72,335 76,754 34,170 32,281 592 964 430 1,405 107,527 111,404 (419) - 107,108 111,404 106 198 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) The following tables contain analyses of the movement of loss allowances from January 1, 2018 to December 31, 2018 in respect of financial investments subject to impairment. Amounts in US $000 ECL Staging Debt securities – FVOCI 2018 Debt securities – amortised cost 2018 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total Loss allowance at January 1, 2018 2,780 8,863 95 Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 3 Debt securities originated or purchased Debt securities fully derecognised Changes in models/assumptions used in ECL calculation Changes to inputs used in ECL calculation Effect of exchange rate changes (54) (759) - 445 (581) (285) 122 (22) 54 - - 759 (1,303) 1,303 259 (1,832) - (92) 1,288 13,650 728 (46) 3,766 74 Loss allowance at December 31, 2018 1,646 8,011 19,555 Credit impairment loss recorded in income - - - - - - - - - - 107 SAGICOR FINANCIAL CORPORATION LIMITED 11,738 1,928 8,581 - - 78 276 - - (78) - 961 - - (276) - (657) (7,502) (1,173) 4 (285) (18) 1,855 - 425 - 1,228 - 980 - 161 - - - 704 (2,505) 14,653 4,616 6 29,212 17,697 917 11,426 - - - 78 (65) - (318) - 612 - - - 1,039 (9,397) 4 802 (18) 3,856 72,179 199 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) Amounts in US $000 Mortgage loans – amortised cost Finance loans and finance leases - amortised cost 2018 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total 2018 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total Loss allowance at January 1, 2018 941 309 1,149 Transfers: Transfer from Stage 1 to Stage 2 Transfer from Stage 1 to Stage 3 Transfer from Stage 2 to Stage 1 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 Transfer from Stage 3 to Stage 1 Loans and leases originated or purchased Loans and leases fully derecognised Write-offs Changes to inputs used in ECL calculation Effect of exchange rate changes Loss allowance at December 31, 2018 Credit impairment loss recorded in income (274) (630) 101 - - 4 107 (140) - 516 - 625 274 - (101) (109) 10 - 18 (60) - (56) (2) 283 - 630 - 109 (10) (4) 85 (78) - (394) (15) 1,472 - - - - - - - - - - - - - 2,399 6,113 1,427 8,295 (248) (26) 332 - - 32 1,740 248 - (332) (256) 11 - 189 (2,071) (735) - (1,316) (115) 4,441 (1) 668 (23) 1,196 - 26 - 256 (11) (32) 1,048 (2,611) - 902 (142) 7,731 - - - - - - 210 (278) - 66 (17) 2,380 726 - - - - - - - - - - - - - 15,835 - - - - - - 2,977 (5,417) (1) 254 (280) 13,368 4,939 108 200 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) Deposits - amortised cost 2018 (continued) (a) Economic variable assumptions Amounts in US $000 ECL Staging Stage 1 12-month ECL Stage 2 life-time ECL Stage 3 life-time ECL POCI Total Loss allowance at January 1, 2018 Deposits originated or purchased Deposits fully derecognised Changes to inputs used in ECL calculation Loss allowance at December 31, 2018 Credit impairment loss recorded in income 506 294 (387) (58) 355 51 - - 13 64 - - - - - - - - - - 557 294 (387) (45) 419 (131) Sagicor has selected three economic factors which provide the overall macroeconomic environment in considering forward looking information for base, upside and downside forecasts. These are as follows: As of December 31, As of January 1, 2019 2020 2021 2018 2019 2020 Unemployment rate (USA) Base Upside Downside World GDP Base Upside Downside WTI Oil Prices/10 Base Upside Downside 4.2% 4.0% 4.4% 3.7% 5.4% 2.8% 4.3% 4.2% 4.7% 3.7% 5.4% 2.8% 4.4% 4.3% 4.8% 3.6% 5.4% 2.7% 4.7% 4.4% 5.2% 3.7% 5.6% 2.8% 4.5% 3.7% 5.5% 4.5% 3.8% 5.7% 3.7% 5.6% 2.8% 3.7% 5.6% 2.85% $4.80 $9.48 $2.95 $5.05 $9.48 $3.10 $5.15 $9.48 $3.16 $5.72 $1.96 $9.52 $5.42 $1.96 $9.52 $5.23 $1.96 $9.52 109 SAGICOR FINANCIAL CORPORATION LIMITED 201 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) Sagicor's lending operations in Barbados, Trinidad, and Jamaica have limited readily available information regarding economic forecasts. Management has examined the information within the market and selected economic drivers that have the best correlation to the portfolio's performance. Economic state is assigned to reflect the driver's impact on ECL. Expected state for the next 12 months Scenario Negative Base Stable Upside Negative Downside Stable Base Stable Upside Negative Downside Expected state for the next 12 months Scenario Negative Base Stable Upside Negative Downside Stable Base Positive Upside Negative Downside Expected state for the next 12 months Scenario Base Upside Downside Base Upside Downside Positive Positive Stable Positive Positive Stable Barbados Unemployment rate GDP growth Trinidad & Tobago Unemployment rate GDP growth Jamaica Interest rate Unemployment rate 110 202 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) (b) Significant increase in credit risk (SICR) The ECL impact of a SICR for debt securities has been estimated as follows. SICR criteria (see note 3.1) Actual threshold applied Change in threshold ECL impact of change in threshold Debt securities 2-notch downgrade since origination 1-notch downgrade since origination $1,301 The staging for lending products is based primarily on days past due with 30-day used as backstop, thus sensitivity analysis is not performed. (c) Loss given default (LGD) The ECL impact of changes in LGD rates is summarised as follows: Debt securities LGD ECL impact of Rate applied Change in rate increase in value decrease in value Corporate 52% ( - /+ 5) % 1,016 Sovereign, excluding Barbados and Jamaica Sovereign - Barbados, excluding BAICO securities domestic Sovereign - Barbados, external Sovereign - Barbados - BAICO bonds (1) (982) (333) - 45% ( - /+ 5) % 5% ( - /+ 5) % 333 181 ( - /+ 5) % 2,887 (2,629) 36% 17% ( - /+ 5) % 41 236 (41) (236) Sovereign - Jamaica 15% ( - /+ 5) % SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) (1) As part of the acquisition of the British American Insurance Company (BAICO) insurance portfolio (note 13.2), Sagicor received bonds issued by the Government of Barbados of US$46.6 million to support the policyholder liabilities transferred. In order to safeguard the interest of policyholders these bonds were issued with a protective clause in accordance with the sale and purchase agreement approved by the Supreme Court which prevented the Government of Barbados from restructuring these bonds at any time. Accordingly, these bonds have been excluded from the Government of Barbados’s restructuring plan, and, have been classified as Stage 1. 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) (d) Scenario design The weightings assigned to each economic scenario as at January 1 and December 31, 2018 are set out in the following table. Sagicor Life portfolios Sagicor Jamaica portfolios Base Upside Downside 80% 10% 10% 80% 10% 10% Sagicor Life USA 80% 10% 10% Refer to section (f) for Government of Barbados exposures The results of varying the upside and downside scenarios are as follows. Base – 80% Upside – 5% Downside – 15% Base – 80% Upside – 15% Downside – 5% Increase in ECL Decrease in ECL Debt securities Lending products Government of Barbados - BAICO bonds (1) $277 $190 $3 ($277) ($189) ($3) 111 SAGICOR FINANCIAL CORPORATION LIMITED 203 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) The following tables explain the changes in the carrying value between the beginning and the end of the period due to these factors. The gross carrying amounts of investments below represent the Group’s maximum exposure to credit risk on these assets. Debt securities - FVOCI ECL staging Amounts in US $000 Stage 1 Stage 2 Stage 3 Purchased Amounts in US $000 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total Debt securities - amortised cost ECL staging Stage 1 Stage 2 Stage 3 Purchased 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total Gross carrying amount as at January 01, 2018 2,061,339 136,393 2,330 - 2,200,062 Gross carrying amount as at January 01, 2018 813,354 225,621 - 12,708 1,051,683 Transfers: Transfers: Transfer from Stage 1 to Stage 2 (18,305) 18,305 - Transfer from Stage 1 to Stage 3 (18,070) - 18,070 Transfer from Stage 2 to Stage 3 - (34,849) 34,849 New financial assets originated or purchased Financial assets fully derecognised during the period 946,087 4,591 - (322,793) (19,696) (2,258) Write-offs (1,791) - - Changes in principle and interest (70,846) (6,845) 1,191 Foreign exchange adjustment (9,445) (666) 97 Gross carrying amount as at December 31, 2018 2,566,176 97,233 54,279 - - - - - - - - - - - - Transfer from Stage 1 to Stage 3 (4,009) - 4,009 Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 - - (545) (450) 545 450 - - - - - - 950,678 New financial assets originated or purchased (344,747) Financial assets fully derecognised during the period 304,702 (100) - 150,724 455,326 (122,604) (208,998) (4,000) (7,053) (342,655) (1,791) Changes in principle and interest (54,663) (3,375) (206) (280) (58,524) (76,500) (10,014) 2,717,688 Foreign exchange adjustment (4,932) (1) - - (4,933) Gross carrying amount as at December 31, 2018 931,848 12,152 798 156,099 1,100,897 112 204 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) Mortgage loans - amortised cost Finance loans and finance leases - amortised cost ECL staging ECL staging Amounts in US $000 Gross carrying amount as at January 01, 2018 Transfers: Stage 1 Stage 2 Stage 3 Purchased 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total 270,719 17,567 29,934 - 318,220 Amounts in US $000 Gross carrying amount as at January 01, 2018 Transfers: Stage 1 Stage 2 Stage 3 Purchased 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total 544,414 12,236 19,946 - 576,596 Transfer from Stage 1 to Stage 2 (12,297) 12,297 - Transfer from Stage 1 to Stage 3 (1,688) - 1,688 Transfer from Stage 2 to Stage 1 7,176 (7,176) - Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 - - Transfer from Stage 3 to Stage 1 967 (3,158) 3,158 688 - (688) (967) 399 New financial assets originated or purchased Financial assets fully derecognised during the period 52,606 815 (28,472) (4,730) (8,334) Write-offs - Changes in principle and interest 12,170 Foreign exchange adjustment (3,535) - 550 226 (35) (242) (238) Gross carrying amount as at December 31, 2018 297,646 17,079 24,675 113 SAGICOR FINANCIAL CORPORATION LIMITED - - - - - - - - - - - - - - - - - - 53,820 (41,536) Transfer from Stage 1 to Stage 2 (15,608) 15,608 - Transfer from Stage 1 to Stage 3 (2,196) - 2,196 Transfer from Stage 2 to Stage 1 2,058 (2,058) - Transfer from Stage 2 to Stage 3 Transfer from Stage 3 to Stage 2 Transfer from Stage 3 to Stage 1 New financial assets originated or purchased Financial assets fully derecognised during the period - - 48 (4,583) 4,583 16 - (16) (48) 200,491 3,411 3,186 (183,391) (8,480) (14,241) (35) Write-offs (26) (20) 12,478 Changes in principle and interest (40,726) (889) (1) 83 (3,547) Foreign exchange adjustment (7,965) (8) (166) 339,400 Gross carrying amount as at December 31, 2018 497,099 15,233 15,522 - - - - - - - - - - - - - - - - - - 207,088 (206,112) (47) (41,532) (8,139) 527,854 205 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) Securities purchased for resale - amortised cost ECL staging Deposits - amortised cost ECL staging Amounts in US $000 Stage 1 Stage 2 Stage 3 Purchased Amounts in US $000 Stage 1 Stage 2 Stage 3 Purchased 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total 12-month ECL Lifetime ECL Lifetime ECL credit- impaired Total Gross carrying amount as at January 01, 2018 16,518 Net new financial assets originated or purchased Financial assets fully derecognised during the period Changes in principle and interest Foreign exchange adjustment Gross carrying amount as at December 31, 2018 354,086 (363,168) (17) (249) 7,170 - - - - - - - - - - - - - - - - - - 16,518 Gross carrying amount as at January 01, 2018 111,034 370 354,086 New financial assets originated or purchased 60,746 (363,168) Financial assets fully derecognised during the period (52,170) (17) (249) 7,170 Changes in principle and interest (11,426) Foreign exchange adjustment (1,028) Gross carrying amount as at December 31, 2018 107,156 371 - - - - - - - 111,404 - 60,747 - (52,170) - - - (11,426) (1,028) 107,527 1 - - - 114 206 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) (e) Reinsurance asset – Guggenheim Partners The reinsurance asset held in the name of Guggenheim Partners is secured by assets held in a trust. The excess of the fair value of the trust assets over the reinsurance asset is as follows: As at September 30, 2018 the negotiations of the new bond were materially completed and on October 1, 2018 Sagicor signed an agreement with the Government of Barbados which outlined the terms of the debt exchange. In exchange for its debt, the Group has accepted the following securities, the majority of which are series G: Fair value of trust assets Carrying value of reinsurance asset 2018 574,731 (464,231) 110,500 Series G A 50-year amortising bond which includes a 15-year grace period on principal payments. The interest rates on the bond range from 4% per annum for the first 15 years to 8% for years 26 through 50 with interest capitalisation of 100% for the first five years. (f) Government of Barbados debt securities in default Series C During the month of June 2018, the Government of Barbados (GOB) suspended all payments to creditors of its external commercial debt which is denominated primarily in US dollars. Interest payments due on June 5, 2018 and June 15, 2018 were not made. Principal payments on matured domestic debt which is denominated in Barbados dollars were suspended and debt holders were required to roll-over principal balances. The announcement of the suspended payments was evidence that the financial assets were credit- impaired and consequently, in June Sagicor re-classified its GOB debt security holdings to Stage 3 with a probability of default of 100%. Some GOB debt instruments were purchased more recently and therefore there were instruments that had not yet experienced a significant increase in credit risk relative to the initial credit risk and moved from Stage 1 to Stage 3 upon the announcement. On September 7, 2018 the GOB announced its debt restructuring program which is being done in conjunction with the economic recovery plan and an IMF programme. The IMF programme will allow Barbados to reduce its current debt service cost substantially and it is expected that the manageability of the restructured cash flows will improve the credit quality of the instrument offered in the debt exchange. A 15-year amortising bond with interest rates ranging from 1.0% for the first 3 years to 3.75% for years 5 through to maturity. Interest on these bonds is to be paid quarterly with the first payment due on December 31, 2018. The principal will be repaid in four equal quarterly instalments commencing one year prior to maturity. Series D A 35-year amortising bond with interest rates ranging from 1.5% for the first 5 years to 7.5% for years 16 through to maturity. Interest on these bonds is paid quarterly with the first payment due on November 30, 2018. The principal will be repaid in three equal instalments commencing one year prior to maturity with the final payment on August 31, 2053. External Debt The restructuring of the external debt is yet to be finalised. 115 SAGICOR FINANCIAL CORPORATION LIMITED 207 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) 41.3 Credit impairment losses – financial assets subject to impairment (IFRS 9 basis) (continued) Credit impairment loss and de-recognition of original domestic debt securities As a result of the debt restructure outlined above, a credit impairment loss has been recognised in the statement of income. In addition, the domestic debt securities were de-recognised since the maturity profile and interest rates of the replacement debt securities were materially different. In November 2018, management derived a yield curve from which the initial fair values of the replacement securities were determined. The yield curve was derived from the Central Bank of Barbados base-line yield curve to which management applied a further risk premium considering • • • • the GOB credit rating relative to investment grade, the potential for further default, the lack of liquidity of the debt, and the economic uncertainty as Barbados enters a period of severe economic reform and structural adjustment. The risk premium derived is summarised in the following table. The replacement debt securities are classified as “originated credit-impaired” (POCI). The consequential movement in the carrying values of GOB debt for the period referred to above is summarised as follows: GOB Debt Securities Gross carrying value prior to default Loss allowance prior to default Domestic debt External debt Total 275,805 (7,890) 50,741 (1,645) 326,546 (9,535) Net carrying value prior to default 267,915 49,096 317,011 Accrued interest and other adjustments 2,664 7,975 10,639 Credit impairment loss arising from the default (75,394) (16,508) (91,902) Carrying value as of October 1, 2018 195,185 40,563 235,748 Years 0-10 11-21 22-24 25-29 30-50 116 208 Spread 25 bps 50 bps 75 bps 100 bps 150 bps Accrued interest and other adjustments Domestic debt not included in restructure Adjusted carrying value on restructure 1,014 (49,765) 146,434 Fair value on recognition of replacement securities 147,250 Gain on de-recognition of original securities 816 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.4 Credit risk – financial investments measured on IAS 39 basis 41.4 Credit risk – financial investments measured on IAS 39 basis (continued) The maximum exposures of the Group to credit risk without taking into account any collateral or credit enhancements are set out below. Investment portfolios Lending portfolios: Reinsurance assets Other financial assets 2017 $000 3,986,428 1,048,917 785,830 219,090 % 64.6 17.0 12.7 3.5 Total financial statement exposures 6,040,265 97.8 Lending commitments Customer guarantees and letters of credit Other items Total off financial statement exposures 78,985 31,235 24,902 135,122 1.3 0.5 0.4 2.2 The results of the risk rating of investment and lending portfolios respectively are as follows: Risk Rating Classification Investment portfolios Lending portfolios 2017 2017 Exposure $000 Exposure % Exposure $000 Exposure % 1 2 3 4 5 6 7 8 9 Minimal risk Low risk 329,099 459,919 Moderate risk 1,445,870 Acceptable risk Average risk Higher risk Special mention Substandard Doubtful 172,175 1,242,095 298,546 3,335 485 n/a n/a 10 Loss TOTAL RATED EXPOSURES 3,951,524 UN-RATED EXPOSURES 34,904 8% 12% 36% 4% 31% 8% 0% 0% n/a n/a 99% 1% 514,455 121,435 267,220 57,670 41,651 12,800 11,307 4,205 7,043 11,048 49% 12% 25% 5% 4% 1% 1% 1% 1% 1% 1,048,834 100% 83 0% Total 6,175,387 100% TOTAL 3,986,428 100% 1,048,917 100% 117 SAGICOR FINANCIAL CORPORATION LIMITED 209 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.4 Credit risk – financial investments measured on IAS 39 basis (continued) 41.4 Credit risk – financial investments measured on IAS 39 basis (continued) The Group’s largest exposures to individual counterparty credit risks as of December 31, 2017 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. Exposure to the lending portfolios by geographic area is as follows. 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) Sagicor Risk Rating 2017 5 3 6 2 5 1 1 4 3 861,252 265,174 280,407 56,357 71,617 106,882 61,574 29,085 531,310 (1) The reinsurance asset held in the name of Guggenheim Partners is secured by assets held in trust totalling $574,135. Barbados Jamaica Trinidad & Tobago Other Caribbean USA 2017 202,098 519,770 154,660 106,805 65,584 1,048,917 (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. Mortgage loans less than 90 to 180 days past due and finance loans and finance leases less than 90 to 180 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 table sets out the carrying values of debt securities, mortgage loans, finance loans and finance leases, analysed by past due or impairment status. 118 210 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.4 Credit risk – financial investments measured on IAS 39 basis (continued) 2017 Debt securities Mortgage loans Finance loans & leases Neither past due nor impaired 3,490,549 291,123 521,860 Past due up to 3 months, but not impaired 7,010 23,255 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 - - - 3,487 4,005 2,257 34,195 1,598 - - Total past due but not impaired 7,010 33,004 35,793 Impaired assets (net of impairment) 883 18,259 6,746 Total carrying value 3,498,442 342,386 564,399 Accumulated allowances on impaired assets 619 7,390 14,414 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. 119 SAGICOR FINANCIAL CORPORATION LIMITED 211 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.5 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. (a) Insurance liabilities 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. 2018 Actuarial liabilities Other insurance liabilities Total 2017 restated Actuarial liabilities Other insurance liabilities Total 120 212 Expected discounted cash flows Maturing within 1 year 201,360 106,982 308,342 208,151 118,584 326,735 Maturing 1 to 5 years 769,778 44,241 814,019 696,530 20,875 717,405 Maturing after 5 years 2,053,326 51,919 2,105,245 2,040,019 52,086 2,092,105 Total 3,024,464 203,142 3,227,606 2,944,700 191,545 3,136,245 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.5 Liquidity risk (continued) (b) Financial liabilities and commitments 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. 2018 - Contractual un-discounted cash flows 2017 - 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 334,537 114,673 402,596 695,300 48,563 424,658 187 2,158 48,948 445,239 55,505 30,054 17,095 - 60 - 15,562 67,133 17,707 - - - - - 399,047 627,045 475,808 725,354 65,658 424,658 247 2,158 320,760 41,034 222,353 687,085 35,009 477,940 2,008 2,568 Accounts payable and accrued liabilities 237,584 1,898 1,342 240,824 173,720 Total financial liabilities 2,260,256 598,799 101,744 2,960,799 1,962,477 Off financial statement commitments: Loan commitments Non-cancellable operating lease and rental payments Customer guarantees and letters of credit Capital commitments Total off financial statement commitments 42,630 4,735 20,596 19,361 87,322 11,590 5,737 1,064 - 8,276 - 13,637 - 62,496 10,472 35,297 19,361 76,192 4,977 17,765 17,831 18,391 21,913 127,626 116,765 53,878 526,404 64,701 71,037 15,356 - 224 - 91,742 823,342 981 8,300 - 1,846 11,127 11,154 - 17,959 8,706 - - - - 385,792 567,438 305,013 766,828 50,365 477,940 2,232 2,568 1,000 266,462 38,819 2,824,638 1,812 - - 11,558 13,370 78,985 13,277 17,765 31,235 141,262 Total 121 2,347,578 617,190 123,657 3,088,425 2,079,242 834,469 52,189 2,965,900 SAGICOR FINANCIAL CORPORATION LIMITED 213 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.5 Liquidity risk (continued) (c) Financial and insurance assets 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 2018 – Contractual or expected discounted cash flows 2017 – 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 563,247 652,926 2,713,308 3,929,481 402,939 536,581 2,558,922 3,498,442 22,513 4,585 41,261 13,758 193,259 243,372 - 1,033 60 303,389 128,703 77,855 - 367,163 147,046 514,486 7,170 1,047 107,116 - 7,696 260,139 318,307 653,722 - - - - 191 - 614 - 46,148 51,633 47,932 358,687 351,967 16,521 3,495 125,568 16,518 103,248 32,253 95,109 49,082 53,446 61,269 31,886 14,127 159,581 - 6,086 224 293,979 124,510 279,250 - 2,070 - 284,649 356,789 - - 71,081 - 201 - 817 8,097 342,386 142,132 564,399 16,518 111,404 32,477 736,547 49,283 53,446 133,167 360,064 7,170 105,036 7,636 75,276 45,957 51,633 47,318 358,687 1,482,317 1,212,549 3,543,414 6,238,280 1,311,415 1,104,215 3,624,635 6,040,265 122 214 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.6 Interest rate risk 41.6 Interest rate risk (continued) The Group manages its interest rate risk by various 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 Group is exposed to interest rate risks. Cash flow interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Fair value interest rate risk is the risk that the fair value of a financial instrument will fluctuate because of changes in market interest rates. The occurrence of an adverse change in interest rates on invested assets may result in financial loss to the Group in fulfilling the contractual returns on insurance and financial liabilities. The return on investments may be variable, fixed for a term or fixed to maturity. On reinvestment of a matured investment, the returns available on the new investment may be significantly different from the returns formerly achieved. This is known as reinvestment risk. Guaranteed minimum returns exist within cash values of long-term traditional insurance contracts, long term universal life insurance contracts, annuity options, deposit administration liabilities and policy funds on deposit. Where the returns credited exceed the guaranteed minima, the insurer usually has the option to adjust the return from period to period. For other financial liabilities, returns are usually contractual and may only be adjusted on contract renewal or contract re-pricing. The Group is therefore exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase or decrease as a result of such changes. Interest rate changes may also result in losses if asset and liability cash flows are not closely matched with respect to timing and amount. The Group is exposed to risk under embedded derivatives contained in a host insurance contract. These risks include exposures to investment returns which may produce losses to the insurer arising from the following contract features: • • • 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. 123 SAGICOR FINANCIAL CORPORATION LIMITED 215 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.6 Interest rate risk (continued) 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 9,310 333,037 4,042 44,274 96,000 338,234 439,732 691,337 47,989 422,786 187 2,158 338 10,905 27,498 16,661 - 60 - 964 2018 Exposure after 5 years 50,947 13,079 56,107 10,366 - - - - - - Not exposed to interest 138,843 7 (66) 569 2,799 - 986 - - Total 203,142 390,397 490,275 461,572 721,634 64,650 423,772 247 2,158 239,392 240,694 Exposure within 1 year Exposure 1 to 5 years 7,920 319,503 4,756 50,194 7,604 406,148 211,648 679,555 40,578 474,579 - 2,568 1,917 49,773 69,462 6,670 - - - 70,946 2017 Exposure after 5 years Not exposed to interest Total 52,086 126,783 191,545 9,321 - 18,043 - - - - - - - 53 379,018 413,805 410 1,931 328 1,455 2,232 - 279,874 750,948 47,576 476,034 2,232 2,568 174,113 246,976 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 Total 2,042,874 442,638 130,499 382,530 2,998,541 1,745,872 657,949 79,450 307,305 2,790,576 124 216 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.6 Interest rate risk (continued) 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. Exposure within 1 year Exposure 1 to 5 years 2018 Exposure after 5 years Not exposed to interest Total Exposure within 1 year Exposure 1 to 5 years 2017 Exposure after 5 years Not exposed to interest Total 621,338 631,971 2,618,873 57,299 3,929,481 626,248 472,660 2,350,813 48,721 3,498,442 Debt securities Equity securities Mortgage loans Policy loans Finance loans and leases Securities purchased for re-sale - 57,558 3,713 489,930 7,170 - 39,711 13,513 17,028 - Deposits 104,683 1,098 Derivative financial instruments Reinsurance assets: other Premiums receivable - - - - - - Other assets and accounts receivable 2,190 1,066 - 267,505 267,505 2,198 4,499 2,145 367,163 147,046 514,486 - 7,170 288 107,116 7,696 45,957 51,633 44,875 7,696 46,148 51,633 48,131 267,696 125,321 5,383 - 1,047 - 191 - - - - 19,996 2,591 486,854 16,435 108,940 - 47 184 4,172 - 36,452 13,855 37,773 - 340 - - - 71,170 - - 245,483 245,483 284,703 120,899 38,191 - 1,700 - 200 - - - 1,235 4,787 1,581 83 424 32,477 49,036 53,262 57,825 89,797 342,386 142,132 564,399 16,518 111,404 32,477 49,283 53,446 133,167 360,064 Cash resources Total 152,656 - 206,031 358,687 270,267 1,439,238 704,387 3,018,511 690,126 5,852,262 1,535,734 632,250 2,796,506 584,711 5,549,201 125 SAGICOR FINANCIAL CORPORATION LIMITED 217 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.6 Interest rate risk (continued) 41.6 Interest rate risk (continued) The table below summarises the average interest yields on financial assets and liabilities held during the year. Sagicor Investments Jamaica Limited and Sagicor Bank Jamaica Limited 2018 – amortised cost & FVOCI instruments 2017 – all instruments 5.8% 6.0% 7.2% 11.4% 7.5% 2.9% 4.8% 8.4% 2.3% 1.6% 3.4% 6.1% 5.7% 7.2% 11.6% 5.1% 2.3% 5.6% 9.5% 2.1% 2.0% 3.6% 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 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 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. 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 financial assets carried at FVOCI (2017 – available for sale) 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 2018 Effect on net income Effect on TCI Change in interest rate JMD USD 2017 Effect on net income Effect on TCI - 1% - 0.5% 4,713 23,850 - 1% - 0.5% 8,525 21,297 +1% + 0.5% (4,663) (21,879) +1% + 0.5% (8,856) (19,691) 41.7 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 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. 126 218 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.7 Foreign exchange risk (continued) 2018 US$ 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 335,070 1,017,543 424,508 145,714 3,026,132 131,191 5,080,158 6,611 12,113 9,135 362,929 194,218 557,147 3,206 50,227 84,474 1,155,450 360,401 1,515,851 393,705 362,175 77,959 32,876 2,698 2,236 29,285 40,696 579,455 17,680 597,135 (39,988) 26,081 63,615 42,845 560,476 24,148 92,226 1,171,566 17,373 1,188,939 326,912 6,132 8,926 51,294 490,860 76,096 566,956 318,810 33,295 162,334 - 1,211 12,443 20,529 548,622 22,974 571,596 (4,640) 4,124 9,033 9,996 168,867 21,002 189,869 59,314 12,545 48,678 - 15,111 (592) 27,160 679,093 14,771 159,566 3,879,562 419,456 4,299,018 1,791,859 40,275 75,558 444,732 1,078,395 2,234 55,819 162,216 3,488,872 4,305 28,038 166,521 3,516,910 23,348 782,108 704 4,694 44,222 180,811 (1,467) 179,344 98,601 12,987 7,336 - 16,604 6,769 4,264 146,561 2,301 148,862 30,482 699,870 99,764 358,687 6,238,479 1,069,706 7,308,185 3,024,464 203,142 390,397 490,275 1,674,033 74,287 240,694 6,097,292 92,671 6,189,963 1,118,222 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets 127 SAGICOR FINANCIAL CORPORATION LIMITED 219 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.7 Foreign exchange risk (continued) 2017 US$ 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 444,488 942,730 430,696 140,655 2,598,363 150,826 4,707,758 5,037 16,335 30,474 496,334 203,652 699,986 401,388 69,223 34,252 - 82,293 29,424 43,000 659,580 14,828 674,408 25,578 312 124,204 103,260 1,170,506 360,583 1,531,089 342,842 23,065 71,648 16,491 547,756 28,364 133,292 1,163,458 3,040 1,166,498 364,591 7,564 7,858 28,523 474,641 72,786 547,427 337,729 30,411 149,381 - 1,348 12,894 16,855 548,618 15,732 564,350 (16,923) 8,476 16,947 16,004 182,082 20,247 202,329 54,441 19,796 44,735 - 15,674 710 4,578 762,719 15,291 122,939 3,499,312 108,991 3,608,303 1,713,101 38,595 70,084 397,314 895,363 1,814 42,880 139,934 3,159,151 4,099 22,174 144,033 3,181,325 58,296 426,978 1,722 6,003 58,864 217,415 (2,017) 215,398 95,199 10,455 8,918 - 16,798 6,821 6,371 144,562 2,243 146,805 68,593 785,830 186,638 360,064 6,040,290 764,242 6,804,532 2,944,700 191,545 379,018 413,805 1,559,232 80,027 246,976 5,815,303 62,116 5,877,419 927,113 (1) Monetary balances only (2) Non-monetary balances, income tax balances and retirement plan assets 128 220 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.7 Foreign exchange risk (continued) 41.7 Foreign exchange risk (continued) (a) Sensitivity JMD currency risk 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, 2018 and for the year then ended are considered in the following table. 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: Amounts denominated in JMD USD Total amounts Effect of a 10% depreciation 1,093,697 755,287 1,848,984 (109,370) 630,115 463,582 630,325 1,260,440 124,962 588,544 • 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: 409,421 48,383 457,804 (28,557) (211,169) (150,651) 4,095 51,696 (9,679) (7,421) - 31,283 (220,848) (158,072) 4,095 82,979 Currency risk relating to the future cash flows of monetary balances Currency risk of reported results of foreign operations (63,011) (46,359) (46,359) 21,117 15,065 (410) 7,215 12,385 (5,170) 7,215 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. 129 SAGICOR FINANCIAL CORPORATION LIMITED 221 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.8 Fair value of financial instruments 41.8 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 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 FVOCI (2017 - available for sale) securities include corporate and government agency debt instruments issued in the Caribbean, primarily 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. The fair value of FVOCI Government of Barbados debt securities have been determined as set out in note 41.3 (f). Level 3 assets designated as FVTPL (2017 - fair value through income) include mortgage loans, debt securities and equities for which the full income return and capital returns accrue to holders of unit linked liabilities. 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 be used in determining the fair value of Level 3 instruments. 130 222 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.8 Fair value of financial instruments (continued) (a) Financial instruments carried at fair value FVOCI (available for sale) securities: Debt securities Equity securities FVTPL (fair value through income) investments: Debt securities Equity securities Derivative financial instruments Mortgage loans Deposits Total assets Total assets by percentage Investment contracts: Unit linked deposit administration liabilities Deposit and security liabilities: Structured products Derivative financial instruments Total liabilities Total liabilities by percentage 2018 2017 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total 646,960 1,986,673 223 - 647,183 1,986,673 15,949 32,677 - - - 104,332 210,290 247 - 8 48,626 314,877 695,809 2,301,550 - 48 48 78,526 24,267 7,449 30,143 - 140,385 140,433 2,633,633 271 2,633,904 198,807 267,234 7,696 30,143 8 503,888 3,137,792 653,516 23,314 676,830 19,185 14,269 - - - 1,610,263 53,167 1,663,430 62,542 144,352 2,232 - - 33,454 209,126 710,284 1,872,556 2,496 10,381 12,877 98,757 - 30,245 45,447 - 174,449 187,326 2,266,275 86,862 2,353,137 180,484 158,621 32,477 45,447 - 417,029 2,770,166 23% 73% 4% 100% 26% 68% 6% 100% - - - - - 0% - - 247 247 247 0% 149,142 149,142 64,650 - 64,650 213,792 100% 64,650 247 64,897 214,039 100% - - - - - 0% - - 2,232 2,232 2,232 1% 139,753 139,753 47,576 - 47,576 187,329 99% 47,576 2,232 49,808 189,561 100% 223 Transfers from Level 1 to Level 2 in 2018 - Nil (2017 – Nil ). Transfers from Level 2 to Level 1 in 2018 – Nil (2017 - Nil). SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.8 Fair value of financial instruments (continued) For Level 3 instruments, reasonable changes in inputs which could be applied to the valuation of FVOCI securities would affect other comprehensive income. Reasonable changes in inputs which could be applied to the valuations of investments designated at FVTPL 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. 2018 FVOCI investments FVTPL investments Derivative instruments Total assets 2017 Total assets 2018 Investment contracts Structured products Total liabilities 2017 Total liabilities Balance, beginning of year under IAS 39 Reclassifications on adoption of IFRS 9 12,877 (9,365) Additions Issues Settlements Fair value changes recorded in investment income Fair value changes recorded in interest expense Fair value changes recorded in OCI - - - - - - Transfers (out of) Level 3 classification Transfers to instruments carried at amortised cost Effect of exchange rate changes Balance, end of year 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 - - (1) 48 - - 144,204 30,245 187,326 176,342 139,753 47,576 187,329 165,447 (7,822) 43,280 - - - (17,187) - 21,837 65,117 78,882 - - - - - - 4,069 (11,407) (7,338) 21,044 - (75) - - - (75) - (98) (10) - 3,305 - - - (10) - (16) - 3,304 (1,014) - - 19,287 (9,903) - (1,121) - - - 1,457 (331) - - - - - - 58,071 77,358 44,185 (41,979) (51,882) (28,256) - - - - - - (1,121) - - - 2,621 (1,639) 4,078 (1,970) - 125 - - - 3,682 2,146 132,936 7,449 140,433 187,326 149,142 64,650 213,792 187,329 4,234 (13,980) (9,746) 11,587 - - - - - (1,121) - - - - (1,121 ) 125 Disposals (3,463) (54,015) (33,226) (90,704) (87,814) 132 224 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.8 Fair value of financial instruments (continued) Level 1 Level 2 Level 3 Total 41.8 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, 2018 is set out in the following tables. Level 1 Level 2 Level 3 Total Debt securities Mortgage loans Policy loans Finance loans and finance leases Securities purchased for resale - - - - - - Investment contracts: Deposit administration liabilities Other investment contracts Notes and loans payable: Convertible redeemable preference shares 592,006 627,036 1,219,042 336,873 336,873 171,421 171,421 - - - - 500,261 500,261 Notes and other items 7,170 7,170 592,006 1,642,761 2,234,767 Deposit and security liabilities Other funding instruments Customer deposits Securities sold for repurchase - - - - - - - - - - - - - - - - 110,585 110,585 130,669 130,669 241,254 241,254 11,105 11,105 337,323 156,637 493,960 337,323 167,742 505,065 - 462,223 462,223 1,255 724,881 726,136 - 423,790 423,790 1,255 1,610,894 1,612,149 338,578 2,019,890 2,358,468 133 SAGICOR FINANCIAL CORPORATION LIMITED 225 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.8 Fair value of financial instruments (continued) 41.9 Derivative financial instruments and hedging activities (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 which are not held under the unit linked model. The table below sets out the source markets of such equity securities and the effects of an across the board 20% change in equity prices on income before tax (IBT) as at December 31, 2018. 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. Listed on Caribbean stock exchanges and markets Listed on US stock exchanges and markets Listed on other exchanges and markets Carrying value Effect of 20% change on IBT 14,311 64,392 27,904 106,607 2,862 12,878 5,581 21,321 2018 Derivatives held for trading: Equity indexed options 2017 Derivatives held for trading: Equity indexed options 41.9 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. Contract / notional amount Fair value Assets Liabilities 768,342 768,342 7,696 7,696 247 247 713,452 713,452 32,477 32,477 2,232 2,232 134 226 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.9 Derivative financial instruments and hedging activities (continued) (i) Equity indexed options The Group has purchased equity indexed options in respect of structured products and in respect of life and annuity insurance contracts. For certain structured product contracts with customers (note 17), equity indexed options give the holder the ability to participate in the upward movement of an equity index while being protected from downward risk. The Group is exposed to credit risk on purchased options only, and only to the extent of the carrying amount, which is their fair value. For certain universal life and annuity insurance contracts, 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. 135 SAGICOR FINANCIAL CORPORATION LIMITED 227 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 41.10 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 2.13. 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. 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 2018 ASSETS Non-derivative financial investments Securities purchased for resale Derivative financial instruments LIABILITIES Non-derivative deposit and security liabilities Derivative financial instruments 2017 ASSETS Non-derivative financial investments Securities purchased for resale Derivative financial instruments LIABILITIES Non-derivative deposit and security liabilities Derivative financial instruments 136 228 5,332,797 7,170 7,696 5,347,663 1,673,786 247 1,674,033 4,904,246 16,518 32,477 4,953,241 1,557,000 2,232 1,559,232 - - - - - - - - - - - - - - 5,332,797 (441,340) (517,319) 4,374,138 7,170 7,696 - (247) - - 7,170 7,449 5,347,663 (441,587) (517,319) 4,388,757 1,673,786 247 1,674,033 (437,160) (247) (437,407) (412,615) - (412,615) 824,011 - 824,011 4,904,246 (1,211,913) (206,987) 3,485,346 16,518 32,477 - (2,232) - - 16,518 30,245 4,953,241 (1,214,145) (206,987) 3,532,109 1,557,000 2,232 1,559,232 (1,191,066) (2,232) (1,193,298) (188,722) - (188,722) 177,212 - 177,212 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 42 INSURANCE RISK – PROPERTY & CASUALTY CONTRACTS 42.2 Claims risk 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. 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. 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; 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 is refined over time until final settlement occurs. In addition, from the pricing methodology used for risks, it is assumed that at any 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 very many 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. 137 SAGICOR FINANCIAL CORPORATION LIMITED 229 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 42.2 Claims risk (continued) 42.3 Reinsurance risk (continued) Total insurance coverage 2018 2017 Property Motor Gross 8,613,754 8,348,729 1,419,817 1,410,917 Net Gross Net 449,467 433,491 433,491 433,491 2,769,682 2,253,850 Accident and liability Gross 3,176,165 Net 2,903,875 Total Gross 12,239,386 11,551,902 Net 4,757,183 4,098,258 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 potential sources of catastrophic losses arising from insurance risks. A realistic disaster scenario modelled for 2018 is presented below and results in estimated gross and net losses. A Barbados and St. Lucia windstorm having a 200-year return period. 204,910 5,000 Gross loss Net loss The occurrence of one or more catastrophic events in any year may have a material impact on the reported net income of the Group. 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. 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. Type of risk Retention by insurers - currency amounts in thousands Property • maximum retention of $4,500 for a single event; • maximum retention of $5,000 for a catastrophic event; • quota share retention to maximum of 20% in respect of treaty limits; • quota share retention is further reduced to a maximum of $375 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. 138 230 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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 357,500 314,000 - - - - - - 53% 47% 0% 0% 0% 0% 0% 0% TOTAL 671,500 100% 43 INSURANCE RISK – LIFE, ANNUITY & HEALTH CONTRACTS 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. 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. 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. 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. 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. 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). 139 SAGICOR FINANCIAL CORPORATION LIMITED 231 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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. 2018 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 26,023 91,280 28,377 27,086 64 1,254 2,501 (88) 1,043 48 24,769 88,779 28,465 26,043 16 172,830 4,758 168,072 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. 2018 2017 Liability 5% increase in liability Liability 5% increase in liability 44,752 4,677 49,429 2,238 234 2,472 47,261 4,280 51,541 2,363 214 2,577 Actuarial liability Claims payable 140 232 (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 pay-out 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 pay-out 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. SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 very many 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 2018 2017 Barbados Jamaica Gross Net Gross Net 4,261,357 1,197,963 3,973,661 1,299,463 3,966,925 1,147,578 3,680,227 1,247,768 8,882,015 6,653,054 8,045,374 5,935,234 8,757,886 6,576,574 7,934,866 5,882,949 Trinidad & Tobago Gross 3,541,183 2,184,995 3,491,638 2,225,487 Net 2,959,623 2,072,894 2,900,602 2,115,756 Other Caribbean Gross 8,165,280 1,595,521 7,936,174 1,443,434 Total liability under annuity contracts provide a good measure of longevity risk exposure. Total liability under annuity contracts Individual contracts Group contracts Individual contracts Group contracts 2018 2017 Barbados Jamaica Gross Net Gross Net Trinidad & Tobago Gross Net Other Caribbean Gross USA Total Net Gross Net Gross Net 104,790 104,790 899 899 114,469 114,469 30,634 30,634 1,292,070 611,227 1,542,862 862,019 47,762 47,762 345,928 345,928 - - 28 28 20,535 5,681 414,253 399,399 116,587 116,587 608 608 120,342 120,342 30,721 30,721 1,183,959 408,531 1,452,217 676,789 45,417 45,417 341,872 341,872 - - 28 28 23,942 7,524 411,259 394,841 Net Gross Net Gross Net 7,170,958 1,409,095 6,939,861 1,282,782 6,970,364 2,800,085 35,427 33,969 6,291,352 2,106,362 38,824 37,318 31,820,199 11,666,960 29,738,199 10,942,442 25,655,477 11,240,110 23,561,918 10,566,573 USA Total 141 SAGICOR FINANCIAL CORPORATION LIMITED 233 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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 is 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 $175 Health insurance contracts with groups Retention per individual to a maximum of $175 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 $500 43.4 Sensitivity arising from the valuation of actuarial liabilities The estimation of actuarial liabilities is sensitive to the assumptions made. 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)). 142 234 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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. Sensitivity Scenario The following table represents the estimated sensitivity of each of the above scenarios to net actuarial liabilities for insurers by segment. Correlations that may exist between scenario assumptions were not explicitly taken into account. Sagicor Life Inc segment Sagicor Jamaica segment Sagicor Life USA segment 2018 2017 2018 2017 2018 2017 926,050 956,305 345,154 374,483 816,843 623,269 Increase in net liability Increase in net liability Increase in net liability 156,151 144,892 66,642 53,868 12,058 11,432 Base net actuarial liability Scenario Worsening rate of lapse High interest rate (97,608) (89,289) (115,773) (111,058) (49,675) (37,115) Low interest rate 169,985 161,474 110,246 102,183 57,482 42,637 Worsening mortality/ morbidity 39,692 37,528 48,267 42,776 16,030 16,783 Higher expenses 20,618 19,053 16,569 17,530 3,002 5,255 Sagicor Life Inc segment Sagicor Jamaica Segment Sagicor USA segment Worsening rate of lapse Lapse rates were either doubled or halved, and the more adverse result was selected. High interest rate Low interest rate Worsening mortality and morbidity 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. Assumed increases in the investment portfolio yield rates of 0.5% for 10 years. Assumed decreases in investment portfolio yield rates of 0.5% per year for 10 years. Mortality and morbidity rates for insurance and critical illness products were increased by 3% of the base rate per year for 5 years. For annuity products, the mortality rates were decreased by 3% of the base rate for 5 years. Lapse rates were increased or reduced by 30%, and the more adverse result was selected. A 1% increase was applied to the investment portfolio rate. A 1% decrease was applied to the investment portfolio rate. rates For life insurance and deferred annuity products, the base assumed were increased annually by 3% cumulatively over the next 5 years. For pay-out annuity products only, the mortality rates were decreased 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. SAGICOR FINANCIAL CORPORATION LIMITED 235 143 . Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 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. 2018 2017 Pension and insurance fund assets 2,166,463 2,072,232 Mutual fund, unit trust and other investment fund assets 1,261,247 1,132,928 3,427,710 3,205,160 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 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 $1,185,805 (2017 - $1,253,052) 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. 144 236 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 46 CAPITAL MANAGEMENT 46.2 Capital adequacy 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 2018 600,869 530,514 490,275 2017 restated 624,187 312,171 413,805 Total financial statement capital resources 1,621,658 1,350,163 The Group deploys its capital resources through its operating activities. These operating activities are carried out by subsidiary companies which are either insurance entities or provide other financial services. The capital is deployed in such a manner as to ensure that subsidiaries have adequate and sufficient capital resources to carry out their activities and to meet regulatory requirements. The capital adequacy of the principal operating subsidiaries is discussed in 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, certain subsidiaries of the Group seek 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 life insurers of the Sagicor Group as of December 31 has been estimated as 234% (2017 – 258%). This is the principal standard of capital adequacy used to assess the overall strength of the life insurers 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 life insurers of the Group and not necessarily applicable to each individual segment, insurance subsidiary or insurance subsidiary branch. The Company complies with all regulatory capital requirements. 145 SAGICOR FINANCIAL CORPORATION LIMITED 237 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 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, 2018 and 2017, this ratio was 183.8% and 186% respectively. (ii) Sagicor Life Insurance Company (USA) A risk-based capital (RBC) formula and model have been 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 a surplus of at least 300% of the RBC amount, and the company has maintained these ratios as of December 31, 2018 and 2017 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 2018 and 2017, all applicable externally imposed capital requirements were complied with. Actual capital base to risk weighted assets Required capital base to risk weighted assets Sagicor Investments Jamaica Sagicor Bank Jamaica 2018 2017 2018 2017 14% 10% 16% 10% 15% 10% 15% 10% 146 238 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 46.3 Financial covenants (a) 8.875% Senior Notes 46.3 Financial covenants (continued) (b) 4.85% notes due 2019 Under the indenture entered into by the Group on the issue of these senior notes the Group has to comply with a number of covenants as follows: COVENANT DESCRIPTION Limitation of indebtedness Limitation on restricted payments covenant Limitation on restricted distributions from subsidiaries Under this covenant, the Group is restricted to incremental borrowing up to a prescribed level. The Group must maintain a fixed charge coverage ratio, in excess of 2:1 in order to incur additional debt. This covenant limits cash outflows, dividends, acquisition and investments by the Group. The Group must maintain a fixed charge coverage ratio of 2:1 and an MCCSR capital ratio in excess of 175%. limits This covenant encumbrances or distributions to the Parent. the subsidiaries restrictions on their ability from creating to make 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 lien, this 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, 2018, and 2017, the Group satisfied these requirements. The Group complies with all covenants. Limitation on sale of assets of subsidiary stock This covenant restricts the Group from selling material subsidiary assets without using the proceeds to either reinvest in the business or offer to buy back bondholders. Limitation on affiliate transactions Change in control Limitation on liens Optional Redemption This covenant restricts affiliate transactions of the Group. This covenant allows investors to put their bonds back to the Group at a certain value when a specified event has changed ownership/control of the Group. This covenant restricts the Group’s ability to secure future debt with the Group’s assets. The notes are redeemable at the Group’s option after August 11, 2018 at specified redemption rates. 147 SAGICOR FINANCIAL CORPORATION LIMITED 239 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 47 RELATED PARTY TRANSACTIONS 48 BREACH OF INSURANCE REGULATIONS – RELATED PARTY BALANCES Other than as disclosed in notes 5, 9, 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 2018 2017 Salaries, directors’ fees and other short-term benefits Equity-settled compensation benefits Pension and other retirement benefits 25,340 5,674 1,733 32,747 19,884 6,969 1,475 28,328 Mortgage loans Other loans Total loans Balance, beginning of year Advances Repayments Effects of exchange rate changes Balance, end of year Interest rates prevailing during the year 4,784 1,348 (1,382) - 4,750 6.00% 1,074 722 (463) (16) 1,317 6.00% – 8.00% 5,858 2,070 (1,845) (16) 6,067 As at December 31, 2018, one of the Group’s subsidiaries, Sagicor Life Jamaica Limited exceeded the regulated 5% maximum of related party balances to total assets of the company. Management is in discussions with the Regulator, Financial Services Commission, in relation to this matter. The regulator has not imposed any penalty. 49 ALIGNVEST AGREEMENT On November 27, 2018, the Group entered into a definitive arrangement agreement as amended on January 28, 2019 with Alignvest Acquisition II Corporation (“Alignvest”) pursuant to which Alignvest will acquire all the shares of Sagicor by way of a scheme of arrangement under the laws of Bermuda, where Sagicor is incorporated. Closing is expected in 2019, and completion is subject to shareholder and regulatory approval and certain conditions being met by both Alignvest and Sagicor. Until such time that the transaction is either completed or the agreement terminated, Sagicor has agreed that it shall make all commercially reasonable efforts to present intact its current business organisation, key employees, material business relationships and operations. Sagicor also announced that Sagicor and Alignvest will acquire Scotiabank’s life insurance operations in Jamaica and in Trinidad & Tobago and will also enter into a 20-year exclusive agreement where Sagicor will provide insurance solutions to Scotiabank’s clients in Jamaica and Trinidad & Tobago. The completion of the acquisition is dependent on the completion of the acquisition of Sagicor as outlined above. Closing is expected in late 2019 or early 2020, subject to regulatory approval and certain conditions being met. 148 240 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 50 RESTATEMENT AND TRANSITION TO IFRS 9 OF FINANCIAL STATEMENTS The changes in accounting policy outlined in note 2.15 which have impacted the prior period statements of the financial position, income and comprehensive income are summarised in the following tables. Other corrections are outlined separately below: STATEMENT OF FINANCIAL POSITION December 31, 2017 January 1, 2018 As reported previously Actuarial adjustment As restated Transition adjustments Carrying value ASSETS Financial investments Income tax assets Miscellaneous assets and receivables Other assets Total assets LIABILITIES Actuarial liabilities Income tax liabilities Other liabilities Total liabilities EQUITY Share capital / premium Reserves Retained earnings Shareholders' equity Participating accounts Non-controlling interests in subsidiaries Total equity Total liabilities and equity 4,953,241 39,980 228,543 1,592,878 6,814,642 2,950,820 28,277 2,903,217 5,882,314 303,529 (47,482) 367,327 623,374 865 308,089 932,328 6,814,642 - - - - - (6,120)(1) 1,225 - (4,895) - 94 1,124 1,218 - 3,677 4,895 - 4,953,241 39,980 228,543 1,592,878 6,814,642 2,944,700 29,502 2,903,217 5,877,419 303,529 (47,388) 368,451 624,592 865 311,766 937,223 6,814,642 (16,177) 284 (48) - (15,941) - - - - - (217) (10,442) (10,659) (2,930) (2,352) (15,941) (15,941) 4,937,064 40,264 228,495 1,592,878 6,798,701 2,944,700 29,502 2,903,217 5,877,419 303,529 (47,605) 358,009 613,933 (2,065) 309,414 921,282 6,798,701 (1) Effective January 1, 2018 the Group implemented a policy to harmonise its actuarial reserving practices across operational segments. This voluntary change in policy was reflected as a prior period adjustment in accordance with IAS 8. In addition, a detailed review of Sagicor USA's actuarial model was completed which concluded that the model inputs were generally appropriate; however, certain items were identified which have been treated as errors and prior periods have been adjusted accordingly. The Sagicor Jamaica’s adjustment reduced actuarial liabilities by $9,070 and Sagicor USA’s adjustment increased the liability by $2,950. 149 SAGICOR FINANCIAL CORPORATION LIMITED 241 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 50. Restatement and transition to IFRS 9 of financial statements (continued) STATEMENT OF FINANCIAL POSITION ASSETS Financial investments Income tax assets Miscellaneous assets and receivables Other assets Total assets LIABILITIES Actuarial liabilities Income tax liabilities Other liabilities Total liabilities EQUITY Share capital / premium Reserves Retained earnings Shareholders' equity Participating accounts Non-controlling interests in subsidiaries Total equity Total liabilities and equity December 31, 2016 As reported previously Actuarial adjustment 4,813,748 59,575 183,018 1,475,579 6,531,920 2,776,362 50,641 2,909,503 5,736,506 300,079 (64,795) 300,865 536,149 1,291 257,974 795,414 6,531,920 - - - - - (4,538)(1) 437 - (4,101) - (3) 934 931 - 3,170 4,101 - As restated 4,813,748 59,575 183,018 1,475,579 6,531,920 2,771,824 51,078 2,909,503 5,732,405 300,079 (64,798) 301,799 537,080 1,291 261,144 799,515 6,531,920 (1) Effective January 1, 2018 the Group implemented a policy to harmonise its actuarial reserving practices across operational segments. This voluntary change in policy was reflected as a prior period adjustment in accordance with IAS 8. In addition, a detailed review of Sagicor USA's actuarial model was completed which concluded that the model inputs were generally appropriate; however, certain items were identified which have been treated as errors and prior periods have been adjusted accordingly. The Sagicor Jamaica’s adjustment reduced actuarial liabilities by $7,815 and Sagicor USA’s adjustment increased the liability by $3,277. 150 242 SAGICOR FINANCIAL CORPORATION LIMITED Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 50. Restatement and transition to IFRS 9 of financial statements (continued) 50. Restatement and transition to IFRS 9 of financial statements (continued) STATEMENT OF INCOME Year ended December 31, 2017 As reported previously Actuarial adjustment As restated STATEMENT OF COMPREHENSIVE INCOME Year ended December 31, 2017 As reported previously Actuarial adjustment As restated - 1,220,869 1,331 (659,430) Other comprehensive income: Items net of tax that may be reclassified subsequently to income: Net change in actuarial liabilities (13,475) (4,677)(1) (18,152) Revenue Benefits Expenses Income before taxes Income taxes Net income from continuing operations Net income from discontinued operation Net income Net income is attributable to: Shareholders - continuing operations Shareholders - discontinued operation Participating policyholders Non-controlling interests 1,220,869 (660,761) (436,362) 123,746 (18,577) 105,169 10,110 115,279 62,123 10,110 72,233 (1,044) 44,090 115,279 See note 34 for the restatement of earnings per common share. - (436,362) 1,331 (736) 595 - 595 190 - 190 - 405 595 125,077 (19,313) 105,764 10,110 115,874 62,313 10,110 72,423 (1,044) 44,495 115,874 (1) This classification reflects the change in the corporation tax rate due to legislation enacted in late 2017 in the USA segment. 151 SAGICOR FINANCIAL CORPORATION LIMITED Retranslation of foreign currency operations Other items Items net of tax that will not be reclassified subsequently to income Other comprehensive income Net income Total comprehensive income Total comprehensive income is attributable to: Shareholders - continuing operations Shareholders - discontinued operation Participating policyholders Non-controlling interests 9,721 45,641 22,155 64,042 115,279 179,321 96,141 10,110 106,251 (210) 73,280 179,321 199 4,677(1) - 199 595 794 295 - 295 - 499 794 9,920 50,318 22,155 64,241 115,874 180,115 96,436 10,110 106,546 (210) 73,779 180,115 243 Notes to the Financial Statements Sagicor Financial Corporation Limited Year ended December 31, 2018 Amounts expressed in US $000 Transparent InformationSagicor is committed to providing stakeholders with easy access to everything they want to know and need to know. SHAREHOLDER INFORMATION INDEX TO THE FINANCIAL STATEMENTS Sagicor Group is committed to maintaining open lines of communication with its shareholders, enabling them to engage actively with the Company and exercise their rights in an informed manner. Keeping Stakeholders Informed Sagicor’s commitment to all stakeholders is at the forefront of its busines culture, and with that commitment comes a track record for transparent, constructive and meaningful communications which add to the value of our relationships with stakeholders. SAGICOR FINANCIAL CORPORATION LIMITED 245 DIVIDENDS An interim dividend of US 2.5 cents per common share, approved for the half-year ended June 30, 2018, was paid on November 15, 2018 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 17, 2018. A final common dividend of US 2.5 cents per common share, payable on May 17, 2019, was approved for the financial year ended December 31, 2018 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 18, 2019. SHARES The following Shareholders own 4% or more of the capital of the Company as at December 31, 2018: NATIONAL INSURANCE BOARD INTERNATIONAL FINANCE CORPORATION The total number of issued shares as at December 31, 2018 and as at December 31, 2017 is set out below: Common Shares As at 31-Dec-18 As at 31-Dec-17 306,555,644 306,555,644 Common Shares Number of Shares 18,950,000 12,269,938 Percentage 6.18 4.00 246 SAGICOR FINANCIAL CORPORATION LIMITED SHAREHOLDER INFORMATION LONG TERM INCENTIVE PLAN (LTI) The Tables below show grants of restricted stock and stock options as at December 31, 2018 under the LTI for Executives: Restricted Stock As of December 31, 2018 Award Year Value attributable to Stock Grant US$ Awards Made and in Effect 2006 - 2008 1.980, 2.010, 2.500 1,302,161 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1.580, 2.500 1,033,058 1.600 1.475 1.530 1.150 1.075 1.050 0.860 1.000 1.190 760,026 625,787 1,024,879 1,572,643 2,146,267 2,818,629 3,440,199 3,335,346 2,733,572 1,302,161 1,033,058 760,026 625,787 1,024,879 1,572,643 2,146,267 2,818,629 2,825,627 2,500,709 1,345,583 12,759 53,581 263,108 493,017 459,998 621,449 689,952 101,867 125,970 70,037 45,818 20,792,567 17,955,369 2,937,556 Vested Forfeited Not Yet Vested Vested in 2018 0 0 0 0 0 0 0 0 614,572 834,637 1,387,989 2,837,198 Taxes Net 0 0 0 0 0 64,726 101,985 724,520 1,149,916 1,399,475 1,345,583 4,786,205 (1,615,996) 3,170,209 SAGICOR FINANCIAL CORPORATION LIMITED 247 SHAREHOLDER INFORMATION Award Year Exercise Price of Stock US$ Awards Made Vested Exercised Forfeited &/or Expired Not Exercised Not Vested Vested in 2018 Stock Options As of December 31, 2018 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1.980 2.010 2.500 2.500 1.600 1.475 1.530 1.150 1.075 1.050 918,815 2,049,598 1,414,758 120,443 72,839 0 1,613,983 828,423 2,060,619 1,224,464 120,443 798,372 72,839 1,976,759 1,414,758 0 0 0 785,560 828,423 836,155 1,224,464 0 0 0 2,569,572 1,559,892 293,153 1,009,680 1,266,739 1,458,559 1,010,473 172,456 448,086 838,017 2,279,818 1,686,831 1,283,735 592,987 403,096 3,275,787 2,756,828 1,801,508 3,401,743 2,408,612 1,599,666 955,320 808,946 0 0 0 0 0 0 0 0 0 596,714 0 0 0 0 0 0 0 0 640,779 791,707 0.860 4,946,649 2,789,265 1,716,924 1.000 4,853,069 1,887,196 1,050,013 1.190 3,518,595 398,578 398,578 1,072,341 1,886,011 1,374,006 837,183 2,784,123 1,516,387 0 3,012,355 398,578 518,959 396,417 271,373 181,750 107,662 34,361,565 16,743,844 8,509,315 9,338,518 8,234,529 8,279,203 4,721,457 248 SAGICOR FINANCIAL CORPORATION LIMITED SHAREHOLDER INFORMATION ANALYSIS OF COMMON SHAREHOLDING Common Shareholders by Size of Holding Number of Common Shareholders by Size of Holding as at December 31, 2018 (with 2017 Comparison) Size of Holding Number of Shareholders Percentage of Shareholders Total Shares Held Percentage of Shares Held 1 - 1,000 1,001 - 2,500 2,501 - 5,000 5,001 - 10,000 10,001 - 25,000 25,001 - 100,000 100,001 - 1,000,000 1,000,001 & above 2018 2017 2018 2017 2018 2017 2018 2017 6,560 14,840 6,901 3,918 2,730 646 220 29 6,534 14,922 6,960 3,916 2,777 661 217 32 18.30 41.40 19.25 10.93 7.62 1.80 0.61 0.08 18.14 3,858,763 3,879,557 41.43 24,585,769 24,732,936 19.32 23,977,161 24,146,139 10.87 28,067,140 27,904,352 7.71 39,219,691 39,948,479 1.84 30,222,281 31,075,736 0.60 63,670,957 61,386,472 0.09 92,953,882 93,481,973 1.26 8.02 7.82 9.16 12.79 9.86 20.77 30.32 1.27 8.07 7.88 9.10 13.03 10.14 20.02 30.49 Total 35,844 36,019 100.00 100.00 306,555,644 306,555,644 100.00 100.00 SAGICOR FINANCIAL CORPORATION LIMITED 249 SHAREHOLDER INFORMATION Common Shareholders by Country of Residence Number of Common Shareholders by Country of Residence and by Type as at December 31, 2018 Country Directors, Management, Staff, Advisors Companies Individuals Total Shareholders % Shareholders Trinidad and Tobago Barbados Eastern Caribbean Other Caribbean Other Total 297 645 151 41 68 1,202 0.83 1.80 0.42 0.11 0.19 3.35 543 232 37 36 5 853 % 1.51 0.65 0.10 0.10 0.01 2.38 Shareholders % Shareholders % 14,641 10,809 6,854 169 1,316 40.85 30.16 19.12 0.47 3.67 15,481 11,686 7,042 246 1,389 43.19 32.60 19.65 0.69 3.88 33,789 94.27 35,844 100.00 Common Shares held by Country of Residence Number of Common Shares Held by Country of Residence and by Type as at December 31, 2018 Country Directors, Management, Staff, Advisors Companies Individuals Total Shares % Shares % Shares % Shares % Trinidad and Tobago 2,726,222 0.89 70,820,015 23.10 77,930,747 25.42 151,476,984 49.41 Barbados 6,165,669 Eastern Caribbean 351,080 Other Caribbean 1,563,308 Other Total 4,973,782 15,780,061 2.01 0.11 0.51 1.62 5.15 39,128,096 12.76 55,350,537 18.06 100,644,302 32.83 4,296,252 3,899,269 1.40 1.27 19,254,011 1,294,941 12,961,249 4.23 5,840,466 6.28 0.42 1.91 23,901,343 6,757,518 23,775,497 7.80 2.20 7.76 131,104,881 42.77 159,670,702 52.09 306,555,644 100.00 250 SAGICOR FINANCIAL CORPORATION LIMITED SHAREHOLDER INFORMATION APPOINTED ACTUARY Sylvain Goulet, FCIA, FSA, MAAA, Affiliate Member of the (British) Institute of Actuaries and Affiliate Member of the Caribbean Actuarial Association ADVISORS AND BANKERS AUDITOR PricewaterhouseCoopers SRL LEGAL ADVISORS Carrington & Sealy, Barbados Conyers Dill & Pearman Limited, Bermuda Barry L V Gale, QC, LLB (Hons), Barbados Patterson K H Cheltenham, QC, LLM, Barbados Hobsons, Trinidad and Tobago Holman Fenwick Willan LLP, London, United Kingdom Johnson, Camacho & Singh, Trinidad and Tobago Paul Hastings LLP, USA Paul Hastings (Europe) LLP 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 New York Mellon The Bank of Nova Scotia SAGICOR FINANCIAL CORPORATION LIMITED 251 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 Drive Business Plaza Coney Drive 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 Sagicor Registered Office SAGICOR FINANCIAL CORPORATION LIMITED Clarendon House 2 Church Street Hamilton HM11 Bermuda Tel: (441) 295-1422 Fax: (441) 292-4720 Sagicor Corporate Head Office SAGICOR FINANCIAL CORPORATION LIMITED 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 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 Sagicor Life Inc. Sagicor Financial Centre Collymore Rock St Michael Tel: (246) 467-7500 Fax: (246) 436-8829 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: info_trinidad@sagicor.com Sagicor Life Inc Agencies Anguilla Malliouhana Anico Insurance Co Ltd Manico Headquarters Cosley Drive, The Valley Tel: (264) 497-3712 Fax: (264) 497-3710 Curaçao Guillen Insurance Consultants P O 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 252 252 SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED OFFICES Haiti Cabinet d’Assurance Fritz de Catalogne Angles Rues de Peuple et des Miracles Port-au-Prince Tel: (509) 3701 1737 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 Sagicor Life Inc. C/o Incorporated Agencies Limited Frenches Kingstown Tel: (784) 456-1159 Fax: (784) 456-2232 SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR LIFE (EASTERN CARIBBEAN) INC. Sagicor Financial Centre Choc Estate Castries, St Lucia Tel: (758) 456-1700 Tel: (758) 450-3787 Trinidad and Tobago 122 St Vincent Street Port of Spain Tel: (868) 623-4744 Fax: (868) 628-1639 or (868) 625-1927 Sagicor General Insurance Registered Office SAGICOR GENERAL INSURANCE INC. Cecil F DeCaries Building Wildey, St Michael, Barbados Tel: (246) 413-2800 Fax: (246) 228-8266 Email: sgi-info@sagicorgeneral.com Sagicor General Insurance Agencies HHV Whitchurch & Company Limited Old Street P O Box 771 Roseau Dominica Tel: (767) 448-2182 Fax: (767) 448-5787 Sagicor General Insurance Inc Haggatt Hall St Michael Barbados Tel: (246) 431-2800 Fax: (246) 426-0752 Email: sgi-info@sagicorgeneral.com Antigua Sagicor Life Inc Sagicor Financial Centre #9 Sir Sydney Walling Highway St John’s Tel: (268) 480-5555 Fax: (268) 480-5550 Email: info_dominica@sagicor.com St Lucia Sagicor Life Inc Sagicor Financial Centre Choc Estate Castries St Lucia Tel: (758) 452-0994 Fax: (758) 450-4870 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 Orry J Sands & Co. Ltd. 300 east Shirley Street Nassau, NP Bahamas Tel: (242) 393-4300 Fax: (242) 393 6258 253 253 OFFICES 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 ASSET MANAGEMENT INC Cecil F de Caires Building Wildey, St Michael Barbados Tel: (246) 467-7500 Fax: (246) 426-1153 Email: info@sagicor.com SAGICOR FINANCE INC Sagicor Financial Centre Choc Estate Castries 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 CAPITAL LIFE INSURANCE COMPANY BAHAMAS LIMITED C/o Family Guardian Insurance Company Limited No 1 Shirley Street & Village Road P O 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 Lyder Insurance Consultants Seroe Blanco 56A Tel: (297) 582-6133 LOJ HOLDINGS LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 SAGICOR GROUP JAMAICA LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com SAGICOR LIFE JAMAICA LIMITED 28-48 Barbados Avenue Kingston 5, Jamaica Tel: (876) 929-8920(-9) Fax: (876) 960-1927 Website: www.sagicorjamaica.com SAGICOR 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 254 254 SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED OFFICES SAGICOR FINANCE LIMITED Maples Corporate Services Limited Ugland House South Church Street George Town, Grand Cayman Cayman Islands Associated Companies FAMGUARD CORPORATION LIMITED No.1 Shirley Street & Village Road P O 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 PROPERTY SERVICES LIMITED 63-67 Knutsford Boulevard Kingston 5 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 SAGICOR INSURANCE BROKERS LIMITED 28-48 Barbados Avenue Kingston, 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 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 17 Dominica Drive Kingston, Jamaica Tel: (876) 960-2340 Fax: (876) 929-7324 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 Website: www.sagicorlifeusa.com 4343 N. Scottsdale Road, Suite 300 Scottsdale, Arizona, 85251, USA Tel: 1-800-531-5067 Fax: (480) 425-5150 Website: www.sagicorlifeusa.com SAGICOR FINANCIAL CORPORATION LIMITED SAGICOR FINANCIAL CORPORATION LIMITED 255 255 Connect with us! Sagicor Financial Corporation Limited welcomes your feedback regarding any aspect of our business, or of any member of the Sagicor Group of companies. We are very happy for you to contact us through any of the channels listed below. Shareholders Contact us for: • Dividends • Change in share registration and address • Lost share certificates • Estate transfer • General shareholder requests Connect with us! Sagicor Financial Corporation Limited Cecil F De Caires Building Wildey St. Michael Barbados, BB15096 Phone: (246) 467-7500 Fax: (246) 426-7907 Email: info@sagicor.com To obtain additional printed copies of the Annual Report or make enquiries regarding company news and initiatives Phone: (246) 467-7500 Fax: (246) 426-7907 Email: info@sagicor.com Don’t forget to: Like us on Facebook www.facebook.com/sagicorFinancialCorporationLimited Follow us on Twitter http://twitter.com/Sagicorgroup Follow us on Instagram http://instagram.com/sagicorgroup (246) 467 7500 | www.sagicor.com