Independent Auditors Report and Financial Statements 2013 Contents Pages Independent Auditors Report 1 Statement of financial position 2 Statement of comprehensive income 3 Statement of changes in shareholder s equity 4 Statement of cash flows 5 6-20
Statement of financial position November 30, 2013 Notes Assets Cash in banks 4 9,704,859 4,109,393 Short term deposit 5 13,650,000 8,650,000 Premiums receivable 6 1,128,798 910,845 Accounts receivable - others 298,427 166,436 Accounts receivable - premium reserves held by cedants 6 8,822,642 4,866,124 Accounts receivable - related parties 12 57,312 348,000 Investment securities 7 1,588,838 1,760,168 Fixed assets 8 1,202,982 9,758 Other assets 78,960 5,260 Total assets 36,532,818 20,825,984 Liabilities and shareholder s equity Liabilities: Loans payable 9 1,149,574 100,016 Technical reserves 10 3,287,956 1,059,636 Accounts payable retroceded 4,329,952 905,913 Accounts payable - premium reserves held by cedants 5,980,227 4,698,265 Accounts payable - related parties 12 390,331 341,978 Accounts payable 11 718,434 1,156,582 Total liabilities 15,856,474 8,262,390 Shareholder s equity: Common shares, with a par value of US$1 each one. Authorized, issued and outstanding 50,000 shares 50,000 50,000 Additional paid-in capital 13,000,000 8,000,000 Investments revaluation reserve 7 (253,165) (365,446) Accounts receivable - shareholders 12 - (36,228) Retained earnings 7,879,509 4,915,268 Total shareholder s equity 20,676,344 12,563,594 Total liabilities and shareholder s equity 36,532,818 20,825,984 The accompanying notes are an integral part of these financial statements. - 2 -
Statement of comprehensive income Notes Continuing operations: Income: Premiums on reinsurance assumed 122,228,500 63,505,601 Retroceded premiums (112,613,008) (59,898,256) 9,615,492 3,607,345 Technical reserves 10 (2,228,320) (478,089) Net income from premiums 7,387,172 3,129,256 Expenses and other incomes: Commissions expense (1,959,511) (452,669) Incurred losses - net of retrocessions (1,862,599) (230,615) General and administrative expenses 13 (944,911) (497,989) Other income 710,448 174,669 Gain on sale of investments securities 79,773 - Interest expense (9,731) - (3,986,531) (1,006,604) Net income for the year from continuing operations 3,400,641 2,122,652 Other comprehensive income: Change in fair value of investment securities 7 112,281 (245,210) Total comprehensive income for the year 3,512,922 1,877,442 The accompanying notes are an integral part of these financial statements. - 3 -
Statement of changes in shareholder s equity Additional Investments Accounts Common paid-in revaluation receivable Retained Notes shares capital reserve shareholders earnings Total Balance at November 30, 2011 50,000 3,000,000 (120,236) - 3,684,567 6,614,331 Additional paid-in capital - 5,000,000 - - - 5,000,000 Accounts receivable - shareholders 12 - - - (36,228) - (36,228) Dividends paid 16 - - - - (891,951) (891,951) Total income for the year - - - - 2,122,652 2,122,652 Change in fair value of investment securities 7 - - (245,210) - - (245,210) Balance at November 30, 2012 50,000 8,000,000 (365,446) (36,228) 4,915,268 12,563,594 Additional paid-in capital - 5,000,000 - - - 5,000,000 Accounts receivable - shareholders 12 - - - 36,228-36,228 Dividends paid 16 - - - - (436,400) (436,400) Total income for the year - - - - 3,400,641 3,400,641 Change in fair value of investment securities 7 - - 112,281 - - 112,281 Balance at November 30, 2013 50,000 13,000,000 (253,165) - 7,879,509 20,676,344 The accompanying notes are an integral part of these financial statements. - 4 -
Statement of cash flows Notes Cash flows from operating activities: Total comprehensive income for the year 3,512,922 1,877,442 Adjustments for: Technical reserves 10 2,228,320 478,089 Depreciation 8 7,507 7,739 Changes in fair value of investment securities 7 (112,281) 245,210 Gain on sale of investment securities 7 (79,773) - Net changes in operating assets and liabilities: Increase in premiums receivable (217,953) (362,152) Increase in premium reserves held by cedants, net (2,674,556) (167,859) (Increase) decrease in accounts receivable - others (131,991) 184,013 Increase in other assets (73,700) (3,960) Increase in accounts payable retroceded 3,424,039 352,555 (Decrease) increase in accounts payable (438,148) 544,866 Net cash provided by operating activities 5,444,386 3,155,943 Cash flows from investment activities: Short term deposit (5,000,000) (5,150,000) Acquisition of investment securities, net 7 363,384 (1,153,289) Acquisition of fixed assets 8 (1,200,731) (2,646) Net cash used in investing activities (5,837,347) (6,305,935) Cash flows from financing activities: Loans payable, net 1,049,558 100,016 Accounts with related parties 339,041 2,322,904 Accounts receivable - shareholders 12 36,228 (36,228) Additional paid-in capital 5,000,000 5,000,000 Dividends paid (436,400) (891,951) Net cash provided by financing activities 5,988,427 6,494,741 Net increase in cash in banks 5,595,466 3,344,749 Cash in banks at beginning of year 4 4,109,393 764,644 Cash in banks at end of year 4 9,704,859 4,109,393 The accompanying notes are an integral part of these financial statements. - 5 -
1. General information Ocean International Reinsurance Company Limited (the Company) was originally domiciled and incorporated in Belize, CA, on May 2006 (identification IBC 52,339) under the INTERNATIONAL BUSINESS COMPANIES ACT - CHAPTER 270, and licensed to operate international reinsurance business under the INTERNATIONAL INSURANCE ACT - CHAPTER 269, (Docket No. INT.INS/62/15/11). During 2012, the company relocated its headquarters in Barbados, WI, under Certificate of Continuance No. 36565, issued under Section 356.2 (1) of the Companies Act, issued by Barbados Intellectual Property Office and Corporate Affairs and authorized by the Financial Services Commission of that country under the Reinsurance License No. 532, granted under Section 8(1) of the Exempt Insurance Act (CAP 308A). The financial statements of Ocean International Reinsurance Company Limited for the year ended November 30, 2013 were authorized for issue by the Board of Directors on May 2, 2014. 2. Significant accounting policies The principal accounting policies used in the preparation of these financial statements are the following: 2.1 Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards. 2.2 Basis of preparation The financial statements have been prepared under the historical cost basis except for investment securities which are measured at fair value. All the accounting polices applied by the entity are consistent with those used in the prior year. 2.3 Premiums receivable Premiums receivable are recognized based on the amount of the corresponding insurance contracts and are measured at cost. The carrying amounts of premiums receivable are reviewed for impairment when events and circumstances indicate that they may not be recoverable, and an impairment loss is recorded in the income statement. - 6 -
Impairment loss is estimated as the difference between the carrying amount of the asset and the current value of future cash flows discounted with the original effective interest rate of the financial asset. 2.4 Cash in banks For the purposes of the statement of cash flows, time deposits with a maturity of three months or less are considered to be cash equivalents. 2.5 Income recognition Revenue is measured as the fair value of the consideration received or receivable, considering any discount, bonus or commercial discount granted by the entity. Income from subscribed premiums and related production costs (paid commissions, ceded reinsurances, and commissions earned from reinsurances), are recognized when insurance contracts enter into effect and premiums are recognized. 2.6 Operating lease Operating lease payments are recognized as an expense in the statement of income under a straight-line basis over the lease term. Such period does not exceed the term of the lease contract. 2.7 Reinsurance contracts During the normal course of operations, the Company has signed reinsurance agreements with reinsurance firms. Ceded reinsurance is contracted with the main purpose of recovering a portion of direct losses, which may be generated by events or catastrophes. Nevertheless, reinsurance contracts do not release the Company from obligations contracted with policyholders or beneficiaries. The amounts expected to be recovered from reinsurers are recognized in accordance with the clauses in the contracts signed by both parties. To ensure the consistency of this policy, the reinsurance Company evaluates on a regular basis, the financial condition of its retrocessionaries, risk concentration, and changes in the economic and regulatory environment. - 7 -
Earnings and losses in reinsurance contracts are recognized in the income statement immediately on the contract dates, and are not amortized. Premiums and catastrophes are presented on a gross basis, for both assumed and ceded premiums. 2.8 Technical reserves for premiums and catastrophes The Company provides technical reserves for premiums and catastrophes through a weighted review in the subscription portfolio, taking into account deviations and accumulations which are compared at the end of the period with the Actuarial Certification to determine the optimal position of the reserves. The Actuary estimates the reserves on a percentage basis applicable to the net premium subscribed or held, in the twelve months prior to the statement of financial position date, in all areas that apply. 2.9 Use of estimates The Administration has made a number of estimates and assumptions related to the reporting of assets and liabilities to prepare these financial statements in accordance with International Financial Reporting Standards. Actual results could differ from these estimates. The relevant estimates that are particularly susceptible to significant changes, relate to the determination of fair value of investment securities, technical reserves and retroceded premiums. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the current period if they affect only that period. If the revision of the estimates affects the current period and future periods, then the revision of the estimate will be recognized in both periods (current and future). 2.10 Impairment of financial assets Financial assets are assessed at each statement of financial position date to determine whether there is evidence of impairment. A financial asset is impaired if there is evidence that as a result of one or more events occurring after the date of initial recognition; future cash flows have been affected. - 8 -
2.11 Investment securities Investment securities are classified as available-for-sale (AFS). AFS are measured at fair value with fair value gains or losses recognized in other comprehensive income. On sale or impairment of the asset, the cumulative gain or loss previously recognized in other comprehensive income is reclassified to profit or loss as a reclassification adjustment. Dividends on an AFS equity instrument are recognized in profit or loss when the entity s right to receive payment is established. Interest on interest-bearing AFS financial assets and impairment losses are recognized in profit or loss. Fair value of AFS is determined based on quoted prices at the statement of financial position date. 2.12 Derecognition of financial assets and liabilities Derecognition of financial assets - Financial assets are derecognized only when the contractual rights to receive cash flows have expired or when financial assets and substantially all risks and benefits inherent in ownership of the asset have been transferred to another entity. If the Company does not transfer and retain substantially all risks and benefits of ownership and continues with the control of the asset transferred, it recognizes its retained interest in the asset and a liability related to the amounts that it would have to pay. If the Company substantially retains all risks and benefits of ownership of a transferred financial asset, it continues to recognize the financial asset and also recognizes a liability secured by the amount received. Derecognition of financial liabilities - Financial liabilities are derecognized when and only when the obligations of the entity are settled, canceled or they expired. 2.13 Functional currency Records are carried in US Dollars, monetary unit of the United States of America. 2.14 Reclassifications Some items of the 2012 financial statements have been reclassified for comparison purposes to comply with the 2013 presentation. - 9 -
3. Standards and interpretations issued but not yet effective As of the date of authorization of these financial statements, the following standards and interpretations were issued but not yet in effect: Description of Standard Effective Date: IFRS 9 - Financial Instruments January 1, 2015. IFRS 10 - Consolidated Financial Statements January 1, 2015. IFRS 11 - Joint Arrangements January 1, 2015. IFRS 12 - Disclosures of Interests in Other Entities IFRS 13 - Fair Value Measurements IAS 19 - Employee Benefits (revised in 2011) IAS 28 - Investments in Associates and Joint Ventures January 1, 2015. January 1, 2015. January 1, 2015. January 1, 2015. At the date of these financial statements, the Board of Directors has not yet completed the evaluation of the potential effect in the adoption of these modifications. Consequently, it does not consider appropriate to provide a reasonable estimate of the effect in the adoption until such evaluation is completed. - 10 -
4. Cash in banks Cash in banks is detailed as follows: Petty cash 200 2,000 Checking accounts 783,211 932,337 Saving accounts 8,921,448 3,175,056 The saving account generated an annual interest rate of 0.30% (2012: 0.85%). 9,704,859 4,109,393 5. Short term deposit The short term deposits generated an annual interest rate of 7% and 2.875% (2012: 3.75% and 2.875%) and matures between April 16, 2014 and September 16, 2015 (2012: April 16, 2013 and November 30, 2013). 6. Premiums receivable Maturity of premiums receivable is as follows: Current 903,985 754,778 31 days 24,852 139,345 61 days 144,355 3,407 91 days and more 55,606 13,315 Total 1,128,798 910,845 The Administration did not consider necessary to establish a provision for uncollectible accounts. - 11 -
The accounts receivable - premium reserves held by cedants are released within 30 days after the expiration of each policy and transferred to the account of premiums receivable (regular account) which has its own default, as reported. Therefore, this account maintains current balances and shows no default. 7. Investment securities Investment securities are classified as available-for-sale (AFS), and are detailed as follows: Investments at cost 749,873 898,653 Investments at fair value 838,965 861,515 1,588,838 1,760,168 Investments at cost are composed of equity securities that are not publicly traded and whose market value could not be reliably measured. These investments are detailed as follows: Proportion of ownership interest Investment in non - consolidated subsidiaries 100% 170,326 547,126 Investments in shares Less than 1% 119,527 101,527 Real estate projects Less than 20% 460,020 250,000 749,873 898,653 The investments in non consolidated subsidiaries represent the initial contribution on American Int l Re T&C (US$113,755 initial contribution) and all American Joint Venture (US$56,571 initial contribution). These investments are presented at cost as these financial statements were prepared to comply with regulatory requirements in Barbados. - 12 -
Investments available for sale, at fair value, are detailed as follows: Bonds 520,597 427,590 Precious metals 200,672 307,585 Common shares 117,696 126,340 A breakdown of the fair value is detailed as follows: 838,965 861,515 Change in Fair fair value value Investment Cost 2013 2013 Bonds 622,827 (102,230) 520,597 Precious metals 298,488 (97,816) 200,672 Common shares 170,815 (53,119) 117,696 Total 1,092,130 (253,165) 838,965 Change in Fair fair value value Investment Cost 2012 2012 Bonds 611,334 (183,744) 427,590 Precious metals 439,770 (132,185) 307,585 Common shares 175,857 (49,517) 126,340 Total 1,226,961 (365,446) 861,515-13 -
The transactions in investments available for sale are summarized below: Balance at beginning of year 1,760,168-852,089 - Acquisitions of investments 641,220 1,153,289 Sales of investments (1,004,604) - Transfers to profit and loss 79,773 - Change in fair value of investment securities 112,281 - (245,210) - Balance at end of year 1,588,838 1,760,168 The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable. Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). 2013 Level 1 Level 2 Level 3 Investments AFS 1,588,838-838,965 749,873 2012 Level 1 Level 2 Level 3 Investments AFS 1,760,168-861,515 898,653-14 -
8. Fixed assets The fixed assets are detailed as follows: As of November 30, 2013 2013 Computer Office Construction Improvements equipment furniture in progress Total Net beginning balance 1,532 3,335 4,891-9,758 Additions 232 1,247 1,328 1,197,924 1,200,731 Depreciation (882) (3,261) (3,364) - (7,507) Net ending balance 882 1,321 2,855 1,197,924 1,202,982 Cost 2,646 9,784 10,091 1,197,924 1,220,445 Accumulated depreciation (1,764) (8,463) (7,236) - (17,463) Net ending balance 882 1,321 2,855 1,197,924 1,202,982 As of November 30, 2012 2012 Computer Office Construction Improvements equipment furniture in progress Total Net beginning balance - 6,596 8,255-14,851 Additions 2,646 - - - 2,646 Depreciation (1,114) (3,261) (3,364) - (7,739) Net ending balance 1,532 3,335 4,891-9,758 Cost 2,646 8,537 8,763-19,946 Accumulated depreciation (1,114) (5,202) (3,872) - (10,188) Net ending balance 1,532 3,335 4,891-9,758-15 -
9. Loans payable The loans payable are detailed as follows: Banco Aliado, S.A. 949,574 - UBS 200,000 100,016 1,149,574 100,016 The mortgage loan with Banco Aliado, S.A. in the amount of US$960,000 was granted on September 24, 2013, maturing on September 26, 2023 at an annual interest rate of 6% and will be repaid by 120 monthly payments of principal and interest in the amount of US$11,197. The purpose of this loan was to purchase the property where the new office of the Company will be located, at Costa del Este - Torre Banco Panama and is secured by a first mortgage on properties. The loan with UBS in the amount of US$200,000 was granted on March 19, 2013, maturing on March 19, 2014 at an annual interest rate of 1.67% plus Libor 30 days and will be canceled at maturity. The purpose of this loan was to finance 50% of the purchase in bonus investment from Global Bank in the amount of US$400,000 and is secured by pledged bonus up to the value of the loan. 10. Technical reserves The technical reserves are detailed as follows: Unearned premium reserve 882,254 537,244 Reserve for losses incurred but not reported 415,432 409,277 Reserve for outstanding losses 1,990,270 113,115 Balance at end of year 3,287,956 1,059,636-16 -
The transactions of the technical reserves are as follows: Balance at beginning of year 1,059,636 581,547 Additions 2,228,320 478,089 Balance at end of year 3,287,956 1,059,636 11. Accounts payable The accounts payable are detailed as follows: Funds received pending processing 486,327 971,358 Accounts payable - ceding companies - 170,917 Commissions payable 232,107 - Accounts payable - other - 8,129 Accounts payable - AON Re - 5,000 Guarantee deposits received - 1,178 Balance at end of year 718,434 1,156,582-17 -
12. Balances and transactions with related parties The most important balances and transactions with related parties are summarized as follows: Balances Accounts receivable 57,312 348,000 Accounts receivable - shareholders - 36,228 Accounts payable 390,331 341,978 The following transactions were carried out with related parties: Transactions Professional fees 135,000 132,000 13. General and administrative expenses General and administrative expenses are details as follows: Professional fees 604,861 266,513 Travel expenses 53,216 15,303 Uncollectible accounts expenses 36,788 - Bank charges 69,658 2,654 Depreciation 7,507 7,739 Office rent 148 10,101 Customer service 3,574 88,326 Conferences and training 102,116 36,887 Bonus 49,537 12,303 Telephone expenses 1,239 8,566 Others 16,267 49,597 Total 944,911 497,989-18 -
14. Fair value of financial instruments The following assumptions were established by the Administration to estimate the fair value of each category of financial instrument in the consolidated balance sheet: a. Cash in banks The book value approximates their fair value for their liquidity and short-term maturity. b. Premiums receivable Premiums receivable are close to their estimated recovery value. c. Investment securities The fair value of securities, negotiated in an active market, is determined with reference to the price established the market. d. Accounts payable The fair value of accounts payable corresponds to the transaction cost realized, which approximates its fair value due to its short-term maturity. These estimates are subjective in nature, involving uncertainties and critical elements of opinion and therefore cannot be determined accurately. Changes in assumptions or criteria can significantly affect the estimates. 15. Risk Management for financial instruments A financial instrument is any contract that creates an asset in an entity and a financial liability of an equity instrument in another entity. The activities of the Company relate primarily to the use of financial instruments and, as such, the balance sheet consists mainly of financial instruments. - 19 -
Financial risk factors The activities of the Company exposed it to a variety of financial risks such as: market risk, credit risk and liquidity risk. The overall risk management program of the Company focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on its financial management. Risk management is undertaken by the Administration following the policies adopted by the Board. a. Credit risk - To mitigate credit risk, risk management policies set limits by debtor. Additionally, the Credit Committee previously evaluates and approves each engagement involving a credit risk to the Company and regularly monitors the financial condition of debtors. At the balance sheet date there are no significant concentrations of credit in the accounts receivable with clients. As for the cash in banks, the funds are deposited in institutions of national and international prestige, which makes for a safe recovery. b. Market risk - The Company has not had significant transactions that expose it to market risk during the period. Neither does it have financial instruments or equity securities that expose it to market risk, nor maintains substantial assets that generate interest income, thus their operating cash flows are independent of the changes in market interest rates. c. Liquidity and funding risk - The prudent management of liquidity risk implies maintaining sufficient cash to meet the projected future obligations and investments. These funds come from contributions made by shareholders. Capital risk management The main objectives of the Company when managing capital are to maintain its ability to continue as a going concern to generate returns to shareholders and maintain an optimal capital structure to reduce the cost of obtaining capital. To maintain an optimal capital structure, such factors are taken into consideration: the amount of dividends payable, return of capital to shareholders or issuing shares. 16. Dividends paid The Board of Directors approved on December 23, 2012 through meeting minute the payment of dividends for the sum of US$436,400 (2012: US$891,951 approved on March 14, 2012). * * * * * * - 20 -