ocean international reinsurance company...

Ocean International Reinsurance Company Limited

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

Notes to the financial statements 6 - 20


Statement of financial position

November 30, 2013

(In US dollars)

Notes 2013 2012

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.

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Statement of comprehensive income

For the year ended November 30, 2013

(In US dollars)

Notes 2013 2012

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


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Statement of changes in shareholder’s equity


(In US dollars)

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


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Statement of cash flows


(In US dollars)

Notes 2013 2012

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



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Ocean International Reinsurance Company Limited Notes to the financial statements For the year ended November 30, 2013 (In US dollars)

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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.


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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.


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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.


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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.


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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

January 1, 2015.

January 1, 2015.

IAS 19 - Employee Benefits (revised in 2011)

January 1, 2015.

IAS 28 - Investments in Associates and Joint Ventures

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.


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4. Cash in banks

Cash in banks is detailed as follows:

2013 2012

Petty cash 200 2,000

Checking accounts 783,211 932,337

Saving accounts 8,921,448 3,175,056

9,704,859 4,109,393

The saving account generated an annual interest rate of 0.30% (2012: 0.85%).

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:

2013 2012

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.


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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:

2013 2012

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:

2013 2012

Investment in non - consolidated subsidiaries 170,326 547,126

Investments in shares 119,527 101,527

Real estate projects 460,020 250,000

749,873 898,653

Proportion of

100%

Less than 20%

Less than 1%

ownership interest

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.


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Investments available for sale, at fair value, are detailed as follows:

2013 2012

Bonds 520,597 427,590

Precious metals 200,672 307,585

Common shares 117,696 126,340

838,965 861,515

A breakdown of the fair value is detailed as follows:

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


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The transactions in investments available for sale are summarized below:

2013 2012

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


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8. Fixed assets

The fixed assets are detailed as follows:

Computer Office Construction

Improvements equipment furniture in progress Total

As of November 30, 2013

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

2013

Computer Office Construction

Improvements equipment furniture in progress Total

As of November 30, 2012

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

2012


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9. Loans payable

The loans payable are detailed as follows:

2013 2012

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:

2013 2012

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



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The transactions of the technical reserves are as follows:

2013 2012

Balance at beginning of year 1,059,636 581,547

Additions 2,228,320 478,089


11. Accounts payable

The accounts payable are detailed as follows:

2013 2012

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


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12. Balances and transactions with related parties

The most important balances and transactions with related parties are summarized as follows:

2013 2012

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:

2013 2012

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


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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.


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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).

* * * * * *

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