As these areas were gradually scaled down, their General Managers left FINSAC, and Patrick McDonald, Corporate Operations Executive, assumed additional responsibilities for their continued operations, as head of the newly named Monitoring and Resolution (M & R) department.

The main work-streams within the M & R department are sectionalised into FINSAC’s Auditing & Compliance, Banking sector, Insurance sector, and Forensic activities.

AUDITING & COMPLIANCE

In order to strengthen FINSAC’s internal audit functions, the M & R department created a new Audit & Compliance Unit during fiscal 2000/2001. Under the guidance of a newly appointed unit head, its primary function is to monitor FINSAC’s compliance with the guidelines set out by the Government of Jamaica for the operations of a limited liability company and government agency. Monitoring activities are performed alongside other internal audit exercises to ensure that there is adherence to established policies and procedures.

Accordingly, the unit conducts financial, operational and compliance audits. During fiscal 2000/2001 its work included the areas listed below.

Asset Sales & Divestment

The unit monitored on a continuous basis, the general sale of all FINSAC assets acquired through its interventions. These included real estate, furniture and fixtures, artwork and other miscellaneous items.

Treasury

Ongoing monthly monitoring of the issued FINSAC Notes continued until April 1, 2001. It was discontinued following the government’s thrust to redeem the issued Notes by issuing Local Registered Stock.

Finance & Administration

Regular audits were conducted in the areas of payroll, petty cash, disbursements and motor vehicle expenses in FINSAC and in all FINSAC-intervened entities.

Given the transitory nature of FINSAC, the Finance and Administration unit recognises the need for internal records to be accurate and complete before the company winds up operations. It is also necessary that all policies and procedures be properly documented so that they are accessible to approved personnel in future. Accordingly, the unit is committed to ongoing internal audits, inclusive of the following:

• treasury management systems;

• review of the loan portfolio; and

• management of FINSAC-owned motor vehicles.

BANKING

At the beginning of the year under review, FINSAC had holdings in four major banking institutions - Union Bank of Jamaica Limited, National Commercial Bank Jamaica Limited, DB & G Merchant Bank Limited and Victoria Mutual Building Society.

Union Bank of Jamaica Limited

Financial Performance

For the year ended December 31, 2000, Union Bank of Jamaica’s asset base stood at J$33.8Billion. Investments accounted for 80.3% of the asset base, while loans (net of provisions) represented 3.8%. FINSAC Notes, including accrued interest, represented approximately 95% of the earning assets of the Bank.

Despite a challenging operating environment, Union Bank’s profitability improved significantly in 2000, as it recorded a profit of J$408.6Million compared to a loss of J$1.1Billion in 1999. The main factors contributing to this improvement were:

• a reduction in operating expenses

• a decline in loan loss provisions, due mainly to an improvement in the quality of loans held by the Bank. This resulted primarily from the sale to FINSAC of non-performing loans with a book value of J$339Million.

Sale

In keeping with its mandate to return its shareholding in intervened entities to private ownership, FINSAC reached an agreement with the Royal Bank of Trinidad & Tobago financial group (RBTT) for the sale of its 99% stake in Union Bank of Jamaica Limited (Union Bank) to RBTT International Limited. Based on this March 2001 agreement, and in accordance with the rules of the Jamaica Stock Exchange, RBTT International Limited made an offer to acquire the interest of all shareholders, including the minority shareholders.

A summary of the terms of the sale is as follows:

Purchase Price: J$1.6Billion

This was calculated from the net book value of the Bank as at June 30, 2000, less a discount of J$2Billion.

The discount on the Bank’s net book value reflected two major factors:

(i) the lack of a history of sustainable earnings by the Bank

(ii) the terms of the Government of Jamaica securities issued to replace the FINSAC Notes formerly held by the Bank.

Payment to be in two tranches as follows:

Tranche 1:

On completion of the sale, RBTT to pay FINSAC the US$ equivalent of J$1Billion, of which an amount equivalent to the purchase price of the minority shares to be placed in a joint account held by

FINSAC and RBTT for payment to the minority shareholders accepting the mandatory offer.

Tranche 2:

The balance of the purchase price is to be paid in US currency on or before March 15, 2003, with interest being payable on the balance at a rate of 6% per annum.

RBTT also agreed to acquire from FINSAC, Union Bank’s current headquarters at 17 Dominica Drive for a consideration of J$200Million, and Union Bank’s Tropical Plaza Branch for a consideration of J$39Million.

RBTT agreed to facilitate Union Bank’s repayment to FINSAC of two loans totalling J$4.675Billion.

National Commercial Bank of Jamaica Limited

Financial Performance

For the year ended September 30, 2000, National Commercial Bank Group Limited’s asset base stood at J$81Billion. The net profit recorded for the financial year was J$967.5Million, a significant improvement over the previous year’s net profit of J$221Million. FINSAC Notes represented approximately 68% of earning assets with interest income generated from this portfolio representing a similar figure.

Its main subsidiary, National Commercial Bank Jamaica Limited (NCB) accounted for J$80.5Billion of the Group’s total assets and contributed a net profit of J$965Million, up from J$206Million in 1999.

Investment in securities by the Group accounted for 66% of total assets, while loans net of provisions accounted for 9%. It should be noted that NCB had previously been limited in its lending capacity by stipulations under a governing Voluntary Undertaking to the Bank of Jamaica. These stipulations have now been lifted. Thus it is expected that there should be some improvement in this ratio.

Restructuring

In keeping with FINSAC’s mandate to return its investments to private hands, a major restructuring of the shareholding of the NCB group of companies was undertaken by way of a court-administered Scheme of Arrangement under the Companies Act.

The former shareholding structure saw FINSAC having a direct holding of 40% of the ordinary shares of the Bank, and a 45% shareholding in NCB Group Limited, which in turn owned the other 60% of the Bank. This translated into a 67% indirect holding in the Bank, and although the combined shareholding saw FINSAC with de facto control of the Bank, FINSAC’s divestment advisors, HSBC plc., were of the opinion that this would not be satisfactory to a potential investor. They recommended that steps be taken to reorganise its shareholdings to give FINSAC both de facto and de jure control of the Bank. The advisors were also of the opinion that investors would prefer to acquire a direct majority shareholding in the Bank, as opposed to an indirect stake via the holding company.

The terms of the proposed scheme were as follows:

• FINSAC (through two separate wholly owned subsidiaries) to own 75% of the Bank, with the non-FINSAC shareholders owning the remaining 25%.

• Ownership of those subsidiaries of NCB Group that were engaged in complementary financial and related services to be transferred from NCB Group to the Bank.

• FINSAC's preference shares in both NCB Group and the Bank to be converted into additional ordinary shares in the Bank at a ratio to result in a 75% FINSAC shareholding in the Bank.

• FINSAC to own 100% of NCB Group and assume responsibility for disposing of the non-core assets left in the Group and its subsidiaries.

• NCB Group to be de-listed from the Jamaica Stock Exchange, and the Bank to be listed.

The Scheme of Arrangement was put to the shareholders of NCB Group, and the shareholders overwhelmingly approved it at a specially convened meeting on November 8, 2000. The Supreme Court later approved the Scheme, which took effect on December 1, 2000.

Sale

At the fiscal year-end, FINSAC was actively engaged in discussions with potential investors for the sale of its stake in the Bank.

To facilitate this, and in accordance with a condition of the Inter American Development Bank (IADB)/World Bank assistance to the Government of Jamaica, an undertaking was given to replace NCB’s FINSAC Notes with Government of Jamaica securities yielding interest in cash, with effect from April 1, 2001. At the fiscal year-end, the Debt Management Unit of the Ministry of Finance was in discussions with NCB with a view to completing the replacement of the FINSAC Notes.

DB & G Merchant Bank Limited

Financial Performance

At the end of the financial year ended March 31, 2001 DB&G Merchant Bank (DB&GMB), had an asset base totalling J$67.5Million. A net profit of J$.5Million was reported, compared to a loss in 1998 of J$21.7Million. DB&GMB effected a change to their accounting date from December to March during the period under review.

Sale

An agreement was reached on March 31, 2001 for the sale of FINSAC’s 49% shareholding in DB&GMB to the local investment firm Dehring Bunting & Golding Limited (DB&G), which had partnered FINSAC in the 1998 re-capitalisation of the then insolvent Billy Craig Finance & Merchant Bank. The purchase price - J$23Million, represents a considerable discount on the amount injected into the Bank by FINSAC, much of which had been used to repair a capital deficit. However, the net asset value of DB&GMB as at December 31, 2000 reflected a value for the Bank of J$20.37Million, and FINSAC’s 49% stake, therefore, represented a net asset value of just over J$10Million. The transaction price, therefore, represents a premium on the value of FINSAC’s holding in the Bank.

DB&G has further agreed to provide an additional capital injection of approximately J$34Million for DB&GMB, arising out of discussions with the Ministry of Finance.

The Merchant Bank’s off-balance sheet portfolio of managed funds will also be consolidated with that of DB&G, and accounted for within DB&G.

Completion of the sale took place on June 12, 2001.

Victoria Mutual Building Society

Financial Performance

Victoria Mutual Building Society’s audited results for the financial year ended December 31, 2000 showed an asset base of J$20.4Billion for the Group, and J$17.7Billion for the Society. The Society’s investments, including securities purchased under resale agreements, accounted for 44% while loans net of provisions represented 36%.

The Group reported a net profit of J$306.6Million for the period, compared to J$328.7Million for 1999, while the net profit for the Society was J$261.3Million, an improvement of 61% compared with 1999’s profit of J$162.2Million. A reduction in operating expenses and an increase in investment income were the main contributing factors to this improvement in profitability for the year 2000.

FINSAC’s investment in the Society consists of US$8.25Million in deferred shares, redemption of which is slated to occur between December 31, 2001 and December 31, 2005.

INSURANCE

FINSAC’s activities in the insurance sector in the year under review focussed on three areas - its holdings in Life of Jamaica Limited and Island Life Insurance Company Limited, the completion of the joint IADB/FINSAC project to reform the insurance regulatory framework in Jamaica, and work to resolve the dilemma of Interest-Sensitive policies issued by a number of failed insurance companies.

Life of Jamaica

Divestment of Share Interest

Starting in June 1999, FINSAC and the Office of the Superintendent of Insurance (OSI) conducted a joint examination of Life of Jamaica (LOJ). The examination revealed that primarily due to the understatement of the actuarial liabilities, LOJ had a severe capital deficiency of approximately J$3Billion, including capital requirements under the proposed Insurance Act. Other problems uncovered by the examination were a mismatch of assets and liabilities, inaccurate systems, and inadequate internal controls.

As a direct result of this examination and LOJ’s request for further assistance, FINSAC assigned an internal team to evaluate the options available to LOJ and FINSAC. The team’s analysis indicated that LOJ needed a substantial injection of funds to repair its capital base. Thereafter, in June 2000, LOJ’s board approached FINSAC for assistance in a further recapitalisation of the company. After lengthy negotiations, Cabinet granted approval for the extension of a package of assistance to the company, and an agreement was struck with the Board of LOJ which saw, inter alia, a proposal being put to the company’s shareholders as follows:

- that the share capital of LOJ be increased by J$111,543,262.50

- that the company issue 1,115,432,624 ordinary shares of J$0.10 each to FINSAC in exchange for the issue of promissory notes of an aggregate principal value of J$111,543,262.50

- that the 1,056,683,670 12.5% cumulative redeemable preference shares of J$1.00 each in the company held by FINSAC, be converted into 1,056,683,670 zero coupon perpetual non-cumulative convertible preference shares of J$1.00 each, with conversion to occur upon the issue by the company to FINSAC of the 1,115,432,264 ordinary shares above, and the issue by FINSAC to LOJ, for a price of J$1.00, a promissory note having a face value sufficient to result in the company having a positive balance sheet net worth of J$1.00. These ‘new’ preference shares were to be automatically converted to ordinary shares at the rate of 3 ordinary shares for

every 10 ‘new’ preference shares, once the company’s auditors confirmed that the company had achieved 100% of the Minimum Continuing Capital Surplus Requirement.

The shareholders approved this proposal at an Extraordinary General Meeting on November 28, 2000, and the capital injection, which saw FINSAC acquiring a 76% majority ownership in the company was effected on March 22, 2001. In accordance with the terms of the proposal, FINSAC also issued to LOJ, a promissory note with a face value of J$2,051,360,000 and an effective date of April 1, 2000.

The acquisition by FINSAC was on the understanding that its majority holding in LOJ would be divested to a fit and proper, financially sound private sector interest.

Once the shareholders approved the transaction in November 2000, FINSAC immediately embarked upon a programme to divest its ownership in LOJ via a bid and tender process. Each bidder was required to pay a non-refundable fee of US$20,000 to receive further information on LOJ and to be eligible to bid. Expressions of interest were received from:

- Barbados Mutual Life Assurance Society (BMLAS) and Life of Barbados (LOB) (joint venture partners)

- First Life Insurance Company Limited

- Colina Insurance Company Limited (Bahamas)

- CL Financial Limited and their subsidiary Colonial Life Insurance Company (Trinidad) Limited (CLICO)

- United Teachers’ Associates Insurance Company (Texas, USA)

- British American Insurance Company of the Bahamas Limited.

In April 2001, FINSAC received bids from:

- First Life Insurance Company Limited

- CL Financial Limited and CLICO

- a consortium of BMLAS, LOB and Colina Insurance Company Limited (Bahamas).

Bid Evaluation Process

An important aspect of the process was the actuarial valuation of Life of Jamaica Limited.

This took place in two stages. First there was a valuation of the LOJ business, and later a valuation of LOJ’s subsidiary company, Global Life Insurance Company, which operates mainly in the Bahamas. At the end of each stage, a report was produced and passed on to the bidders. The valuation was based on seriatim policy data, valuation assumptions and experience data provided by LOJ and Global Life as at September 30, 2000.

In addition to the actuarial valuation, FINSAC contracted PricewaterhouseCoopers (Canada) to prepare an analysis of LOJ’s value, including a figure for goodwill or the intangible value of the "LOJ brand". This report utilised the actuarial reports and other material. The report was not distributed to the bidders, but was used by FINSAC to validate the price expected for the company.

FINSAC’s technical personnel evaluated the offers received, as well as the financial state of the bidding companies, in order to determine whether they were capable of financing the acquisition of the portfolios without suffering financial damage in the process.

In the bid evaluation process, the FINSAC team used the requirements of the draft of the proposed new Insurance Act due to be enacted in 2001, and the corresponding draft regulations that specify the methodology and basis for valuing insurance liabilities. These regulations specify use of the Policy Premium Method (PPM) for valuation of policy liabilities, and the related Minimum Continuing Capital and Surplus Requirements (MCCSR) to ascertain the required capital for the portfolio and evaluate the financial strength of the bidders.

Another major criterion against which bids were assessed was "fit and proper" considerations of the bidding companies’ management and directors.

Based on these analyses, FINSAC made recommendations to the Cabinet, which were accepted, and on May 16, 2001 the bid submitted by the consortium of BMLAS, LOB and Colina was announced as the winner.

It was proposed that the joint venture partnership of Barbados Mutual Life Assurance Society and Life of Barbados Limited would be the new owners of Life of Jamaica. Colina Insurance Company Limited (incorporated in the Bahamas), would then seek to purchase LOJ’s interest in its subsidiary, Global Life Insurance Company.

The successful bid for LOJ and its subsidiary was J$2.0475Billion, subject to due diligence.

Interest-Sensitive Policies

In December 1998, all "interest-sensitive" policies issued by Mutual Life, Crown Eagle and Dyoll Life Insurance companies were placed under a court injunction preventing any funds being paid out to policyholders by any of the three companies. This was because the interest rates offered in these policies were unrealistic, based on the financial viability of the issuing companies.

In an effort to resolve this situation, FINSAC subsequently made an offer to the policyholders of three of the plans - Mutual Investor Plus (MIP), Asset Investor, and Fortune, to provide payments of cash values up to J$200,000 via accounts at Bank of Nova Scotia (BNS). Policyholders with cash values in excess of J$200,000 were offered tradable 5-year certificates of participation for the portion over J$200,000 via Scotiabank Jamaica Trust and Merchant Bank Limited, yielding a rate of interest equivalent to 1% above the Bank of Nova Scotia’s passbook savings rate. This offer was accepted by 52% of the policyholders. The remaining 48% did not come in to sign an agreement, despite numerous efforts to publicise this alternative scheme.

Pursuant to an order made by the Supreme Court, these remaining policyholders had their policies transferred to Larnaka Limited, a subsidiary of FINSAC, and it was ordered that they should be subject to a similar scheme as that provided to the policyholders who had transferred to BNS. Each policyholder would receive:

• an insurance policy for the life insurance component of each policy

• immediate access to the proceeds of the investment component of the policy up to a J$200,000 limit

• access in five years to that portion of the investment component of each policy which exceeds J$200,000 with interest payable semi-annually at the passbook rate.

In satisfaction of the court order, FINSAC negotiated the transfer of the life insurance component and the investment component (up to J$200,000 of each policy) to Guardian Life Limited, and any excess investment component (over J$200,000) to Union Bank to be managed in trust for the policyholders.

In addition to the Larnaka policyholders, there were some policyholders who accepted the original BNS offer that elected to keep the insurance component of their policy. These policies, along with any cash values, were also transferred to Guardian Life.

Custodian was another product marketed by Crown Eagle Life Insurance Company. It was simply a term deposit with no life insurance component, and was, therefore, unaffected by the court order. All Custodian accounts were transferred to Union Bank.

*N/A - not applicable

In consideration of the liabilities, FINSAC and the Government of Jamaica provided appropriate assets to Guardian Life and Union Bank. Due to the potential liquidity requirements of the policies and accounts, the form of these assets was cash and Local Registered Stocks (LRS).

Island Life Insurance Company

FINSAC continues to own 26% of Island Life, 64% of which is owned by Barbados Mutual Life Assurance Society, and 10% of which is owned by minority shareholders. The company reported a profit of J$166.2Million for the year ended December 31, 2000, representing a significant reversal of the J$15.4Million loss for the previous year. Results for 2001 have also been encouraging.

The company now appears to be in a position to take advantage of opportunities in the market place, and to develop new strategies to position itself for financial success.

IADB Project

The Government of Jamaica and IADB, have since 1998, jointly provided funding for the implementation of a project with the general aim of re-structuring the insurance industry in Jamaica. Specifically, the goals of the project included updating and strengthening the Insurance Act and Regulations of Jamaica, managing FINSAC’s investments in the insurance industry, and evaluating the management of private pension funds. FINSAC was designated the implementing agency.

Originally scheduled for completion in July 2000, an extension for the project was requested to July 2001, and this was granted in order to ensure the achievement of all goals in a sustainable way, and to facilitate the transfer of technical expertise to Jamaicans. This extension was particularly important in view of Government’s proposals to re-structure the Office of the Superintendent of Insurance (OSI), and to make it part of a new multi-faceted financial regulatory body.

The IADB project team continued to work closely with the OSI throughout this fiscal year, and regular bi-weekly meetings were held with the Superintendent of Insurance.

Throughout fiscal 2000-2001, Insurance Regulatory Reform continued to be the major focus of activity.

The following deliverables were successfully completed:

• Working along with the OSI, Supervisory Ladders of enforcement for Life and General Insurance Companies were completed. This is a framework for developing an orderly evaluation of the risk characteristics of supervised institutions, and for the likely range of supervisory responses to different levels of risk.

• Annual Reporting Forms and the Instructions to the Annual Report for both Life and General Insurance Companies were further revised, based on additional feedback from both the industry and the OSI.

• Annual Reporting Forms for Segregated Funds were also completed.

• Follow-up reviews were completed in respect of the Examinations conducted of Island Life, which looked at the accuracy of the accounting records, the consistency of accounting policies and procedures with accounting standards, solvency, and adherence to statutory obligations.

• Organisational charts, staffing structure and the budget for the new regulatory body referred to above, were developed and completed. The proposal is that this body will incorporate the OSI and the Securities Commission, and will also supervise the management of pension funds.

• The Draft of the new Insurance Act, already prepared by the IADB project team, was further revised based on industry and stakeholder comments, and a Final Draft submitted to the Chief Parliamentary Counsel, to Cabinet, and to the Joint Select Committee where preliminary reviews have been conducted.

• Draft Actuarial regulations were developed for Life and General Insurance Companies, after consultations with stakeholders. A special training session was conducted with the Jamaica Association of General Insurance Companies to familiarise the industry with the upcoming requirements.

• Draft Solvency regulations were completed for both Life and General Insurance Companies, having considered comments previously requested from stakeholders. The standards are the Minimum Continuing Capital & Surplus Requirements (MCCSR) for Life insurers and Minimum Asset Test (MAT) for general insurers.

• A Training Programme for OSI was undertaken and completed. This included presentations on the new Insurance Act, and Regulations for investment, solvency, reporting forms, and Early Warning Systems (EWS) for both Life and General insurance companies.

• Accounting Guidelines were completed for the Life and General insurance industries.

• A Unit Trust Examination was completed at Jamaica Unit Trust Services Limited and a final report produced, which led to the re-organisation at that institution.

• A trial of a new automated monthly reporting and financial analysis computer software, commissioned by the IADB project team was initiated at two life insurance companies.

• The IADB project team continued to provide support to the Jamaica Insurance Regulatory Information System used by the OSI for complaints and registration of companies agents and brokers.

• Support was also given to the Securities Commission, with the team providing a Provisional Liquidator for Voche Capital Investments Co. Ltd., and a report was produced and submitted. Work included the review of a Securities Commission Examination Report, and liaison with the Attorney General and the Fraud Squad.

Throughout fiscal 2001, close consultations with the IADB continued. Monthly reports were submitted to the Bank, as well as half-yearly and annual reports. IADB representatives also completed an audit of the project accounts, which were deemed satisfactory.

At the end of the original two-year project period, an independent assessor carried out an evaluation of the project on behalf of the funding agency. This evaluation praised the work done by the project team and stated:

"The overall goal has been met. With implementation, the outputs generated by FINSAC will provide Jamaica with a modern supervisory infrastructure which will engender public and investor confidence in the country’s financial system, with all that that implies in terms of serving as a foundation for future economic development."

FORENSIC UNIT

Major litigation developments for the year April 1, 2000 to March 31, 2001 included the completion of the hearing of the appeal in the dispute over possession and ownership of the Blaise Industrial Park. The Court of Appeal affirmed FIS’s right to possession and ownership of the property.

Additionally, the hearing of the appeal brought by former Century National Bank majority shareholder Donovan Crawford, against the judgement of the Supreme Court took place. The Court of Appeal reserved its judgement in this matter.

Other activities during this period included :

• settlement of the civil suit against the former principals of Ciboney Group Limited. The settlement relieved the Ciboney Group of liabilities amounting to US$7.7Million and J$220Million and released all liens on the assets of the company, leaving the way clear for the sale of the hotel in Ocho Rios

• litigation was initiated against the former principals of Workers Bank et al., arising from the initial public offering of shares in Friends Group Limited in 1993. It should come to trial in the next court term

• a number of potentially criminal matters were investigated, discussed with, and handed to the Director of Public Prosecutions for a ruling.

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