] 2 [ Cover: "Viriato" detail. Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ]

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1 Lusitania Lusitania Companhia de Seguros SA SA [ [ A Annual n n u a l R Report e p o r t ] 0 ] 1 [

2 ] 2 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] Cover: "Viriato" detail Sculpture by João Cutileiro Lusitania Collection - Porto

3 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 3 [

4 ] 4 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] INDEX INTRODUCTION 5 PRINCIPAL BUSINESS INDICATORS 6 LUSITANIA S STRATEGY 7 CORPORATE GOVERNANCE 9 PARTNERSHIPS 14 PROJECTS 17 MAIN EVENTS 18 ECONOMIC AND FINANCIAL BACKGROUND 20 LUSITANIA S PEFORMANCE 27 Technical business 27 Running costs 29 Reinsurance ceded and accepted 29 Asset management 30 Result and Profits 34 ATTACHMENT TO THE REPORT OF THE BOARD OF DIRECTORS 37 BALANCE SHEET AS AT 31 DECEMBER PROFIT AND LOSS FINANCIAL YEAR 43 NOTES TO THE FINANCIAL STATEMENTS AS AT 31 DECEMBER LAND AND BUILDINGS AS AT 31 DECEMBER, LUSITANIA COLLECTION 65 REPORT AND OPINION OF THE BOARD OF AUDITORS 76 ANNUAL REPORT ON THE AUDITING DONE BY THE REGISTERED AUDITOR 77 LEGAL RATIFICATION OF ACCOUNTS 78 AUDITORS REPORT 79

5 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 5 [ INTRODUCTION Dear Shareholders, Pursuant to legislation and the articles of association we hereby submit for your approval the report and accounts for the twentieth financial year of LUSITANIA, Companhia de Seguros, S.A., ending at 31 December This report will not only describe the constant improvements made to the company and management s objective over two decades to promote Lusitania in the eyes of all those in some way concerned, but will also demonstrate the sustainability of the strategy adopted.

6 ] 6 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] PRINCIPAL BUSINESS INDICATORS (thousands of euros) Gross premiums earned Market share (non-life) (a) 2,3% 2,8% 3,0% 2,9% 3,0% Growth rate of premiums 13,8% 33,8% 14,7% -0,8% 6,3% Claims index 61,9% 64,3% 62,3% 58,5% 57,8% Expense ratio 33,4% 29,7% 28,8% 29,6% 30,6% Combined ratio 95,3% 93,9% 91,1% 88,2% 88,4% Net result Investment N of employees Premiums per employee Policies per employee GVA per employee Profits from sales 1,0% 1,9% 1,5% 2,1% 2,2% Cash & Reserves Profits from cash & reserves 3,1% 7,5% 6,1% 8,1% 8,7% Costs Type / Policy 43,79 52,29 53,59 53,42 51,99 Personnel costs / Policy 22,69 28,33 28,69 29,45 29,42 FSE / Policy 12,99 15,94 16,42 16,02 14,98 Solvency margin cover 1,7 1,5 1,4 1,5 1,4 (a) Source: ISP

7 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 7 [ LUSITANIA S STRATEGY Vision, mission and values Lusitania is a Portuguese insurance company, and to pursue its purpose is part of the Montepio Geral Group. The Company aims to achieve high levels of profit and solvency through flexible, motivated organisation, high efficiency and quality, built on humanistic values and solid partnerships, guaranteeing security with a difference for its clients by knowing how to differentiate and adjust to each case. Offering security with a difference: providing solid, stable protection for persons and goods part of the biggest inancial group mutual - based financial origin sustaining higher profit and solvency levels safe-guarding the interests of shareholders, staff, policy holders and third parties as a defending moral and human values above all whole with solid partnerships, namely with the companies of the group, brokers, reinsurers and suppliers with flexible organisation that adapts constantly to challenges proposed asking of its staff a team spirit and dedication, as well as continuous professional development, and providing high quality services trading on the market in a spirit of loyalty, cooperation and healthy competition, to stand up to our competitors, constantly high levels of but always promoting our motivation and efficiency distinctions. Principles and objectives In conducting its business, LUSITANIA aims to add value to all those in some way related to the company and who are the very reason for the company s existence and the mainstay of its business: clients, shareholders, staff and suppliers, in full compliance with legislation in force, and mindful of our responsibilities in the society surrounding us, making rational use of natural resources and providing society with means of development either through training and study grants, or through cultural and sports events.

8 ] 8 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] Lusitania s constant working principles are: To maintain a high standard To promote an adequate To set up reserve funds To increase its share of the To prepare strategic and of efficiency in all our services policy for applying the adequate for meeting insurance market, bearing in operational plans that clearly with a view to higher profits, resources it manages, with responsibilities assumed mind the objectives and unequivocally define adequate returns on capital an eye on immediate income established by the Group objectives to be achieved at invested in the company, and and also medium and long any given tine to continue to be solidly term profits based in economic and financial terms To constantly encourage To constantly maintain an To respect working High quality in the service Strict compliance with employees by promoting attitude of innovation and regulations that will lead to provided to policyholders legislation, standards and human qualities and their positive criticism constant corporate and third parties instructions in force. own personal knowledge, innovation and a dynamic remembering that this is the approach likely to create new company s most important methods and products and capital to improve those already existing, while encouraging enlightened consumer capacity rooted in healthy selective criteria The major objectives for the three-year period beginning in 2005, are the same as those defined for the Montepio Geral Group and for the first time these were defined and improved together with the other companies in the Group. The aim is to increase the number of premiums for products that are innovative and adjusted to demand and sold via dedicated, efficient distribution channels. Keeping the total claims rate below 60% is another major objective for this three-year period, to be achieved by applying a policy of careful, balanced underwriting and by constant improvements to the management process so that costs can be brought down to an expense ratio below 30%. been listed with a view to: Making the company even more approachable from outside; Focusing on an increase in productivity by optimising the business process; Developing a reference framework for strategic partnerships; Defining risk as a factor in strategic development. Achieving these objectives will lead to a pre-tax return on capital of 14% at the close of the period covered by the Strategic Plan. To achieve these objectives a series of projects and tasks have

9 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 9 [ CORPORATE GOVERNANCE Management of Lusitania has been very much underpinned by the principles of good governance, rooted in a code of ethics that from the very launch of the company has been of capital importance. Business is conducted through a hierarchical, functional structure that at any given time aims to be the best for the objectives to be achieved. There is a clear definition of functions and responsibilities, internal and external auditing and management modules for access permissions to information, limits to underwriting and claims regulation, controlled through the company s information system. Always with good governance in mind, at the start of 2005 the functional structure of the company was altered with a view to improving the management and decisionmaking process, as shown in the attached organisational chart, with the introduction of a managerial department dedicated to Corporate Risk Management. At the same time, a study on the organisation is underway that will lead to more indepth internal control. Reinsurance Development & Control Corporate Risk Management Information Technologies Organisational Chart Board of Directors Executive Council Secretariat Marketing Client Management Bank insurance Business Units Management Centre for Claims Management Distribution Channels Operations Management

10 ] 10 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] Governing Bodies Management and Advisory Bodies General Meeting Dr. Vítor Melícias Lopes Chairman Eng.º José Joaquim Fragoso Vice-Chairman António Ferreira Carvalho Secretary Board of Directors Prof. Dr. José da Silva Lopes Chairman Dr. José António de Arez Romão CEO / Board Member Dr. Jorge José Conceição Silva Board Member Board of Auditors Dr. Vasco Ferreira César das Neves Chairman Dr. Luís Bartolomeu Baptista de Nagy Member Dr. Fernando Vassalo Namorado Rosa Member Official Registered Auditor Dr. Victor Reis Pereira da Luz Deputy Member Official Registered Auditor In 2005 Dr. António Tomás Correia was replaced as Chairman of the Board of Directors by Sr. Prof. Dr. José da Silva Lopes. The current Board of Directors, on behalf of the company, would like to thank Sr. Dr. António Tomás Correia for the dedication and enthusiasm he put into the development of Lusitania. Salaries Board Dr. Vítor Melícias Lopes Chairman Dr. V. C. Neves Member Dr. António de Seixas da Costa Leal Member Top Management Top level company management is conducted by the Executive Council that meets weekly and that sees to the implementation of strategies, policies, objectives and guidelines defined by the Board of Directors, and it also conducts the management duties delegated to it by the Board. Executive Council Dr. José António de Arez Romão CEO / Board Member Dr. Jorge José Conceição Silva Board Member Márcio Manuel Ventura Figueiredo Senior Manager Advisory Councils With a view to making the management of the company more agile, more receptive to others and ever closer to the market, the Board has several advisory councils. There is an Internal Control Council that meets monthly, its aim being to monitor company performance and propose to Administration corrective measures to help Lusitania achieve its objectives. Internal Control Council Dr. José António de Arez Romão CEO / Board Member Dr. Jorge José Conceição Silva Board Member Márcio Manuel Ventura Figueiredo Senior Manager António Paulo da Silva Gonçalves Raimundo Director of Business Unit Management Dra. Ana Isabel Gonzaga de Carvalho Director of Claims Management Centre Dr. Gonçalo Lopes da Costa Ramos e Costa Director of Operations Dr. Jorge Rafael Torres Gutierrez de Lima Director of Distribution Channels Dr. Nuno Ribeiro Quesada van Zeller Director of Development and Control

11 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 11 [ Brokers Council Along lines similar to those described above, and looking for more proximity to the surrounding environment and making the whole of corporate management aware of market problems, there is a Brokers Council, appointed annually, whose members are the biggest and best agents who have been working with Lusitania for many years. This Council meets with Administration once every six months. Information can be accessed regularly via access levels, and the Information Technology and Development and Control Departments manage the respective permissions. The continuity of the information system is ensured by keeping data base back-up copies filed off the company s premises. A copy is also made daily of changes to the management application both for software and the parameters for the same. A Project on a business continuity plan is underway to help improve this area. Risk management and internal control systems In creating the Corporate Risk Management Department in January 2005, Lusitania took an important step in its organisational structure, equipping the company with the means to identify and manage corporate risks and allocate capital all the more efficiently, anticipating the demands of the market and the control body for the insurance business. The Corporate Risk Management Department, as well as the Department for Development and Control, this latter in terms of its internal control, are currently a strategic axis in supporting the balanced, sustained development of Lusitania. The intention is that the multi-annual Project Risk Management A new challenge for the organisation should meet the objectives of identifying and analysing the company s exposure to different types of risk market risk, liquidity risk, strategic risk, operational risk, credit risk and actuarial risk and to adopt strategies for assessing and mitigating the same. Lusitania has already begun a study on the integrated model for risk management that includes Pillars I and III of Solvency II Capital Requirements and Corporate Governance, streamlining management of financial assets and the business continuity plan. As mentioned above, Lusitania is perfecting its internal control model to guarantee even more conformity between measures adopted and objectives outlined, as well as ensuring policies and procedures established are implemented and financial information produced. The model will introduce internal control procedures but also revise, check and improve them regularly. Information Systems Lusitania s information system operates based on the philosophy of data integration, and the business application was developed and is maintained internally by a permanent staff team. All documents included in the management of contracts and claims processes are entered in the system. Communication Internal communication on management is provided in a series of documents that are regulated and made available to staff via the Intranet A document produced daily, entitled Breves Instantes circulates general information and is sent via Lusitania s to all staff and to the whole network of exclusive brokers. A news letter is produced monthly relating the main events taking place in the company and it is also sent to all staff and whoever else is registered for this purpose on the Lusitania Internet site. Intellectual Capital The fundamental principles for human resources management have consisted of identifying, retaining and developing skills, encouraging personal and professional development to guarantee the continued growth of Lusitania, and to ensure that managers sharing the Company s values and its strategy remain with the company. At the close of 2005 Lusitania had 331 employees, most of them under the age of 45, 59% of them men and 41% women. Approximately 60% of these employees have been working for more than 10 years, a sign of considerable experience. Around half of 29,0% Age groups 34,6% 2,1% 34,3% To at at 45 More 45

12 ] 12 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] employees have above average academic training. This situation has been improved gradually by hiring staff with higher education and training not only in technical areas but also in management. Length of service in the business 21,0% 26,3% 18,4% Indicators Qt. employees Premiums per employee Policies per employee ,3% To 5 5 at at 20 More 20 GVA per employee Length of service in the Company 52,1% 24,4% 23,5% To 5 5 at 10 More Nº Training Events Nº Participants Nº Hours Training Costs C.Training / C.Personnel 2,50% 2,20% 1,70% 2,50% Nº Hours/ Nº Persons 35,7 19,6 21,2 18,8 Of all training administered in 2005, 62.7% was done outside the company, 31.8% was adminis-tered by company specialists and 5.5% at the work place using the tools of e- learning. In addition, agree-ments were signed with three well-known universities to provide practical training courses to recent graduates in areas of interest to the company s business. 29,6% Level of schooling 27,6% In return there has been a high increase in productivity over the past year and over the past five years, measured against any one of the traditional indicators. 5,4% Revenue per employee increased 6% in the past year Degree 37,4% Bachelor Complementary Remainder and 47% over the past five years. Productivity measured by the quantity of polices per employee improved 10.5% in Gross Added Value per employee improved 18% in 2005 and 42% over the past five years. The salaries policy takes into account the need to have company development working in Managerial staff tandem with the personal and professional development of staff. Since 1999, the company has 8,4% been implementing a Management System based on Objectives, which together with professional 32,8% assessment, awards the 58,8% more talented and dedicated employees and those that most share Lusitania s principles and strategies. Upper Middle Remaider

13 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 13 [ A series of promotions also result from performance assessment and in 2005 this affected 14.9% of all company staff and another 17.6% who benefited from the performance related increase in salary. The company s pension fund, to complement the staff retirement pension, rose at to the sum of euros, which fully covers responsibilities. In pursuing a health and welfare policy Lusitania provides its staff free of charge with a wide-coverage health insurance. Annually all staff over the age of 40 are health screened and other staff are screened every 2 years. 209 check-ups were done in A team of outside specialists visited seven of the company s offices in 2005 to certify the quality of working conditions as a whole, and of each work position in particular, which completed the analysis begun the year before. Shareholder structure Lusitania Vida raised its investment in the share capital of Lusitania slightly in 2005 by acquiring a small batch of shares. At year-end, Lusitania s share capital was distributed as follows: Shareholder Quantity Shares Share of Capital held Montepio Geral Associação Mutualista ,71% Caixa Económica Montepio Geral ,25% Lusitania Vida Companhia de Seguros, S.A ,32% Other Shareholders ,72% Total ,00% Investment structure In 2005 Lusitania maintained the strategic holdings it has in other companies, with a slight increase in investment in the capital of Lusitania Vida and Moçambique, Companhias de Seguros, with no particular significance in terms of investment percentage. Company Quantity Shares Share of Capital Held Sociedade Portuguesa de Administrações, S.A ,50% Clínica de Serviços Médicos e Computorizados de Belém, S.A ,51% Moçambique Companhia de Seguros, S.A ,20% Clínica de Santa Maria de Belém, S.A ,61% Lusitania Vida Companhia de Seguros, S.A ,17% Banco de Desenvolvimento e Comércio ,08%

14 ] 14 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] PARTNERSHIPS Brokers Lusitania continues to gear its distribution strategy to having the company recognised as the Company preferred by the best brokers. Agent profile is also clearly defined: experienced in the sector, focussed on the quality of the service they provide, personally and professionally distinguished, hard working, promoting personal relations and sharing the Company s values. To make all of this possible, Lusitania forms a variety of partnerships, seeking out the characteristics of each broker segment: Lusitania Forum, New Partnerships, Exclusive Brokers and Agents. The last segment was finalised in 2005, bringing a project to a close through which the respective management model was designed. Exclusive Agents have high strategic relevance for the potential contribution they make to the business, as well as in spreading to more locations throughout the country and giving local assistance to clients and the public as a whole. With a view to promoting the sharing of experiences, professional development and boosting team spirit, the first Annual Meeting of Exclusive Agents was held in the last quarter of the year. In addition, work tools were developed and implemented, as well as policies for boosting business and image building specific to this segment. This was done through: office architecture, furnishings, outdoor advertising, training events and sales campaigns geared to current and potential clients. The Forum, that brings together those agents who have worked for some years with Lusitania out of preference for the company, and whose performance is good, form a central platform in the development strategy for the insurance brokerage channel. In 2005, the VII Lusitania Forum was held, this time in the Congress Centre of the Oporto Customs House, on the theme Energy for adding value, with almost two hundred participants. The meeting included a variety of work sessions with specialists on the themes of the Forum adding to the interest. The Brokers Council also made its annual trip, this time against the culture background and landscape of Peru, in a mix of work and leisure. A new initiative, New Partnerships, was launched in 2005 to promote relationships with new agents. This group held welcome and incentives events and specifically planned promotional meetings. The numbers who joined far exceeded expectations and many commercial protocols were signed, but above all relations were strengthened with a large number of high quality agents. Agents relevant for their contribution towards Lusitania s development travelled to selected destinations, such as Greece, Estonia and Hungary, where they made contact with other realities in a pleasant atmosphere conducive to friendly socialising and an exchange of experiences. New initiatives were promoted for insurance agents, backed by renewed protocols, which contributed to the positive performance achieved by this segment. Per type of Broker Type of Broker Nr. % Share Brokers 88 3% Agents % Intermediaries % Total % Per location Zone Nr. % Share North Zone % Greater Porto % Greater Lisbon % Autonomous Regions 63 2% South Zone % Total % Brokers are distributed throughout the country very similarly to population distribution and serve the market where they are located. The management departments responsible for the North and South Agents network saw the highest growth in premiums processed, 17% and 18% respectively, the Brokers channel growing only 1% due to a loss of major business at the start of Direct Sales maintained the original portfolio due to the fact that it closed the year with a growth of only 0.4%. Efforts will have to be continued to develop business for those brokers with smaller portfolios and with those brokers who cannot respond today with what is demanded of them, considering that 83% of those appointed in the company represent only 19% of the premiums portfolio and 27% of all contracts. We are sure that the business that potentially these smaller scale brokers could have can be increased, counting on the factors that distinguish Lusitania from the others, that is, decentralised management, with considerable autonomy and solid, competent

15 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 15 [ assistance provided by more than 140 employees working in the 30 outlets scattered throughout the country. Bank-insurance Communication with the structures of Caixa Económica Montepio Geral was simplified and is now more agile and effective. There was intense activity in project development in 2005 that helped to streamline and automate management tools and procedures. As a result of this work, shared by the two companies, important gains were made in productivity, response capacity to clients and in giving marketing support for products on sale at outlets. New products specific for the banking channel were also developed, highlighting MG Auto, which is an innovative product. In 2005, and as an integral part of the CEMG study on marketing strategy, known as MG10, a solid contribution was made to the potential of assurfinance in the Group and alternative models were analysed for its implementation. Reinsurers 2005 was the worst year for international reinsurance in recent decades as a result of the natural disasters that hit the world in both number and scale, above all hurricane Katrina that practically destroyed the United States city of New Orleans. On the Portuguese market, two factors marked the financial year now ended, which together represent the key points of the problem with reinsurance. These are, the increase in competition in major insurable risks that was not backed by optional reinsurance, and the increasing difficulty in getting the capacity for covering disasters. The second of these two problems has been getting worse over the years and, in our opinion, implies the urgent need for measures to be adopted nationally. The continued increase in capital and a premium too low for the risk of disaster, is what led Munchener Ruck, the second biggest European reinsurer, to give up this type of cover in proportional reinsurance. However, Lusitania s reinsurance programme was renewed with significant increases in capacity and with better conditions, and the replacement of Munchener Ruck, in proportional contracts, was done without difficulty. Despite radical changes in this type of market, Lusitania s reinsurers have an excellent rating and strong leadership and are accepted at all levels. For their quality and diversity the Company s reinsurers, listed below, are an important added value. Companhia Rating S&P Swiss Re (leader) AA Assurances Mutuelles de France * Converium BBB+ Mapfre Re AA- Munchener Ruck A+ Nacional Re A PartnerRe AA- R+V Versicherungs A+ SCOR A- Secura A+ * Non-listed Mutual Company Clients Lusitania aims to design product supply and services to meet the expectations and characteristics of its clients, providing the variety and adjustment required and with policyholders fully aware of the value on offer. Several measures were implemented in 2005 to promote easy, accessible communication between clients and the company and we are sure that this will help build lasting relationships. To the same end, campaigns were launched to bring clients back, and also to revise contracts. At the same time, the Family Plan and the Business Plan were adjusted to make them more attractive and in line with the needs of policyholders. Lusitania increased its client base in 2005 by 8.7%, against a growth of 3.6% in Policy holders coming via the Bank-insurance channel rose 6.5%, similar to growth in 2004, that had been 5.7%, remembering however that the companies segment rose far above the 3.8% in 2004, to increase 15.8% in The number of private clients attracted by the other channels increased encouragingly, with a growth of 12.7% against 3.7% in 2004, the highest growth levels occurring in the segments with the best results. The segments Adults and Young Adults rose 22.1% and 30.2%, respectively. The number of clients in the Major Companies segment fell again in 2005, but the portfolio of companies insured rose 14.5%, a segment that had stagnated in All these indicators confirm that the marketing strategy adopted has led to the results expected from a wider spread of risks although concentrated in well-identified segments. The company seen from outside, when well perceived by the

16 ] 16 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] organisation, brings improvements and benefits that lead to increasing the satisfaction level of clients, a critical factor in the success of any company. prices to the most recent risk experience and that the company had accumulated. Improvements made to the procedures of an organisation often begin with a complaint. The company views complaints and suggestions as opportunities to encourage better quality in its services. However, the number of complaints sent to Client Management has been falling, which is certainly a sign of a better quality service. Innovation Innovation is seen as a critical factor in the success of LUSITANIA, so that we have technical staff dedicated to researching new services and products to meet the expectations of our clients, brokers and the public as a whole. New work processes are also being developed that are ever simpler and closer to the event, the aim being to raise the satisfaction level of those involved and to make gains in efficiency. These two aspects underlay the concerns of the company in 2005 and gave rise to innovative procedures and services of the type described below. Development began on new premium simulators to increase the number available. The Motor product simulator was revised to give it new functions such as a table comparing simulations, print-out of proposals and registering policies. More ergonomics was introduced and control was improved by creating parameters for users. A workflow system was developed for managing requests to annul contracts, the objective being to promote pro-active commercial action prior to effective annulment. Conditions were created for the reception, integration and automatic issue of electronic invoices for some of our main service providers. Also created were the conditions to integrate our information system with the main providers of damage assessment services, so that the booking for assessment and receipt of the respective report are immediate. A service to provide assistance to our policyholders with prevention and safety was also begun in 2005, contributing with awareness campaigns and training visits to client installations. A new basic product for Personal Accidents was launched in 2005 and the rate for Workmen s Compensation revised, adapting

17 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 17 [ PROJECTS New projects are launched in Lusitania every year that aim to develop the company and that assist with innovation, as reported above, always with an eye on strategy defined. In 2005 projects were sub-divided into 9 lines of strategic action: Strategic guidelines Nr. Projects Aligning with the strategy of the MG Group 1 The Broker website on the Internet was redesigned to help make it more user friendly and, among its other functions, it incorporates portfolio management and issues premium contracts and receipts in real time, using existing simulators. Responding to market demands to face up to globalisation, reinforce transparency and better account comparison, a project is being developed by an external consultant to adapt financial statements to International Financial Reporting Standards, with implementation planned in insurance companies from Apart from showing what impact the new standards will have on the Company, the Project already made it possible in 2005 to consolidate the accounts of the Montepio Geral Group. Adopting the CEMG channel as the main channel 5 Selling CEMG products and services through the brokers channel 1 Continuing to take profitability as the crux of the Company s business policy 15 Aligning the organisation with a view to the client 17 Increasing productivity 21 Improving processes 25 Developing new distribution channels 4 Increasing geographic coverage 2 Multi-disciplinary teams developed all of these projects, combining their knowledge, creativity and energy to innovate and promote company development. Although not wishing to run the risk of omitting some initiatives, certainly the projects with most added value should be mentioned, such as the significant improvements made to the claims management system and greater use of workflow tools already in use. Developing an entirely new bank insurance management model, which combines Lusitania s information system with that of Caixa Económica Montepio Geral, is an important Project for the impact it has on the company. The launch of a new Management Information System also merits mention in that it gives permanent access to the company s main indicators required for good diagnosis and the rapid adoption of corrective measures.

18 ] 18 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] MAIN EVENTS (18 and 19 February) New Partnerships meeting (28 February) Launch of MG10 project (29 March) General meeting of Shareholders (01 April) Managers meeting to assess results of 2004 (05 and 06 April) National meeting of sales network to assess 2004 results (19 to 21 May) CIAR meeting (28 June) Managers meeting to assess interim results of 2005 (01 September) Inauguration of new installations in Braga Office (23 and 30 September) New Partnerships meeting (03 and 05 October) Meeting of R&SA Network Action to provide community support As part of its social responsibilities, Lusitania continued to make its facilities available and to provide support for those promoting initiatives of community interest, among them: Meeting organised by the British Embassy on the theme The energy of waves ; Meeting of the Royal British Club and the Luso-Britânica Chamber of Commerce; Visit from a delegation of the Soibada School in East Timor to the Head Office of Lusitania; International meeting of the CEPER Group Conference on Exchange Rates and Currencies, organised by the Bank of Portugal; 15th. Lisbon Meeting, organised by the Bank of Portugal, with delegates from the Portuguese- speaking African countries and from East Timor who attend the Annual Meeting of the IMF/World Bank; Throughout the year the Company continued to give its support to institutions that make a relevant social contribution, among them: Acreditar Associação de Pais e Amigos de Crianças com Cancro (Association of Parents and Friends of Children with Cancer) Liga Portuguesa Contra o Cancro (Portuguese anti- Cancer League) (14 to 16 October) Sales meeting (21 October) Preparatory meeting for 2006 Budget (28 October) Annual managers meeting of MG group to submit the Integrated Strategic Plan for (05 and 06 November) I National Meeting of Exclusive Brokers (18 and 19 November) Forum Lusitania (01 and 02 December) Meeting of Lusitania s Managers to submit business and financial plans for 2006 (12 December) Inauguration of new installations in the Santa Maria da Feira office Action to provide support for sport and culture In promoting a wide range of cultural events, in its facilities, and in particular in the António da Costa Leal Auditorium, Lusitania has held many different cultural events designed for clients, brokers, staff and the public as a whole. The following national and international visual arts exhibitions are among the different events held: Barcos e Lugares, de Arq.Vasco d Orey Bobone Barcos e Lugares, by Arq.Vasco d Orey Bobone 5 Plays, by Margarida Neto who developed the theme of Pedro and Inês and in which the author pays homage to the well known ballerina and choreographer, Olga Roriz, who presented a ballet at the inauguration Solstício, by Guilherme Parente Odyssey a long eventful journey, Diane Kazakis Ar, Água, Terra, by Nicolle Callebaut O Tempo em que os caminhos se cruzam, by Ana Maria Figueiredo Pinturas no Paint, by Luís Teixeira da Silva, an initiative to show solidarity and support for the institutions Operation Red Nose and Acreditar Viagens Solidárias, exhibition of a collection held as part of the VII National Congress of Misericórdias. Par-

19 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 19 [ ticularly notable were works by the well-known artists: Nadir Afonso, Gracinda Candeias, Rogério Ribeiro, Álvaro Lapa, Alba Simões, António Macedo, António Sem, Baltazar Torres, José Manuel Castanheira, Manuel Casimiro, Manuela Pinheiro, Mário Bismarck, Pere Camps, Ricardo Paula and Rogério Timóteo. Lusitania promoted a Cycle of Music for Piano at the company s head Office, inviting artists well known at home and abroad: Jorge Moyano Domingos António Olga Pratz António Rosado Miguel Borges Coelho Miguel Henriques Paulo Pacheco Filipe Pinto Ribeiro. In addition, the garden of the Porto Covo Palace welcomed the Marta Hugon Quintet with the program Gershwin and Cole Porter Songs, in an agreeable night of jazz in the open air. Sponsorship Sports events also continued to be encouraged and supported, particularly through the following entities and sportspersons: José Veras: Athlete of 2005, Six-Time National SkySurf Champion and holder of two bronze medals won at the European Championship; Final National Tennis Championship, held in Evora; Participation of the Recreio Açor in regatas; Cross country Rally Lisbon Dakar, supporting the entry of the pilot Pedro Grancha; Golf: Tournament Ribagolfe, of the Association of Former Pupils of S. João Brito College, Quinta do Lago and Old Village Golf Tournament. Sponsorship As part of its policy for sponsorship of the arts, Lusitania was once again the Official Insurer for the Instituto Português de Museus (IPM), supporting exhibitions in several museums under the control of the IPM, such as: The Centenary of the Coach Museum ; The exhibition One hundred years later by Raul Lino presented in Venice; Malhoa and Bordalo - Confluências de uma geração ; The International Biennial of Vila Nova de Cerveira The exhibition The Baptismal gown of the last Emperor of Austria. Other important cultural events were also backed by the Company: Lisbon Photo in the Belém Cultural Centre ; Quixote s illustrators in the National Library Recording of the video clip of the last record of the fado singer Mafalda Arnauth in the Porto Covo Palace. The protocol was also renewed with the Museum of the Presidency of the Republic, and the following exhibitions were given backing: The First Ladies of the Portuguese Republic The Belém Palace Sentidos de Estado

20 ] 20 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ECONOMIC AND FINANCIAL BACKGROUND International Economy The world economy continued to grow in 2005, and global wealth is likely to increase by 4.3%, according to European Commission estimates, much of this due to development in some Asian countries. China maintained robust economic growth, sustained on exports and investment, and should settle at 9.3%, according to the OECD. India followed the same trend and should increase wealth by 7.1%. According to OECD data, economic activity in the USA grew 3.6%, slightly below last year, due to a fall in domestic consumption and private investment. Inflation should remain at around 3.4%, due to a deceleration in energy prices at year-end. The Japanese economy slowed from a growth of 2.7% in 2004 to a likely growth of 2.4% in 2005, due to the deterioration in net exports because both private consumption and the FBCF are likely to increase. However, Japan is still facing a climate of deflation with a likely -0.4% price variation at year-end. Economic Growth 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% World USA Japan Euro Zone China Source: European Commission The economy of the euro zone continued to show modest economic growth among the more advanced economies. According to the European Commission, growth in GDP should be around 1.3% in 2005, reflecting slack domestic demand. Unemployment settled at around 8.6% at year-end and there is no sign of a return of confidence among economic agents. Exports fell drastically from 6.5% in 2004 to 3.4% in 2005, due to the influence of countries like China and India on the international economy and a rise in the euro on the exchange market. The budgetary constraint policies applied by the European Commission continue to have a negative effect on economic growth in the zone. Countries such as France, Germany and Italy expect to achieve a growth rate for 2005 of 1.5%, 0.8% and 0.2%, respectively, and budget deficits of 3.2%, 3.9% and 4.3% of their respective GDP. The performance of oil prices throughout the year confirmed their volatility, with Brent reaching a maximum of dollars a barrel on the London market. The futures market and current speculation on oil prices suggest continued high prices, the result of political instability in some producer countries, aggravated by high global demand. Inflation has remained relatively stable at world level, due to a fall in food and industrial prices, the result of rationalising costs at industrial level and the growing presence of low cost producers on the world market. In addition, constraints on salary increases have compensated

21 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 21 [ partially for the rise in the price of oil. In the euro zone, inflation is likely to settle at 2.2%. Value increases were seen throughout the year on the main financial markets, reflecting expectations of high profits and low uncertainty indicators. In the euro zone, shares as a whole rose in value in most business sectors, with the Dow Jones Euro Stoxx valued at around 23%. On exchange markets the rising trend in the euro in recent years ceased. At the close of 2005 the euro had depreciated 7.1% compared to the same period in This was due to the political uncertainty provoked by rejection of the European Constitution and the result of the elections in Germany. Against the main international currencies, the euro fell 13.4% against the dollar and 0.5% against the yen. Euro Exchange Euro/Dólar 1,4 1,3 1,2 1,1 1,0 0,9 0,8 0,7 0,6 0,5 0, Euro/Iene EUR/USD EUR/JPY Source: European Central Bank Interest rates for the euro zone remained at all time lows but they could rise in the near future. In December 2005, the European Central Bank changed the reference rate by 25 base points, bringing it to 2.5%, with a view to revitalising the euro zone economy and trying to ensure price stability. Also in December, the North American Federal Reserve increased the reference rate of federal funds by 25 base points, bringing it to 4.25%, forecasting that an increase in the use of resources on the economy and continued high fuel prices could provoke a rise in inflation. National economy After Portuguese GDP rose 1.1% in 2004, the initial economic forecasts for 2005 suggested an increase in wealth of around 1.6%, sustained by investment and foreign demand, based on forecasts of significant growth in world trade. However, successive estimates of GDP for 2005 had to be revised downwards, and the Bank of Portugal forecasts a modest 0.3% of growth for the Portuguese economy.

22 ] 22 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] Changes in GDP 5% 4% 3% 2% 1% 0% -1% -2% (e) GPD pm Source: Bank of Portugal It is clear that investment did not perform well in 2005 and it was probably lower than in Despite favourable financing conditions, there has been no recovery in investment due to Portugal s inability to attract foreign investment, the economy has failed to be competitive any longer and economic recovery has been poor since The high climate of uncertainty regarding oil prices and the way in which the imbalances that have accumulated in the economy will be corrected, condition investment decisions in the current economic scenario. Private consumption should rise 1.8% in 2005, above growth in available income, meaning a fall in the rate of saving. The reduction in liquidity restrictions, resulting from joining the monetary union, and low interest rates, are the cause of growing family indebtedness. Public consumption should grow 1.1% in 2005 and remain stable against Implicit in this estimate is the same number of civil servants being maintained and a reduction in spending on goods and services. Weak growth in exports is also a cause of a falling GDP. Although the initial growth forecast was 7.5%, the estimate is that exports will rise only 1.8% in Despite the rise in world demand, the Portuguese economy has not acquired market shares due to increased competition from the countries of Asia and Eastern Europe. Weak economic growth and the loss of productivity inevitably have repercussions on the labour market. Consequently, unemployment is likely to rise from 7.1% in 2004 to 8% in However, it is hoped that the budgetary constraints put in place by the government will begin to bear results in 2005, and the budget deficit should be 6% of GDP at year-end, 20 points below that initially forecast. According to data supplied by the INE (National Statistics Institute), inflation settled at 2.3% at year end, conditioned by oil prices and by the effect of the increase in VAT from 19% to 21% in 2005.

23 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 23 [ Inflation Rate 6% 5% 4% 4,3% 3% 2% 2,3% 1% 0% Source: National Statistics Institute The reference interest rate remained low throughout 2005, although it did rise slightly at the close of the year, with Euribor at six month settling at 2.6%. Interest Rates 6% 5% 5,2% 4% 3% 2,6% 2% 1% 0% Euribor (6m) Source: European Banking Federation The Portuguese stock market performed well and in line with the main international stock markets. At year end the PSI 20 was up in value by more than13%.

24 ] 24 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] PSI 20 Index Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez Source: EURONEXT Lisbon Analysis by sector An analysis of GVA developments for the first three quarters of 2005 reveals a sharp fall in agriculture, forestry and fisheries, construction and industry. During this period, there was also a fall in GVA in transport, communications and in financial and real estate business. Electricity, gas and water, commerce, restaurants and hotels and other services continued with positive growth. In their relation to National Product, business with most value added is other services (31%), industry and commerce, restaurants and hotels (17%), and financial and real estate business (16%). The national insurance market Despite the context of weak economic growth, the Portuguese insurance market in recent years has grown ahead of the economy and has increased its share and importance in the economy. As in other sectors, the insurance industry has witnessed the phenomenon of concentration. 86 companies were trading in 2001 while in 2004 there were 70 insurers in operation. It is not surprising therefore that the 5 companies with the largest share represent 55% of the whole market and that the major group represents 22.3% of the insurance market, holding 16.6% of returns on Life and 34.3% on Non-Life premiums. Around people work in the insurance industry and turnover accounts for 7.7% of GDP, while in 2001 it was only 6.5%, bringing it close to the more developed countries in Europe. Data made available by the APS show that in 2005, even in an adverse economic climate, the insurance business evolved positively, due to the increase in returns from the Life sector, which rose 49.4% against This expansion in the Life sector was mainly the result of high demand for capitalisation products strongly influenced by transforming the financial applications of non-resident citizens, mainly emigrants.

25 Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] ] 25 [ Market production 10,00 9,14 8,00 6,25 6,00 4,00 4,48 4,56 3,50 3,85 5,40 4,04 4,21 4,29 2,00 0, (a) Life Non-Life However, growth in Non-Life premiums was 1.9%, which in real terms is a fall in returns against 2004, reflecting the performance of the national economy. Motor 46% Composition of Non-Life Sundry Transport 3% 2% Acc. And Health 31% The increase in the share of some operators in the Non-Life sectors was due above all to a significant rise in competition, both in the price of supply and the level of commissions paid in brokering and the improved quality of services. Motor insurance, accounting for 48.2% of the Non-Life market, grew 2.6%, reflecting developments in numbers of vehicles. According to ACAP (Automobile Association) data, the market in light vehicles increased only 3% in 2005 against Workmen s Compensation insurance remained unchanged with the respective turnover rising by a nominal 0.7% due to rising unemployment and constraints on salaries. 3rd. Party 2% Fire 16% The population s growing concern over medical care and the known difficulties the National Health Service is facing certainly added to the reasons justifying a rise of 7.7% in Health premiums. In some Non-Life sectors the market moved hardly at all or fell, the case with transport (-2.1%) and third party liability and other sectors (0.14%). Important also in the year was the publication of a new law on coverage for Non-Life premiums, the impact of which on efficiency and the accounts of insurers cannot yet be assessed as it came into force only at the end of the year. Composition of Life Portfolio Capitalization 6% Funds 34% Life Risk 60% According to information provided through the Associação Portuguesa de Seguradores, on the third quarter of 2005, the claims ratio for direct insurance, prior to entering Costs per Type, for

26 ] 26 [ Lusitania Companhia de Seguros SA [ A n n u a l R e p o r t ] all the Non-Life sectors was 61.6%, practically the same as the 61.7% in However, there has been a rise from 66.8% to 69.1% in all sectors of Accidents & Health, particularly in the Health sector, which rose 3.2 percentage points, and in Workmen s Compensation that went from 70.4% to 71.8% due to the rising cost of clinical care services. Inversely, there was a fall in the claims index in the Motor sector, which at the close of the third quarter was around 68.9%, against 70.9% for the same period in Lastly, the Instituto de Seguros de Portugal published regulation nº. 14/2005R, of 19 November, that regulates the principles of governance for insurers and risk management, greatly improving the transparency of the business. Prospects for business development In 2005 the insurance business achieved the average level of the European market in its contribution to Gross Domestic Product. Associating this with low expectations for economic growth it is unlikely that the insurance business will show much sign of growth, particularly in the Non-Life sectors in which Lusitania deals. However, we are sure that the way in which the business is shared out among the different insurance companies will continue similar to 2004, with small and average sized, stable, well organised companies that are flexible and hard working benefiting from the instability that the major units will continue to experience as a result of recent restructuring, which in some cases was not concluded. We believe that the concentration of insurers is not complete and that in 2006 there will be some new developments in this area.