legacy - malayan insurance co., inc. · achievements with the moral compass to pursue success...
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Legacy
2012 ANNUAL REPORT
TABLEofCONTENTS
COVER STORY
FinancialHighlights
Message fromAmbassador Alfonso
T. Yuchengco
YGC Chairman’sBusiness Affiliations
Report toStakeholders
03 04 05 06
FinancialReview
Board of Directors
Consolidated Assets Investments
Insurance RiskPortfolio Distribution
Directory of Products & Services
Principal Officers
Financial Reports
Vision, Mission and Core Values
Products and Services
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Legacy may be described as something that is valuable and that which was left behind either by a person or by an institution. Rather than consider legacy as a thing of the past, Malayan Insurance celebrates the Legacy of its leadership as a continuing sharing of triumphs, and achievements with the moral compass to pursue success without sacrificing values. Just like Ambassador Alfonso T. Yuchengco, whose image we honor in this 2012 Annual Report’s cover as a fitting gesture of thanksgiving for laying out for us and the future generations of Malayan Insurance the Legacy of excellence, of rising above the tides of challenges into the crux of triumph – with honor, integrity and dynamism. It is a Legacy that paves the way towards a deep sense of contribution to the society where the true meaning of legacy finds its most sublime meaning.
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MICO Equities, Inc. and SubsidiariesFINANCIALHIGHLIGHTS
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Alfonso T. Yuchengco greets the Malayan Insurance staff during the celebration of the
company’s anniversary in 1959.
IN US DOLLARS 2012 2011 Percent (%) Gross Premium Written $ 163,849,317 $ 143,200,937 14% Premiums Earned 64,583,606 65,050,736 -1% Net Undewriting Income 7,312,429 10,696,159 -32% Investments and Other Income 20,510,415 16,657,274 23% General expenses 21,762,567 19,658,257 11% Provision for Income Tax 631,088 895,886 -30% Net Income 2,393,409 5,868,773 -59% AT YEAR END Total Assets 575,001,624 467,634,748 23% stockholders’ Equity 278,742,999 232,999,969 20% Unearned Premiums 74,099,855 65,225,478 14% Reserve for Losses and Loss Expenses 133,896,586 101,719,097 32% Investments 287,974,464 234,914,840 23% IN PHILIPPINE PESOS 2012 2011 Percent (%) Gross Premium Written 6,920,552,746 6,048,420,953 14% Premiums Earned P 2,727,837,128 P 2,747,567,436 -1% Net Undewriting Income 308,857,271 451,776,877 -32% Investments and Other Income 866,304,540 703,558,284 23% General expenses 919,192,058 830,311,684 11% Provision for Income Tax 26,655,456 37,839,788 -30% Net Income 101,091,116 247,881,131 -59% AT YEAR END Total Assets P 23,603,816,674 P 19,196,406,402 23% stockholders’ Equity 11,442,400,101 9,564,648,720 20% Unearned Premiums-gross 3,041,799,036 2,677,505,855 14% Reserve for Losses and Loss Expenses-gross 5,496,454,854 4,175,568,933 32% Investments 11,821,346,433 9,643,254,178 23%
CONVERSION RATES
BalancesheetAccountsP41.05=US$1.00ProfitandLossAccountsP42.2373=US$1.00
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MESSAGEofAmb. Alfonso T. Yuchengco
We cannot help but express a deep sense of hope in the country’s surging economy. Undoubtedly, this was a banner year for the country as it topped a 6.7 percent growth in Gross Domestic Product (GDP). What is more remarkable is that this performance beats market expectations – yes, even the government’s own target of 5 – 6 percent GDP growth for 2012. In the same manner, Malayan Insurance takes pride in its double digit performance this year. The many initiatives undertaken by the management to sustain Malayan Insurance Co. Inc.’s (MICO) leadership position in the Philippine non-life insurance industry resulted in a 13.8% growth, beating expectations and keeping pace with strong domestic performance. With this strong performance and a growing asset base, MICO is more than ever, able to honor its commitment of offering our clients peace of mind in their businesses and property, settling all just and valid claims. This is the beautiful story of Malayan Insurance which I wish to share to the world. That when things are at its lowest, Malayan Insurance is the reliable partner who keeps a strong will and commitment to even better itself. And when the season is in full bloom, Malayan is also able to share in the harvest of good fortune. It is not a coincidence that we are able to withstand fortune’s crashing waves with poise and dignity. Our business remains strong, our commitment ever sturdy. And we do this all the time, never skirting on the moral and always doing what is right. We do this to honor our clients and business partners who deserve nothing but the best from us – in good or indifficulttimes.Ourgrowthisasmuchatestamentoftheloyaltyofourclientsandintermediaries,asitisthe success of our partnerships. We thank you for trusting in us.
Beating Expectations!
Ambassador Alfonso T. YuchengcoCHAIRMAN
MICO Equities, Inc.
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GOVeRnMenT POSITIOnS: Under the Administration of President Gloria Macapagal Arroyo• Presidential Adviser on Foreign Affairs with Cabinet Rank (January 19, 2004 – June 2010)• Member, Consultative Commission to Propose Revision to the 1987 Constitution (August 2005 – March 2006)• Philippine Permanent Representative to the United Nations with the rank of Ambassador (November 2001 – December 2002)• Presidential Special Envoy to Greater China, Japan and Korea (2001)
Under the Administration ofPresident Joseph ejercito estrada• Presidential Assistant on APEC Matter with Cabinet Rank (1998-2000)
Under the Administration of President Fidel V. Ramos• Ambassador Extraordinary & Plenipotentiary of the Republic of the Philippines to Japan (1995-1998)• Chairman, Council of Private Sector Advisers to the Philippine Government on the Spratly Issue (Marine and Archipelagic Development Policy Task Group) (1995-1998)• Member, Philippine Centennial Commission (1998)
Under the Administration of President Corazon C. Aquino• Ambassador Extraordinary & Plenipotentiary of the Republic of the Philippines to the People’s Republic of China (PROC) (1986-1988)
AFFIlIATIOnS – PRIVATe SeCTORS• Bachelor of Science in Commerce–Far Eastern University, Philippines – 1946• Certified Public Accountant (CPA) - 1947• Master of Science – Columbia University – 2007• Pan Malayan Management and Investment Corporation (PMMIC) Chairman of the Board and Chief Executive Officer• Rizal Commercial Banking Corporation Honorary Chairman of the Board• MICO Equities Inc. (holding company of Malayan Group of Insurance Companies) Chairman of the Board• GPL Holdings, Inc. (holding company of Great Pacific Life Assurance Corporation & Great Life Financial Assurance Corporation) Chairman of the Board• Sunlife Grepa Financial Inc. Member of the Board of Directors• Malayan Colleges, Inc., Chairman of the Board of Trustees• EEI Corporation Chairman of the Board of Trustees• RCBC Realty Corporation Chairman of the Board• RCBC Land Inc., Member of the Board of Directors• AY Foundation, Chairman of the Board• Yuchengco Center, De La Salle University, Philippines, Chairman of the Board• Yuchengco Museum, Chairman of the Board• YGC Corporate Services, Inc. Chairman of the Board• Waseda Institute for Asia Pacific Studies Member of the International Advisory Board
• Ritsumeikan Asia Pacific University Member of the Advisory Board• University of Alabama Member, International Business Advisory Board• Culverhouse College of Commerce & Business Administration• University of San Francisco, (Mclaren School of Business), USA Trustee Emeritus• Columbia University, Business School, New York, USA - Member, Board of Overseers• Master of Business Administration (MBA) - Juris Doctor (JD) dual degree program of De La Salle University, Professional Schools Inc. Graduate School of Business and Far Eastern University Institute of Law Chairman of the Board• University of St. La Salle, Roxas City Member, Board of Trustees• Pacific Forum, Honolulu, Hawaii Member, Board of Governors• International Insurance Society (IIS) Member of the Board of Directors and Former Chairman of the Board• Bantayog ng mga Bayani (Pillars of Heroes Foundation), Chairman of the Board• Philippine Constitutional Association (PHILCONSA) Chairman Emeritus• Blessed Teresa of Calcutta Awards Vice-Chairman of the Board of Judges• Bayanihan Foundation (Bayanihan Folk Arts Foundation, Inc.) - Philippine Women’s University, Chairman of the Board of Trustees• Philippines-Japan Society, Incorporated Advisory Board Member and Member of the Board of Directors• Philippines-Japan Economic Cooperation Committee, Member, Advisory Board• Confederation of Asia-Pacific Chambers of Commerce and Industries (CACCI) Chairman, Advisory Board and Former Chairman of the Board• The Asia Society, New York Trustee Emeritus• Honda Cars Kaloocan, Inc., Chairman of the Board• Enrique T. Yuchengco, Inc., Chairman of the Board• Compania Operatta ng Pilipinas, Inc. (Philippine Opera Company) Honorary Chairman of the Board
GOVeRnMenT AwARDS:Distinguished Service AwardDepartment of Foreign AffairsFebruary 24, 2011
Philippine legion of Honor with the Degree of Grand CommanderPresented by President Gloria Macapagal-ArroyoJune 29, 2010
First Recipient of the Order of lakandula with the rank of Bayani (Grand Cross) Presented by President GloriaMacapagal-Arroyo, Republic of the Philippines (November 20, 2003)
Order of Sikatuna with the Rank of DatuPresented by President Fidel V. RamosRepublic of the Philippines (1998)
Grand Cordon of the Order of the Rising SunPresented by His Majesty, the Emperor of Japan.The highest honor ever given bythe Emperor to a foreigner (1998)
Knight Grand Officer of RizalPresented by the Knights of RizalRepublic of the Philippines (1998)
Order of the Sacred Treasure, Gold and Silver StarAwarded by His Majesty,The Emperor of Japan (1993)
Outstanding Manilan in DiplomacyCity of Manila (1995)
Outstanding Citizen in the Field of BusinessCity of Manila (1976)
nOn-GOVeRnMenT AwARDS:Outstanding lam-An Townmates AwardPhilippine Lam-An Association Inc.November 19, 2012
Icons of the IndustryPhilippine Insurers and Reinsurers Association (PIRA, Inc.), October 18, 2012
Business Icons of the Decade AwardPresented by Biz News AsiaNovember 25, 2011
Rizal AwardPresented by Aliw AwardsNovember 8, 2011
Distinguished Service AwardPresented by the Confideration of Asia-Pacific Chambers of Commerce and Industry (Ocrober 23, 2011)
First Recipient of the F.A.I.R. Hall of FamePresented by the Afro-Asian Insurers & Reinsurers (FAIR) October 5, 2011
leadership AwardPresented by the Philippine Constitution Association (PILCONSA)Septemder 26,2011
lifetime Achievement AwardAsia Insurance Industry Awards(October 17, 2010)
Philconsa Maharlika AwardPresented by the Philippine ConstitutionAssociation (2010)
Hall of Fame AwardeeFar Eastern University (December 13, 2003)
Outstanding Alumni AwardeeFar Eastern University (May 2003)
lifetime Achievement AwardDr. Jose P. Rizal Awards for Excellence(June 2002)
KnP Pillar AwardKaluyagan Nen Palaris, Pangasinan(December 2006)
Parangal San MateoPhilippine Institute of Certified PublicAccountants Foundation, Inc.(October 2001)
The Outstanding Filipino AwardeeTOFIL 2000
Gold MedallionConfederation of Asia-PacificChambers of Commerce & Industry (CACCI) (2000)
First Asean to be elected to the“Insurance Hall of Fame”,International Insurance Society, Inc. (1997)
First Recipient of the GlobalInsurance Humanitarian AwardUniversity of Alabama (USA) (2008)
Hall of Fame AwardPhilippine Institute of Certified PublicAccountants (PICPA) (1997)
Outstanding Certified Public Accountant(CPA) in International RelationsPhilippine Institute of CertifiedPublic Accountants (PICPA) (1996)
CeO eXCel AwardInternational Association of BusinessCommunicators (2009)
Medal of MeritPhilippines-Japan Society (1995)
Outstanding Service to Church & nationDe La Salle University (1993)
Management Man of the YearManagement Association ofthe Philippines (1992)
Distinguished la Sallian Award forInsurance & FinanceDe La Salle University (1981)
First Asian to Receive InternationalInsurance Society (IIS) Founders’Gold Medal Award of excellenceInternational Insurance Society (1979)
Presidential Medal of MeritFar Eastern University (1978)
Most Outstanding JCI Senatorin the Field of Business and economicsXXXIII Jaycee Chamber International (JCI) World Congress (1978)
Insurance Man of the YearBusiness Writers Association ofthe Philippines (1955)
Most Distinguished AlumnusFar Eastern University (1955)
AmbAssAdor Alfonso T. YuchengcoChairman, MICO Equities, Inc.,
BUSINESSAFFILIATIONS
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Helen Y. DeeCHAIRPERSON
REPORTtoSTAKEHOLDERS
WWe look back to 2012, a year that offered a mixed plate of opportunities and challenges for the Philippine non-life insurance industry. An accommodative Philippine economic environment provided a solid foundation for insurance companies to grow. However, catastrophe losses and stiff competition continued to strain insurance companies’ profits.Meanwhile,arapidlychangingmarketenvironment has increased the demands for innovation and improvements in the way insurance companies do business.
Yvonne S. YuchengcoPRESIDENT
“ Malayan’s tradition of excellence is continuously mirrored in every product, every employee, and in every way we interact with our clients and partners.”
“It is that legacy that drives us to continuously improve our levels of performance as we move forward through a constantly changing business landscape.”
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With these serving as backdrop, Malayan stayed true to its mission of providing our policyholders the best non-life insurance protection and settlement of valid claims at all times.
2012 MARkET HIgHLIgHTS
The Philippine Economy on the RiseThe resurgent Philippine economy in 2012 was a welcome relief for the non-life insurance industry because this presented increased economic activity, thus expanding the pool of insurable risks.
Shrugging off the impact of a lacklustre global economy, the Philippines posted strong economic performance in 2012 with Gross Domestic Product growing by 6.6% vs. the 3.7% growth in 2011, and posting the highest growth in the ASEAN region. The country saw sustained growth in consumer spending fuelled by increased remittances from overseas Filipino workers. There was also a notable uptick in government spending, as the government tried to make up for lost ground after under-spending in 2011. The economic activity was broad-based with the services sector leadingtheway,andconstructionandmanufacturingalsoprovidingsignificantboost.
Inflationremainedlowin2012duetostablefoodandfuelpricesandcontinuedstrengthofthepeso.Thisallowedthe government to adopt monetary policies pushing for increased investments. This further propped-up domestic consumption,asreflectedinsignificantexpansioninbankloansportfolioforhousing,auto,commercialandothers.
The Philippine stock market rose to become one of Asia’s best performers, increasing the value of equity exposures andalsopresentinganalternativehigher-yieldassetclasstocompensate for themarginalyieldsoffixed-incomeassets.
The Non-life Insurance Industry Moving in the Right DirectionIn 2012, the insurance industry worked for the amendment of the old Insurance Code to make the insurance industry more responsive to the changing market environment. The joint efforts of both life and non-life associations bore positive fruits. The new Insurance Code is set to be enacted into law within 2013.
Centraltotheseamendmentsisthestrengtheningoftheindustry’sfinancialcapacitybyincreasingthecapitalizationrequirements of insurance companies from a minimum Net Worth of Php250M by mid 2013, increasing progressively to Php1.3B by 2022.
The changes could not have come at a better time, with the industry bracing for regional integration of the insurance industries of the Association of South East Asian Nations (ASEAN) in 2015, ushering in heightened competition inaborderlessmarket.Asidefromincreasingitsfinancialcapacity,theindustrywillneedtoalignlocalregulatorystandards with regional standards.
Putting more pressure on the industry were increased catastrophe losses, rising costs of reinsurance, and falling investment yields.
Thriving in a Volatile Insurance Environment
Riding on a resurgent economy, Malayan’s Gross Premiums Written grew by 17% from Php 6.05B in 2011 to Php 6.92B in 2012. Almost all product lines posted healthy growth. Fire insurance and Casualty/Engineering lines grew by 17% and 31% respectively, on the strength of the expansion of the construction and real estate industry for both commercial and residential sectors. Personal Accident insurance grew by 21%, with travel insurance as the main
growth driver due to the surge in tourism activity in the country. Motorcar business grew by 8% as a result of asurgeinautomobilepurchases.Thegrowthwasalsoareflectionofoureffortstofirmuppricingtoadequatelevels for policies with catastrophe exposures and adverse loss experience.
Investment Income increased by 7% from Php 689M in 2011 to Php 740M in 2012, mainly due to an increase ingainonavailable-for-salefinancialassets.Thecompanyrodethefavourablefinancialmarketsforactiveandtimelytradingofequityholdingsandfixedincomeassetstogenerateinvestmentincome.
However, Net Income decreased by 65% from Php 273M in 2011 to Php 96M in 2012 due to a contraction in ourUnderwritingProfit.Ourunderwritingperformancein2012and2011wereweakenedbylossesoriginatingfromforeignreinsurancetreatieswithexposuretotheThailandfloodlosses.TheThaiflood,oneofthebiggestcatastrophic events in South East Asia in recent years, was un-modelled, and affected most of the reinsurance market.
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One of the 1956 Malayan InsurancePrint Advertisement
Total AssetsIn Billion Pesos
2012 2011
Gross Premium WrittenIn Billion Pesos
2012 2011
Investment & other IncomeIn Million Pesos
2012 2011
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Malayan’s total Assets grew by 22% from Php 19.63B in 2011 to Php 24.01B in 2012 primarily due to the increaseinthemark-to-marketvaluationofourfinancialassetsbenefitingfromthestrongequitymarketsandlow interest rate environment that promoted asset price appreciation. There was also an increase in reinsurance assets corresponding to the reinsurers’ share of outstanding claims and incurred-but-not-reported claims (IBNRs).
Therewas a significant increase in the gross outstanding claims in the Liabilities sidemainly as a result ofprovisions for theThai flood losses.Malayanbelieves that an insurance company’s discipline is reflectedonits treatment of loss reserves because it backs the company’s ability to pay claims. Outstanding losses are appropriately and adequately reserved, in line with Malayan’s prudent and conservative reserving policy.
Net Worth expanded by 22% from Php 9.59B in 2011 to Php 11.46B in 2012 due to the increase in the value of financialassets.
Malayan prides itself on its balance sheet and overall corporate health, which is demonstrated in our continued favourableratingsfromprestigiousglobalratingagencies.A.M.Best,theworld’smostrespectedandrecognizedinsurance rating agency, recently upgraded our Issuer Credit Rating from bbb to bbb+, while affirming ourFinancialStrengthRatingofB++(Good).TheratingsupgradereflectsMalayan’ssolidrisk-adjustedcapitalization,prominentbusinessprofileinthePhilippineinsurancemarketandconsistentlyfavorableinvestmentperformance.On the other hand, Standard & Poor’s also affirmed Malayan’s Financial Strength Rating of BB with stableoutlook. Malayan Insurance Co., Inc. is the only non-life insurance company in the Philippines rated by both rating agencies.
Technology Innovation to Adapt to Evolving Markets In this highly competitive insurance industry, technological innovation has been a key ingredient for business growth and creating value. It improves the company’s agility in adapting to market demands, thereby increasing customer satisfaction, loyalty and business growth. With effective use of new technology platforms, insurers can create competitive advantage by making better and more timely decisions in customer service, product innovation, risk selection and claims handling.
Continuing the Development of a New Information SystemAs the company embarked on a new customer-centric underwriting and administration system, it kept in mind a robust system that will provide new business capabilities for enhanced customer service and access to new growth opportunities.
Throughout the project, the company poured in considerable man-hours for the analysis of business requirements, undertaking requisite company-wide training, and modifying existing operating guidelines and procedures as needed.
While it was not without its development issues and early transition pains, the new system was completed in December 2012 and commenced live implementation in January 2013.
Enhanced business analytics to improve Risk Management and Catastrophe ModelingAn important functionality of the new information system is providing the business analytics platform to improve our risk management and catastrophe modeling.
In 2012, Malayan, with the help of strategic partner Tokio Marine Asia, began a two-year project to improve our existing enterprise-wide risk management system (ERM). The ongoing ERM project will rely on the new system’s business analytics capability to produce a more comprehensive and granulated statistical database to create an
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Internal Capital Model and improve our Risk Monitoring and Reporting. The comprehensive database will also improve our catastrophe modeling. Since 2011, Malayan has been using an earthquake modeling software to enable our underwriters and reinsurance unit to determine the acceptability of prospective risks, the level of capacity to accept, and the level of catastrophe cover to purchase.
Enhanced data analytics is also seen in our expanding use of geospatial solutions especially for mapping areas with various acts-of-nature exposures.
Product Development to Drive Retail GrowthMalayan saw the growth of home, automobile, and motorcycle ownership, as well as opportunities in the tourism and travel sector, as a means to grow its retail business. Our product development initiatives focused on developing retail product brands to capture this expansion of the retail market.
Malayan Insurance has already laid the groundwork for this by creating several years ago the Integrated Marketing and Communication unit primarily tasked to develop specially designed branded/packaged products for the open marketsaswellasopennewmarketsanddistributionmodelsthroughaffinitymarkets/tie-ups.
Malayan also enhanced its penetration of the retail market by going into microinsurance and bancassurance. Two companies in the Malayan Group, i.e. BAC for microinsurance, and FNAC for bancassurance provided focus in their respective strategies, with positive results manifesting in 2012.
Raising the Bar with E-commerce PlatformMalayan reached another milestone with the development of the Malayan Facebook Store to jump into the social media bandwagon for insurance sales opportunities. To enhance the Malayan Group’s ability to distribute insurance online, Malayan obtained approval to issue policies via digital format. MICO clients may now opt to receivetheirpolicyinelectronicform,asrecognizedbytheInsuranceCommission.Beingindigitalformat,thiswill also spare clients from the danger of losing their documents and policy details. On a wider scale, the e-policy will serve as blueprint for going paperless in keeping with Malayans eco-friendly business advocacy.
Continuing Process ImprovementsMalayan is one of a few ISO-rated non-life insurance companies in the country. In December 2012, Malayan maintaineditsISOcertificationafteranintensiveauditofallprocesses.ThisdemonstratesMalayan’scontinuedcommitment to excellence through adherence to globally-accepted management practices.
Malayan also put emphasis on improving the inspection process by developing a survey risk rating system for all inspection reports to improve decision-making on whether risks are acceptable or not acceptable. We also expanded the use of the thermal imaging in the assessment of the electrical installations of the risks. These improved the quality of inspection which is critical in the assessment of the risks and the loss control recommendations that we provide our clients.
Industry RecognitionAmbassadorAlfonsoYuchengcowasrecognizedbythePhilippineInsurers&Reinsurers’Association(PIRA)lastOctober2012asan Insurance Industry IconoftheYear.TheMICOEquitieschairmanwasrecognizedforhiscontributions to the growth and development of the Philippine insurance industry.
On the other hand, Malayan was awarded as Best in Corporate Governance and Best in Corporate Social Responsibilitybythesameorganizationforthe2ndstraightyear.TheBest inCorporateGovernanceAwardrecognizesacompany’sadherencetosoundethicalpractices,whiletheBestinCorporateSocialResponsibilityis given to a company with a unique and sustainable impact on the community.
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Corporate Social ResponsibilityMalayanInsurancewasrecognizedbyCSRpartnerChildhopeAsia,Philippinesfor its10yearsofsupportandassistance to the Binondo Street Children Education Program. The Malayan SEP is one of the longest running streetchildrenalternativelearningprogramsinthePhilippines,asrecognizedbytheDepartmentofEducation.
Furthermore, Malayan’s Cebu branch was awarded a YGC Exemplar Award for its adopt-a-school program with the Sta.CruzElementarySchoolinRonda,Cebu. The Malayan Group likewise joined hundreds of YGC member company volunteers to the hills of Laiban Dam WatershedinSanAndres,Tanay,RizalforthesecondyearoftheYGCCentennialForestProjecttree-plantingactivity.
The Laiban Dam watershed is part of the Sierra Madre mountain range, which streches from the province of CagayaninNorthermLuzonandendsintheprovinceofQuezon.ThrutheYGCtree-plantinginitiative,thereishope to revive this once pristine forest.
Enduring LegacyLiving up to a legacy is not an easy task, especially if that legacy encompasses more than 83 years of being the standard name in providing the best non-life insurance products in the country. Such is the legacy that our founder, Don Enrique Yuchengco, and Ambassador Alfonso Yuchengco, have built in Malayan, and one that our current leaders and employees are committed to continue. As a result, Malayan’s tradition of excellence is continuously mirrored in every product, every employee, and in every way we interact with our clients and partners. It is that legacy that drives us to continuously improve our levels of performance as we move forward through a constantly changing business landscape.
We would like to take this opportunity to thank our Clients, Partners, Employees and Shareholders, for the continued support and trust you have placed in us throughout the years.
HELEN Y. DEEChairPErSON
Malayan insurance Co., inc.
YVONNE S. YUCHENGCOPrESiDENT
Malayan insurance Co., inc.
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IIt was a year marked by progression for Malayan Insurance Company, Inc. (MICO) as the Company moved from years experiencing minimal growth rates to post a remarkable expansion of 13.8 percent in its Gross Premiums Written (GPW) or Php 6.8 billion, compared to previous year’s attainment of Php 5.6 billion.
ThisperformanceisthehighestthatMalayanhaspostedinfiveyearswhereintheCompanywasaffectedbytheglobalfinancialcrisisandincreasesincatastrophicriskinthePhilippineandinternationalmarkets.ThejumpinthetoplinewasaresultofMalayan’ssustainedfocusonseveralfronts,includingthefortificationofabalancedportfoliomix in its production strategy, creation of new platforms for distribution as its business development strategy, and a hedging strategy for acceptance of risk while repositioning products for better underwriting results.
TheCompanywasalsoabletosettleoutstandingbalancesbroughtbytheThailandtyphoon/floodingwhichcausedmassive losses/claims against the company in 2011 until 2012.
All these were achieved despite the threat of increased frequency of natural disasters and severity of weather disturbance.
Malayan Insurance President Alfonso T. Yuchengco withKenzo Mizusawa of Tokio Marine & Fire Insurance duringa conference in Manila in 1969
FINANCIALREVIEW
Malayan Insurance employees and officers from all over the country converge at the Venezia Hotel in Subic Bay to participate in a company-wide sales rally.
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In 2012, the country was visited by 18 natural disasters. These natural disasters resulted in huge destruction to property and losses on human lives. Despite this, Malayan was able to tide the storms, particularly the effects of severe Habagat (monsoon) rains in August due in large part to the measures it took into place such as its reinsurance strategy adopted in 2012.
Thus, MICO’s reinsurance share of the GPE increased by 15 percent from Php 3.4 billion in 2011 to Php 3.9 billion in 2012.This,plusotherexpensescontributedinlesserNetIncomeofPhp61.2millionascomparedto2011’srealizedprofitsofPhp272.7million.
In terms of overall assets, MICO gained a remarkable 25 percent increase from Php 16.2 billion to Php 20.0 billion, highlightedbyanincreaseinitsfinancialassetssuchasAvailable-for-salefinancialassetsof18percent,signifyingincrease in its loans receivables which amounted to Php 1.2 billion as compared to 2011’s Php 359 million. In addition, MICO saw a 40.5 percent increase in its reinsurance assets from Php 3.7 billion to Php 5.2 billion.
Recognition and awards
MICO’sstrongfiscalyearwassupportedbythevoteofconfidenceofAMBestwhichupgradedtheCompany’sissuer credit rating from a previous “bbb” grade to “bbb+” rating.
AM Best also affirmed MICO’s financial strength rating of B++ (Good) with the outlook for both ratings asstable.
TheupgradewasduemainlytoMICO’ssolid-riskadjustmentcapitalization,prominentbusinessprofileandstronginvestment performance.
Signing an Underwriting Agreement with Carpenter & Locke Pty. Ltd., 1972. In photo (from left) are Malayan Insurance Senior Vice President
Helen Y. Dee, Director and General Manager of Carpenter & Locke Pty. Ltd., Owen J. Bloore, Malayan Insurance President Alfonso T. Yuchengco, and Malayan Insurance
Assistant Vice President and Casualty Manager Alex Yu.
Malayan Insurance turns-over 350 Noli Me Tangere books to Calamba National High School (CNHS) in an effort to propagate the appreciation of the life and works of our national hero, Jose Rizal.
Malayan Insurance joins hundreds of other YGC member company volunteers to the hills of Laiban Dam Watershed in San Andres, Tanay, Rizal for the second year of the YGC Centennial Forest Project tree-planting activity.
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InthelatestoutlookreportofStandard&Poors(S&P),thefinancialratingagencygaveMICOalong-termissuergradeof“BB”stablecreditratingand its long-termfinancialstrengtha“BB”rating.ThesecreditratingsareS&P’s opinion on the “general creditworthiness” of Malayan Insurance. MICO’s favorable credit rating means that the Company’s operation is strong, solidifying further its position as the leading non-life insurer in the country.
MalayanwasalsorecognizedbyitspeersinthePhilippinegeneralinsuranceindustryduringthe2ndPhilippineInsurers and Reinsurers Association (PIRA) Awards wherein MICO brought home the Best in Corporate Governance and Best in Corporate Social Responsibility (CSR) Awards.
MICO Equities Chairman Ambassador Alfonso T. Yuchengco was also honored by PIRA, giving him the Icon of the Industry Award.
TheBestinCorporateGovernanceAwardrecognizesacompany’sadherencetosoundethicalpractices,whiletheBest in Corporate Social Responsibility (CSR) is given to a company with a unique, sustainable and high-impact CSR.
ThePIRAAwardsisthefirstandonlybadgeofexcellenceforthePhilippinenon-lifeinsuranceindustry.
Malayan Insurance Chairperson, Mrs. Helen Y. Dee was also awarded with the Most Outstanding Manileño Award by the City of Manila, in recogntion of her contributions to the business climate of Manila. Malayan Insurance's headofficehasbeeninthecitysinceitsestablishmentin1930.
Journey towards new system, the digital land
MICO’s constant reinvention and innovation remain at the very forefront even as the Company continues to invest in new technologies to even better serve its clients.
This year, MICO launched the Polisy/Asia (P/A) business systems which will usher the company to a new level of customer servicing. This is because P/A is a powerful business suite for all lines of insurance which features end-to-endpolicy/groupmanagement,productconfiguration,andbusinessanalyticscapabilities.
Some of the capabilities of P/A are the integration of all active accounts which makes it even more responsive to the needs of customers especially those who maintain several policies with Malayan.
The innovation does not end here. In 2012 the groundwork were laid out for the full implementation of Malayan’s digital marketing strategy. During this time, MICO experimented with group buying sites and other online avenues to offer its products and services hassle-free.
Theinitialreceptionbeingapositivesign,MICOundertookthefullexpansionofitsonlinepresencefirstbyreinventing its corporate website and leveraging technology and its brand equity to make available for pur-chases online, Malayan's Personal Accident and Travel insurance products.
Malayan also expanded its presence in social media with the launch of its Facebook store to be able to transact business24/7anywhere inthecountry.Thisstrategy,afirst inAsia, isan innovationthatmade iteasyforpeople to get protected through the convenience of online transactions.
ElsewhereintheMICOGroup,whichiscomposedofMICO,FNAC,andBAC,themembersallpostedsignificantachievements in 2012.
Ambassador Alfonso T. Yuchengco receiving PIRA’s Icon of the Industry Award during the 2nd Philippine Non-Life Insurance (PIRA) Awards held at the Marriott Hotel in Pasay City in November 2012.
Malayan Insurance Chairperson Helen Yuchengco-Dee is named one of the “Ten Outstanding Manilan” for 2012 on the occasion of the city’s 441st anniversary celebrations.
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The First Nationwide Assurance Corporation (FNAC)
FNAC made a remarkable run in 2012, breaching the hundred-million-peso mark to post a 52 percent growth performance in its Gross Premiums Written (GPW).
The company’s GPW of Php 108.5 million, as compared to 2011’s Php 73.6 million, in terms of absolute numbers, is 34.9 million more than the year-ago performance.
This growth could be attributed to FNAC’s focused and aggressive marketing of its bancassurance products throughthe220branchesofbankpartner,RizalCommercialBankingCorporation(RCBC).
FNAC’s Net Income of Php 25.9 million is 46.3 percent higher than its Php 17.7 posted in the previous year.
Total Networth of FNAC is at Php 760.7 million, higher than 2011’s Php 602.6 million or 26.2 percent.
The strong showing of FNAC’s operation is a result of the company’s effort to further strengthen its core sales conduits by expanding its marketing mix. These include bank walk-in clients and forging partnerships which will carrysomeofits“MySeries”productsparticularlyits“MyBiz”and“MyWellness”lines.
Bankers Assurance Corporation (BAC)
The Bankers Assurance Corporation (BAC) made headways in 2012 wherein it fostered partnerships with numerous Microfinance Institutions (MFI) and Mutual Benefit Associations (MBA) which generated new microinsurance business for BAC in 2012.
A number of co-branded products for these microinsurance partnerships were also developed to address the risk prioritiesofclientsandmembersoftheseinstitutionsandorganizations.
Due to these strategies, BAC posted a 95 percent increase in its Gross Premiums Earned from the Php 22.8 million in 2011 to Php 44.4 million, mainly due to the engagement of new microinsurance channels. This resulted to an even larger increase of 135 percent to its Net Premiums Earned of Php 37.8 million in 2012 compared to Php 16.0 million in 2011.
Steadfast to the Malayan Group's unwavering commitment to innovative insurance products, BAC led the way toforgingkeypartnershipswithAIAPhilippineaffiliatePhilippineAmericanLifeandGeneralInsuranceCompany(Philam Life) and International SOS (ISOS) to offer the Pinoy Assist compulsory insurance product to our overseas Filipino workers. The product was a results of the enactment of Republic Act 10022 in November 2010.
BAC likewise collaborated with Microensure and Munich Re to develop weather index insurance products offeredtoMFIsutilizingthelatesttechnologyforweatherdataandmodeling.
Partnership for OFW Protection: (from left) BAC Chairman Antonio M. Rubin and BAC President Joel T. Almagro with Philam Life President & CEO Rex A. Mendoza and Philam Life FVP for Corporate Solutions Rowena A. Ferrer during the MOA signing for Pinoy Assist OFW insurance.
The Malayan Group joins the Branch Managers Conference of RCBC last October 4 to 5, 2012 at the Dusit Thani Hotel, Makati City. Malayan Insurance, the First Nationwide Assurance Corporation and Bankers Assurance Corporation promoted each of their non-life insurance products during the annual gathering event of the bank’s nationwide branch heads.
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CONSOLIDATEDASSETSMICO EQUITIES, INC. and SUBSIDIARIES
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INSURANCEriskPORTFOLIOMICO EQUITIES, INC. and SUBSIDIARIES
Alfonso T. Yuchengco, President and Carlos P. Romulo, Chairman of
Malayan Insurance 1977
The management of MICO EQUITIES, INC. and Subsidiaries is responsible for the preparation and fairrepresentationoftheconsolidatedfinancialstatementsfortheyearsendedDecember31,2012and 2011, including the additional components attached therein, in accordance with Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to thepreparationand fairpresentationof theconsolidatedfinancial statements thatare free frommaterial misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
TheBoardofDirectorsreviewsandapprovestheconsolidatedfinancialstatementsandsubmittedthesame to the stockholders.
SyCip, Gorres, Velayo & Co., the independent auditors, appointed by the stockholders has examined the consolidatedfinancialstatementsofthecompanyinaccordancewithPhilippineStandardsonAuditing,and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination.
MICO EQUITIES, INC. and SUBSIDIARIESSTATEMENT OF MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
ALFONSO T. YUCHENGCOChairMaN OF ThE BOarD
YVONNE S. YUCHENGCOPrESiDENT
MICHELLE DEE SANTOSTrEaSUrEr
ALEGRIA R. CASTROCONTrOLLErL
egac
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18
MICO EQUITIES, INC. and SUBSIDIARIES INDEPENDENT AUDITORS’ REPORT
The Stockholders and the Board of DirectorsMICO Equities, Inc.
We have audited the accompanying consolidated financial statements of MICO Equities, Inc. andSubsidiaries,whichcomprisetheconsolidatedstatementsoffinancialpositionasatDecember31,2012and 2011, and the consolidated statements of income, statements of comprehensive income, statementsofchangesinequityandstatementsofcashflowsfortheyearsthenended,andasummaryofsignificantaccountingpoliciesandotherexplanatoryinformation.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financialstatements in accordance with Philippine Financial Reporting Standards, and for such internal control as managementdetermines isnecessarytoenablethepreparationofconsolidatedfinancialstatementsthat are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Ourresponsibility istoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assuranceaboutwhethertheconsolidatedfinancialstatementsarefreefrommaterialmisstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures intheconsolidatedfinancialstatements.Theproceduresselecteddependontheauditor’sjudgment,includingtheassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevanttotheentity’spreparationandfairpresentationoftheconsolidatedfinancialstatements inorder to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financialstatements.
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Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforour audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of MICO Equities, Inc. and Subsidiaries as at December 31, 2012 and 2011, and theirfinancialperformanceandtheircashflowsfortheyearsthenendedinaccordancewithPhilippineFinancial Reporting Standards.
SYCIP GORRES VELAYO & CO.
Lucy L. ChanPartnerCPACertificateNo.88118SEC Accreditation No. 0114-AR-3 (Group A), February 4, 2013, valid until February 3, 2016TaxIdentificationNo.152-884-511BIR Accreditation No. 08-001998-46-2012, April 11, 2012, valid until April 10, 2015PTR No. 3669669, January 2, 2013, Makati City
June 26, 2013
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MICO EQUITIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31 2011 (As restated 2012 - Note 2)ASSETS
Cash and Cash Equivalents (Notes 4, 26, 27 and 28) P1,469,356,945 P1,896,811,975
Short-term Investments (Notes 5, 26, 27 and 28) 38,021,248 11,099,040
Insurance Receivables - net (Notes 6, 26 and 27) 3,378,656,755 2,813,798,273
Financial Assets (Notes 7, 26, 27 and 28) Available-for-salefinancialassets 10,857,169,577 9,063,830,701 Financialassetsatfairvaluethroughprofitorloss 217,541,191 224,561,299 Loans and receivables - net 1,277,167,477 432,531,764
Accrued Income (Notes 8, 26, 27 and 28) 55,514,117 46,376,162
Deferred Acquisition Costs (Notes 9 and 29) 337,840,897 273,845,906
Reinsurance Assets (Notes 10, 14, 26 and 29) 5,165,862,593 3,671,503,544
Investment Properties - net (Note 11) 108,901,090 88,467,387
Property and Equipment - net (Notes 12 and 29) 230,419,496 244,857,940
Pension Assets (Note 17) 601,160 7,032,535
Deferred Tax Assets (Note 24) 47,798,630 70,024,767
Other Assets (Notes 13 and 29) 418,965,498 351,665,109 P23,603,816,674 P19,196,406,402
LIABILITIES AND EQUITY
Liabilities Insurance contract liabilities (Notes 14 and 26) P8,538,253,890 P6,853,074,788Insurance payables (Notes 15, 26 and 27) 2,370,288,917 1,609,674,066Accounts payable, accrued expenses and other liabilities (Notes 16, 26 and 27) 1,102,354,268 1,011,849,749Income tax payable 133,579 –Deferred reinsurance commissions (Note 9) 106,783,983 114,520,762Deferred tax liabilities (Note 24) 2,347,272 2,136,384Pension liability (Note 17) 41,254,664 40,501,933 12,161,416,573 9,631,757,682
Equity (Note 29) Equity attributable to equity holders of the Parent Company Capital stock - P100 par value P600,000,000 P600,000,000 Revaluation reserve on available-for-sale financialassets(Note7) 4,771,487,147 3,131,432,419 Other revaluation reserve (Note 18) 23,466,647 23,466,647 Cumulative translation adjustments (119,542,562) (78,627,747) Retained earnings (Note 18) 5,096,394,636 4,998,868,776 10,371,805,868 8,675,140,095Non-controlling interests 1,070,594,233 889,508,625 11,442,400,101 9,564,648,720 P23,603,816,674 P19,196,406,402
See accompanying Notes to Consolidated Financial Statements.
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MICO EQUITIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 2011 (As restated 2012 - Note 2) INCOME Gross premiums earned P6,556,259,565 P6,135,392,053Reinsurers’ share of gross premiums earned 3,828,422,437 3,387,824,617Net premiums earned (Notes 14 and 19) 2,727,837,128 2,747,567,436
Investment and other income - net (Note 20) 866,304,540 703,558,284Commission income (Note 9) 242,243,182 245,448,605Other income 1,108,547,722 949,006,889
Total income 3,836,384,850 3,696,574,325 BENEFITS, CLAIMS AND EXPENSES Grossinsurancecontractbenefitsandclaimspaid (Notes 14 and 21) 2,357,591,648 2,443,944,923Reinsurers’shareofgrossinsurancecontractbenefits and claims paid (Notes 14 and 21) (667,227,177) (1,056,527,485)Gross change in insurance contract liabilities (Note 21) 1,320,885,921 (601,141,908)Reinsurers’ share of gross change in insurance contract liabilities (Note 21) (1,320,931,725) 828,201,407Netinsurancecontractbenefitsandclaims 1,690,318,667 1,614,476,937
Commission expense (Note 9) 856,537,947 845,546,569Other underwriting expenses (Note 9) 114,366,425 81,215,658General and administrative expenses (Note 22) 919,192,058 830,311,684Investment and other expense (Note 20) 128,223,181 39,302,558
Other expenses 2,018,319,611 1,796,376,469
Totalbenefits, claims and other expenses 3,708,638,278 3,410,853,406
INCOME BEFORE INCOME TAX 127,746,572 285,720,919
PROVISION FOR INCOME TAX (Note 24) 26,655,456 37,839,788
NET INCOME (Note 25) P101,091,116 P247,881,131Attributable to: Equity holders of the Parent Company P97,525,860 P220,310,489 Non-controlling interests 3,565,256 27,570,642 P101,091,116 P247,881,131
See accompanying Notes to Consolidated Financial Statements.
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MICO EQUITIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31 2011 (As restated 2012 - Note 2)
NET INCOME P101,091,116 P247,881,131 OTHER COMPREHENSIVE INCOME Netfairvaluechangesonavailable-for-salefinancial assets - net of tax effect (Note 7) 1,828,875,080 91,303,613Cumulative translation adjustment (40,914,815) 3,545,470
TOTAL COMPREHENSIVE INCOME P1,889,051,381 P342,730,214 Total comprehensive income attributable to: Equity holders of the Parent Company 1,696,665,773 308,037,342 Non-controlling interests 192,385,608 34,692,872 P1,889,051,381 P342,730,214
See accompanying Notes to Consolidated Financial Statements.
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MIC
O EQ
UITI
ES, I
NC. A
ND S
UBSI
DIAR
IES
CONS
OLID
ATED
STA
TEM
ENTS
OF
CHAN
gES
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QUIT
Y
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uity
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ble
to E
quity
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f the
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ent
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) (N
ote
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) Ad
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ts
Earn
ings
Tota
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Tota
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Fo
r the
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ecem
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Balan
ce a
t beg
inning
of y
ear,
as p
revio
usly
repo
rted
P600
,000
,000
P3
,131
,432
,419
P2
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6,64
7 (P
128,
040,
167)
P5
,073
,082
,556
P8
,699
,941
,455
P8
89,5
08,6
25
P9,5
89,4
50,0
80Pr
ior p
eriod
adj
ustm
ents
– –
– 49
,412
,420
(7
4,21
3,78
0)
(24,
801,
360)
–
(24,
801,
360)
Balan
ce a
t beg
inning
of y
ear (
As re
stat
ed)
600,
000,
000
3,13
1,43
2,41
9 23
,466
,647
(7
8,62
7,74
7)
4,99
8,86
8,77
6 8,
675,
140,
095
889,
508,
625
9,56
4,64
8,72
0Ne
t inc
ome
–
– –
– 97
,525
,860
97
,525
,860
3,
565,
256
101,
091,
116
Othe
r com
preh
ensiv
e inc
ome
(loss
) –
1,64
0,05
4,72
8 –
(40,
914,
815)
–
1,59
9,13
9,91
3 18
8,82
0,35
2 1,
787,
960,
265
Tota
l com
preh
ensiv
e inc
ome
(loss
) –
1,64
0,05
4,72
8 –
(40,
914,
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97
,525
,860
1,
696,
665,
773
192,
385,
608
1,88
9,05
1,38
1Ca
sh d
ivide
nds d
eclar
ed
–
– –
– –
– (1
1,30
0,00
) (1
1,30
0,00
0)Ba
lance
end
of y
ear
P 600
,000
,000
P4
,771
,487
,147
P2
3,46
6,64
7 (1
19,5
42,5
62)
P5,0
96,3
94,6
36
P10,
371,
805,
868
P1,0
70,5
94,2
33
P11,
442,
400,
101
Fo
r the
yea
r end
ed D
ecem
ber 3
1, 2
011
Balan
ce a
t beg
inning
of y
ear
P 400
,000
,000
P3
,047
,251
,036
P2
3,46
6,64
7 (P
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P4,9
80,1
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44
P8,3
68,6
51,5
10
P866
,115
,753
P9
,234
,767
,263
Net i
ncom
e
– –
– –
220,
310,
849
220,
310,
849
27,5
70,6
42
247,
881,
131
Othe
r com
preh
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e inc
ome
–
84,1
81,3
83
– 3,
545,
470
– 87
,726
,853
7,
122,
230
94,8
49,0
83To
tal c
ompr
ehen
sive
incom
e
– 84
,181
,383
–
3,54
5,47
0 22
0,31
0,48
9 30
8,03
7,34
2 34
,692
,872
34
2,73
0,21
4St
ock
divide
nds (
Note
18)
20
0,00
0,00
0 –
– –
(200
,000
,000
) –
– –
Cash
divi
dend
s dec
lared
– –
– –
– –
(11,
300,
000)
(1
1,30
0,00
0)Tr
ansa
ction
cos
ts (N
ote
18)
– –
– –
(1,5
48,7
57)
(1,5
48,7
57)
– (1
,548
,757
)Ba
lance
end
of y
ear
P 600
,000
,000
P3
,131
,432
,419
P2
3,46
6,64
7 (P
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27,7
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4,99
8,86
8,77
6 8,
675,
140,
095
P889
,508
,625
P9
,564
,648
,720
See
acco
mpa
nying
Not
es to
Con
solid
ated
Fina
ncial
Sta
tem
ents
.
Leg
acy
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MICO EQUITIES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 2011 (As restated 2012 - Note 2)CASH FLOWS FROM OPERATINg ACTIVITIES Income before income tax P127,746,572 P285,720,919Adjustments for: Unrealizedforeigncurrencyexchangeloss-net(Note20) 130,129,788 37,929,364 Fairvalueloss(gain)onfinancialassetsatfairvaluethrough profitorloss(Note20) (13,495,788) 8,331,918 Depreciationandamortization(Note22) 54,135,980 48,438,026 ImpairmentlossonAFSfinancialassets(Notes7and20) 2,181,316 15,529,779 Interest expense on reinsurance funds held (Note 20) 1,541,166 7,518,460 Dividend income (Note 20) (286,144,668) (305,579,021) Interest income (Note 20) (288,058,684) (276,305,551) Loss on winding up of subsidiary (Note 22) 3,432,372 – Loss (gain) on sale of (Note 20): Available-for-salefinancialassets (225,542,472) (56,684,763) Financialassetsatfairvaluethroughprofitorloss (3,888,112) – Real estate properties for sale (4,647,144) (3,011,250) Property and equipment (212,610) (1,151,198) Long-term commercial papers – (100,000)Operating loss before working capital changes (502,822,284) (239,363,317) Decrease (increase) in: Loans and receivables (66,294,598) 29,991,628 Insurance receivables (568,907,233) (392,511,124) Pension assets 6,431,375 3,156,274 Accrued rent income (1,007,388) 1,778,289 Deferred acquisition costs (63,994,991) 28,202,078 Reinsurance assets (1,494,359,049) 933,116,084 Other assets (66,080,368) (49,991,439) Increase (decrease) in: Insurance contract liabilities 1,694,487,066 (680,282,948) Insurance payables 760,614,851 497,629,419 Deferred reinsurance commissions (7,736,779) 5,617,494 Pension liability 752,731 (5,827,272) Accounts payable, accrued expenses and other liabilities 90,504,519 31,131,156Net cash provided (used in) by operations (218,412,148) 162,646,322Income tax paid (32,978,265) (28,070,852)Interest paid on reinsurance funds held (Note 20) (1,541,166) (7,518,460)Net cash provided by (used in) operating activities (252,931,579) 127,157,010
(Forward)
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Years Ended December 31 2011 (As restated 2012 - Note 2)CASH FLOWS FROM INVESTINg ACTIVITIES Proceeds from sale or maturities of: Available-for-salefinancialassets(Note7) P1,838,671,511 P804,944,384 Financialassetsatfairvaluethroughprofitorloss(Note7) 16,490,774 147,650,550 Short-term investments 11,099,040 10,536,503 Investment properties (Note 11) – 160,000 Long-term commercial papers (Note 7) 25,200,000 9,789,700 Property and equipment (Note 12) 981,264 2,869,204 Long-term investments (Note 7) 10,026,513 33,169,799 Real estate properties for sale 6,772,144 6,246,061Dividends received 282,797,137 305,579,021Interest received 291,544,085 318,922,742Acquisitions of: Available-for-salefinancialassets(Note7) (1,697,544,518) (1,219,611,567) Financialassetsatfairvaluethroughprofitorloss(Note7) (6,630,519) (4,289,434) Short-term investments (38,021,248) (11,099,040) Long-term commercial papers (Note 7) (427,000,000) (82,799,930) Property and equipment (Note 12) (35,240,827) (49,632,406) Investment properties (Note 11) (20,541,294) (20,848,630) Computer software (Note 13) (5,535,791) (12,436,889) Real estate properties for sale (Note 13) (2,931,697) – Non-trade notes receivable (Note 7) (390,000,000) –Net cash provided by (used in) investing activities (139,863,426) 239,150,068
CASH FLOWS FROM FINANCINg ACTIVITIES Payments of: Dividends (Note 18) (11,300,000) (11,300,000) SECfilingfeeforincreaseinauthorizedcapitalstock(Note18) – (1,548,757)Cashusedinfinancingactivities (11,300,000) (12,848,757)
EFFECT OF EXCHANgE RATE CHANgES ON CASH AND CASH EQUIVALENTS (23,360,025) 1,412,656
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (427,455,030) 354,770,977
CASH AND CASH EQUIVALENTS AT BEgINNINg OF YEAR (Note 4) 1,896,811,975 1,542,040,998
CASH AND CASH EQUIVALENTS AT END OF YEAR P1,469,356,945 P1,896,811,975
See accompanying Notes to Consolidated Financial Statements.
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MICO EQUITIES, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
MICO Equities, Inc. (the Parent Company) is a domestic corporation which was incorporated and registered with the Philippine Securities and Exchange Commission (SEC) on June 28, 1972 to invest in nonlife insurance companies.
TheParentCompany’sultimateparentisPanMalayanManagementandInvestmentCorporation(PMMIC)withregisteredofficeaddressat48thFloor,YuchengcoTower,RCBCPlaza,6819AyalaAvenue,MakatiCity.
TheconsolidatedfinancialstatementscomprisethefinancialstatementsoftheParentCompanyandthefollowingwhollyandmajority-owned subsidiaries:
Percentage of Place of Ownership Incorporation 2012 2011Malayan Insurance Co., Inc. (MICO) and Subsidiaries: Philippines 88.7% 88.7% Bankers Assurance Corporation (BAC) Philippines 100.0 100.0 The First Nationwide Assurance Corporation (FNAC) Philippines 54.7 54.7Malayan International Insurance Corporation, Limited (MIIC) and Subsidiaries: Bahamas 100.0 100.0 Malayan Insurance Company (U.K.) Limited United Kingdom 100.0 100.0 Malayan Insurance Company (H.K.) Limited Hong Kong 100.0 100.0 British VirginAsia-PAC Reinsurance Company, Limited Islands 100.0 100.0FNAC Philippines 45.3 45.3Malayan Securities Corporation (MSC) Philippines 100.0 100.0
MICO and Subsidiariesisengagedinthenonlifeinsurancebusinessdealingwithallkindsofinsurancesuchasfire,marine,bond,motor car, personal accident, miscellaneous casualty and engineering, except life insurance.
MIIC and Subsidiaries and Asia-PAC Reinsurance Company, Limited are engaged in the reinsurance of nonlife insurance business.
MSC is incorporated to invest in equity and debt securities.
Pursuant to a special resolution passed on the general meeting of Malayan Insurance Company (U.K.) Limited, a subsidiary of MIIC, on April 4, 2012, Malayan Insurance Company (U.K.) Limited entered into a members’ voluntary winding up and joint liquidators were appointed on the same date for such purpose. Upon the appointment of the joint liquidators, MIIC and Subsidiaries has lost control of Malayan Insurance Company (U.K.) Limited which was deconsolidated from the date that control ceased.
TheaccompanyingconsolidatedfinancialstatementsofMICOEquities,Inc.andSubsidiaries(theGroup)wereapprovedandauthorizedforissuebytheBoardofDirectors(BOD)onJune26,2013.
2. SummaryofSignificantAccountingPolicies
Basis of PreparationTheaccompanyingconsolidatedfinancialstatementsoftheGrouphavebeenpreparedonahistoricalcostbasis,except foravailable-for-sale(AFS)financialassetsandfinancialassetsatfairvaluethroughprofitorloss(FVPL)whichhavebeenmeasuredatfairvalue.TheconsolidatedfinancialstatementsaremeasuredinPhilippinePeso(P), which is also the Parent Company’s functional currency. All values are rounded off to the nearest Philippine Peso values, unless otherwise indicated.
Statement of ComplianceTheaccompanyingconsolidatedfinancialstatementsoftheGrouphavebeenprepared incompliancewithPhilippineFinancialReporting Standards (PFRS).
Prior Period AdjustmentsIn 2012, the Group recorded prior period adjustments pertaining to the elimination of an intercompany transaction and reversal of income in 2011. This resulted in a decrease in 2011 investment and other income, 2011 net income and December 31, 2011 retained earnings by P74,213,780, increase in December 31, 2011 cumulative translation adjustment by P49,412,420 and a decrease in December 31, 2011 loans and receivables by P24,801,360.
In addition, in 2012, the Group recorded prior period adjustment pertaining to the elimination of intercompany insurance-related receivables/payables in 2011. This resulted in a decrease in reinsurance assets and insurance contract liabilities by P412,138,728.
ReclassificationsCertainaccountsinthe2011consolidatedstatementoffinancialpositionandstatementofincomehavebeenreclassifiedtoconformtothecurrentyearpresentation.Thefollowingpresentsthenatureandamountoftheitemsreclassified:
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a) Impairment loss on AFS financial assets amounting to P15,529,779, fair value loss on financial assets at FVPLamounting to P8,331,918 and foreign exchange loss amounting to P240,709 previously included in “Investment andotherincome”accounthavebeenreclassifiedto“Investmentandotherexpense”account;
b) Reinsurance recoverable on unpaid losses amounting to P4,984,170 previously offset against insurance contract liabilitiesarenowpresentedaspartofreinsuranceassets;
c) Funds held by ceding companies amounting to P11,317,428 previously offset against insurance payable are now presentedaspartofinsurancereceivables;
d) Funds held for reinsurance companies amounting to P6,533,650 previously offset against insurance receivables are presentedaspartofinsurancepayables;
e) Brokers’commissionincidentaltosaleofAFSfinancialassetsamountingtoP1,456,944 previously included in “Other investmentexpense”accounthasbeenoffsetagainstgainonsaleofAFSfinancialassetsincludedin“Investmentandotherincome”account;
f) Input VAT amounting to P241,457 previously presented under “Other assets” is netted against output VAT included in “Accounts payable, accrued expenses and other liabilities” account.
Thereclassificationshavenoimpactonthe2011consolidatednetincomeandJanuary1,2011consolidatedassets,liabilitiesandequityaccounts,thus,noconsolidatedstatementoffinancialpositionasofJanuary1,2011ispresented.
Basis of ConsolidationTheconsolidatedfinancialstatementscomprisethefinancialstatementsoftheGroupasofandfortheyearsendedDecember31, 2012 and 2011.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue tobeconsolidateduntilthedatewhensuchcontrolceases.Thefinancialstatementsofthesubsidiariesarepreparedforthesame reporting period as the Parent Company, using consistent accounting policies. All intra-group balances, transactions, unrealizedgainsandlossesresultingfromintra-grouptransactionsanddividendsareeliminatedinfull.
Non-controlling interests (NCIs) pertains to the equity in a subsidiary not attributable, directly or indirectly to the Parent Company. Any equity instruments issued by a subsidiary that are not owned by the Parent Company are NCIs.
NCIsrepresenttheportionofprofitorlossandnetassetsinsubsidiariesnotwholly-ownedandarepresentedseparatelyintheconsolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equityandconsolidatedstatementsoffinancialposition,separatelyfromtheParentCompany’sequity.
LosseswithinasubsidiaryareattributedtotheNCIevenifthatresultsinadeficitbalance.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. Any differencebetweentheamountbywhichtheNCIsareadjustedandthefairvalueoftheconsiderationpaidorreceivedisrecognizeddirectly in equity as “Equity reserve” and attributed to the owners of the Parent Company.
If the Parent Company loses control over a subsidiary it:
• Derecognizestheassets(includinggoodwill)andliabilitiesofthesubsidiary• Derecognizesthecarryingamountofanynon-controllinginterest• Derecognizesthecumulativetranslationdifferencesrecordedinequity• Recognizesthefairvalueoftheconsiderationreceived• Recognizesthefairvalueofanyinvestmentretained• Recognizesanysurplusordeficitinprofitorloss• Reclassifiestheparent’sshareofcomponentspreviouslyrecognizedinothercomprehensiveincometoprofitor lossor
retained earnings, as appropriate.
Changes in Accounting PoliciesTheaccountingpoliciesadoptedareconsistentwiththoseofthepreviousfinancialyearsexceptfortheadoptionofthefollowingamended PFRS which became effective beginning January 1, 2012. Except as otherwise stated, the adoption of these amended standardsdidnothaveanyimpactontheGroup’sfinancialstatements.
• PFRS7(Amendments),Financial Instruments: Disclosures - Transfers of Financial Assets Theamendmentsrequireadditionaldisclosuresaboutfinancialassetsthathavebeentransferredbutnotderecognizedto
enhancetheunderstandingoftherelationshipbetweenthoseassetsthathavenotbeenderecognizedandtheirassociatedliabilities.Inaddition,theamendmentsrequiredisclosuresaboutcontinuinginvolvementinderecognizedassetstoenableusersoffinancialstatementstoevaluatethenatureof,andrisksassociatedwith,theentity’scontinuinginvolvementinthosederecognizedassets.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionor performance.
• PAS12(Amendments), Income Taxes - Deferred Tax: Recovery of Underlying Assets ThisamendmenttoPAS12clarifiesthedeterminationofdeferredtaxoninvestmentpropertymeasuredatfairvalue.The
amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a ‘sale’ basis. The presumption is rebutted if the investment property is depreciable anditisheldwithinabusinessmodelwhoseobjectiveistoconsumesubstantiallyalloftheeconomicbenefitsintheinvestmentproperty over time (‘use’ basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. L
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Future Changes in Accounting PoliciesThe Group will adopt the following new and amended standards and Philippine Interpretations of International Financial Reporting Interpretation Committee (IFRIC) interpretations enumerated below when these become effective. Except as otherwise indicated, theGroupdoesnotexpecttheadoptionofthesenewandamendedPFRSandPhilippineInterpretationstohavesignificantimpactontheconsolidatedfinancialstatements.
Effective 2013
• PFRS7(Amendments),Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities These amendments require an entity to disclose information about rights of set-off and related arrangements (such as
collateralagreements).ThenewdisclosuresarerequiredforallrecognizedfinancialinstrumentsthataresetoffinaccordancewithPAS32.Thesedisclosuresalsoapplytorecognizedfinancialinstrumentsthataresubjecttoanenforceablemaster netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information.
Thisispresentedseparatelyforfinancialassetsandfinancialliabilitiesrecognizedattheendofthereportingperiod:
a) Thegrossamountsofthoserecognizedfinancialassetsandrecognizedfinancialliabilities;b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented
intheconsolidatedstatementoffinancialposition;c) Thenetamountspresentedintheconsolidatedstatementoffinancialposition;d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise
included in (b) above, including:i. AmountsrelatedtorecognizedfinancialinstrumentsthatdonotmeetsomeoralloftheoffsettingcriteriainPAS
32;andii. Amountsrelatedtofinancialcollateral(includingcashcollateral);and
e) The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments to PFRS 7 are to be applied retrospectively and are effective for annual periods beginning on or after January 1,2013.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionorperformance.
• PFRS10,Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for
consolidatedfinancialstatements.ItalsoincludestheissuesraisedinSIC-12,Consolidation-SpecialPurposeEntities.PFRS10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS10willrequiremanagementtoexercisesignificantjudgmenttodeterminewhichentitiesarecontrolled,andtherefore,are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The standard becomes effective for annual periods beginning on or after January 1, 2013.
• PFRS11,Joint Arrangements PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions
by Venturers. PFRS 11 removes the option to account for jointly controlled ntities (JCEs) using proportionate consolidation. Instead,JCEsthatmeetthedefinitionofajointventuremustbeaccountedforusingtheequitymethod.Thestandardbecomes effective for annual periods beginning on or after January 1, 2013.
• PFRS12,Disclosure of Interests with Other Entities PFRS12includesallofthedisclosuresthatwerepreviouslyinPAS27relatedtoconsolidatedfinancialstatements,aswell
as all of the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The standard becomes effective for annual periods beginning on or after January 1, 2013.
• PFRS13,Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when
an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The standard becomes effective for annual periods beginning on or after January 1, 2013.
TheGroupdoesnotanticipatethattheadoptionofthisstandardwillhaveasignificantimpactonitsfinancialpositionandperformance.
• PAS1(Amendment),Financial Statement Presentation, Presentation of Items of Other Comprehensive Income or OCI The amendments to PAS 1 changed the grouping of items presented in other comprehensive income. Items that could be
reclassified(or‘recycled’)toprofitorlossatafuturepointintime(forexample,uponderecognitionorsettlement)wouldbepresentedseparatelyfromitemsthatwillneverbereclassified.Theamendmentaffectspresentationonlyandwillhaveno impactontheGroup’sfinancialpositionorperformance. TheamendmentbecomeseffectiveforannualperiodsbeginningonorafterJuly1,2012.Theamendmentswillbeappliedretrospectivelyandwillresulttothemodificationofthe presentation of items of OCI.
• PAS19(Revised),EmployeeBenefits Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of
expectedreturnsonplanassetstosimpleclarificationsandrewording.Therevisedstandardalsorequiresnewdisclosuressuchas,amongothers,asensitivityanalysisforeachsignificantactuarialassumption,informationonasset-liabilitymatchingstrategies,durationofthedefinedbenefitobligation,anddisaggregationofplanassetsbynatureandrisk.Theamendmentsbecome effective for annual periods beginning on or after January 1, 2013. Once effective, the Group has to apply the amendments retroactively to the earliest period presented.
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TheGrouprevieweditsexistingemployeebenefitsanddeterminedthattheamendedstandardhassignificantimpactonitsaccountingforretirementbenefits.TheGroupobtainedtheservicesofanexternalactuarytocomputetheimpacttothefinancialstatementsuponadoptionofthestandard.Theeffectsaredetailedbelow:
Consolidated Statement of Financial Position
As at December As at January 1, 31, 2012 2012 Increase in deferred tax asset P33,907,501 P38,898,145 Increase (decrease) in: Pension obligation 113,025,003 129,660,483 Other comprehensive income (102,959,663) (111,014,538) Retained earnings 23,842,161 20,252,200 P33,907,501 P38,898,145
Consolidated Statement of Income
For the year ended December 31, 2012 Increase (decrease) in: Pension expense (P5,128,514) Income tax expense 1,538,553 Increaseinnetprofitfortheyear (P3,589,961) Attributable to: Equity holders of the Parent Company (P3,232,677) Non-controlling interests (357,284) (P3,589,961)
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2012 Increase in: Other comprehensive income P11,506,966 Tax effect (3,452,091) P8,054,875 Attributable to: Equity holders of the Parent Company P7,686,748 Non-controlling interests 368,127 P8,054,875
• PAS27,Separate Financial Statements (as revised in 2011) As a consequence of the new PFRS 10, Consolidated Financial Statements and PFRS 12, Disclosure of Interests in Other
Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separatefinancialstatements. TheamendmentbecomeseffectiveforannualperiodsbeginningonorafterJanuary1,2013.
• PAS28,Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new PFRS 11, Joint Arrangements and PFRS 12, PAS 28 has been renamed PAS 28, Investments
in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013.
• PhilippineInterpretationIFRIC20,StrippingCostsintheProductionPhaseofaSurfaceMine This Philippine Interpretation applies to waste removal costs (“stripping costs”) that are incurred in surface mining activity
duringtheproductionphaseofthemine(“productionstrippingcosts”).Ifthebenefitfromthestrippingactivitywillberealizedinthecurrentperiod,anentityisrequiredtoaccountforthestrippingactivitycostsaspartofthecostofinventory.Whenthebenefitistheimprovedaccesstoore,theentityshouldrecognizethesecostsasanon-currentasset, only if certain criteria are met (“stripping activity asset”). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost orrevaluedamountlessdepreciationoramortizationandlessimpairmentlosses,inthesamewayastheexistingassetofwhich it is a part. This Philippine Interpretation becomes effective for annual periods beginning on or after January 1, 2013. This Philippine Interpretation is not relevant to the Group.
Annual Improvements to PFRSs (2009-2011 cycle)
The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted.
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• PFRS1,First-time Adoption of PFRS - Borrowing Costs Theamendmentclarifiesthat,uponadoptionofPFRS,anentitythatcapitalizedborrowingcosts inaccordancewith its
previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalizedinitsopeningstatementoffinancialpositionatthedateoftransition.SubsequenttotheadoptionofPFRS,borrowingcostsarerecognizedinaccordancewithPAS23,BorrowingCosts.TheamendmentdoesnotapplytotheGroupasitisnotafirst-timeadopterofPFRS.
• PAS1,PresentationofFinancialStatements-Clarificationoftherequirementsforcomparativeinformation The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are
mandatorydueto retrospectiveapplicationofanaccountingpolicy,or retrospective restatementor reclassificationofitemsintheconsolidatedfinancialstatements.Anentitymustincludecomparativeinformationintherelatednotestotheconsolidatedfinancialstatementswhenitvoluntarilyprovidescomparativeinformationbeyondtheminimumrequiredcomparativeperiod.Theadditionalcomparativeperioddoesnotneedtocontainacompletesetoffinancialstatements.On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accountingpolicy,orretrospectiverestatementorreclassificationofitemsintheconsolidatedfinancialstatements)arenotrequired.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionorperformance.
• PAS16,Property,PlantandEquipment-Classificationofservicingequipment Theamendmentclarifiesthatspareparts,stand-byequipmentandservicingequipmentshouldberecognizedasproperty,
plantandequipmentwhentheymeetthedefinitionofproperty,plantandequipmentandshouldberecognizedasinventoryifotherwise.TheamendmentwillnothaveanysignificantimpactontheGroup’sfinancialpositionorperformance.
• PAS32,Financial Instruments: Presentation - Tax effect of distribution to holders of equity instruments Theamendmentclarifiesthatincometaxesrelatingtodistributionstoequityholdersandtotransactioncostsofanequity
transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not haveanyimpactonitsfinancialpositionorperformance.
• PAS34,InterimFinancialReporting-Interimfinancialreportingandsegmentinformationfortotalassetsandliabilities Theamendmentclarifiesthatthetotalassetsandliabilitiesforaparticularreportablesegmentneedtobedisclosedonly
when the amounts are regularly provided to the chief operating decision maker and there has been a material change from theamountdisclosedintheentity’spreviousannualfinancialstatementsforthatreportablesegment.TheamendmentaffectsdisclosuresonlyandhasnoimpactontheGroup’sfinancialpositionorperformance.
Effective 2014
• PAS32(Amendments),Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities The amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the
application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact ontheGroup’sfinancialpositionorperformance.Theseamendmentsaretoberetrospectivelyappliedforannualperiodsbeginning on or after January 1, 2014.
Effective 2015
• PFRS9,FinancialInstruments:ClassificationandMeasurement PFRS9,asissued,reflectsthefirstphaseonthereplacementofPAS39andappliestotheclassificationandmeasurement
offinancialassetsand liabilitiesasdefined inPAS39,Financial Instruments:RecognitionandMeasurement. Workonimpairmentoffinancialinstrumentsandhedgeaccountingisstillongoing,withaviewtoreplacingPAS39initsentirety.PFRS9requiresallfinancialassetstobemeasuredatfairvalueatinitialrecognition.Adebtfinancialassetmay,ifthefairvalueoption(FVO)isnotinvoked,besubsequentlymeasuredatamortizedcostifitisheldwithinabusinessmodelthathastheobjectivetoholdtheassetstocollectthecontractualcashflowsanditscontractualtermsgiverise,onspecifieddates,tocashflowsthataresolelypaymentsofprincipalandinterestontheprincipaloutstanding.Allotherdebtinstrumentsaresubsequentlymeasuredatfairvaluethroughprofitorloss.AllequityfinancialassetsaremeasuredatfairvalueeitherthroughOCIorprofitorloss.Equityfinancialassetsheldfortradingmustbemeasuredatfairvaluethroughprofitorloss.For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presentedinOCI.Theremainderofthechangeinfairvalueispresentedinprofitorloss,unlesspresentationofthefairvaluechangeinrespectoftheliability’screditriskinOCIwouldcreateorenlargeanaccountingmismatchinprofitorloss.AllotherPAS39classificationandmeasurementrequirementsforfinancialliabilitieshavebeencarriedforwardintoPFRS9, including the embedded derivative separation rules and the criteria for using the FVO. PFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Group conducted an impact evaluation of the early adoption of PFRS 9andbasedontheresultsofthisstudy,theGroupwillnotearlyadoptPFRS9.TheGroupdoesnotexpectasignificantimpactonitsfinancialstatementsbasedontheevaluationofexistingclassificationandmeasurementoffinancialassetsand liabilities.
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real EstateThis Philippine Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Philippine Interpretation requires that revenue on construction of real estateberecognizedonlyuponcompletion,exceptwhensuchcontractqualifiesasconstructioncontracttobeaccountedforunderPAS11,ConstructionContracts,orinvolvesrenderingofservicesinwhichcaserevenueisrecognizedbasedonstageofcompletion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the FinancialReportingStandardsCouncil(FRSC)havedeferredtheeffectivityofthisinterpretationuntilthefinalRevenuestandardisissuedbyInternationalAccountingStandardsBoard(IASB)andanevaluationoftherequirementsofthefinalRevenuestandardagainst the practices of the Philippine real estate industry is completed.
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ProductClassificationInsurancecontractsarethosecontractswheretheGroup(the insurer)hasacceptedsignificant insurance risk fromanotherparty(thepolicyholders)byagreeingtocompensatethepolicyholdersifaspecifieduncertainfutureevent(theinsuredevent)adverselyaffectsthepolicyholders.Asageneralguideline,theGroupdetermineswhetherithassignificantinsurancerisk,bycomparingbenefitspaidwithbenefitspayableiftheinsuredeventdidnotoccur.Insurancecontractscanalsotransferfinancialrisk.
Onceacontracthasbeenclassifiedasaninsurancecontract,itremainsaninsurancecontractfortheremainderofitslifetime,eveniftheinsuranceriskreducessignificantlyduringthisperiod,unlessallrightsandobligationsareextinguishedorhaveexpired.
Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of placement and that are subject to an insignificantriskofchangesinvalue.
Short-term InvestmentsShort-term investments are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of more than three months but less than one year from dates of placement. These earn interests at the respective short-term investment rates.
Insurance ReceivablesPremiumreceivables(Duefrompolicyholders,agentsandbrokersandduefromcedingcompanies)arerecognizedonpolicyinception dates and measured on initial recognition at the fair value of the consideration receivable for the period of coverage. Subsequent to initial recognition, insurance receivables aremeasured at amortized cost. The carrying valueof insurancereceivables is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable,withtheimpairmentlossrecordedinprofitorloss.
Financial InstrumentsDate of recognitionFinancialinstrumentsarerecognizedintheconsolidatedstatementoffinancialpositionwhentheGroupbecomesapartytothecontractualprovisionsoftheinstrument.Purchasesorsalesoffinancialassetsthatrequiredeliveryofassetswithinthetimeframeestablishedbyregulationorconventioninthemarketplacearerecognizedonthetradedate.
InitialrecognitionoffinancialinstrumentsFinancialinstrumentsareinitiallyrecognizedatfairvalueoftheconsiderationgiven(incaseofanasset)orreceived(incaseofaliability).Exceptforfinancialinstrumentsatfairvaluethroughprofitorloss(FVPL),theinitialmeasurementoffinancialassetsincludestransactioncosts.TheGroupclassifiesitsfinancialassetsinthefollowingcategories:held-to-maturity(HTM)investments,AFSinvestments,FVPLinvestmentsandloansandreceivables.TheGroupclassifiesitsfinancialliabilitiesintofinancialliabilitiesatFVPLandotherfinancialliabilities.
Theclassificationdependsonthepurposeforwhichtheinvestmentswereacquiredandwhethertheyarequotedinanactivemarket.Managementdeterminestheclassificationofitsinvestmentsatinitialrecognitionand,whereallowedandappropriate,re-evaluates such designation at every end of the reporting period.
AsofDecember31,2012and2011,theGroup’sfinancialinstrumentsareinthenatureofAFSfinancialassets,loansandreceivablesandotherfinancialliabilities
Determination of fair valueThefairvalueforfinancial instrumentstraded inactivemarketsattheendofthereportingperiod isbasedontheirquotedmarket price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence ofthecurrentfairvalueaslongastherehasnotbeenasignificantchangeineconomiccircumstancessincethetimeofthetransaction.
Forallotherfinancial instrumentsnot listed inanactivemarket, thefairvalue isdeterminedbyusingappropriatevaluationtechniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.
Day1profitWhere the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market,theGrouprecognizesthedifferencebetweenthetransactionpriceandfairvalue(a‘Day1’profit)inprofitorlossunless itqualifiesforrecognitionassomeothertypeofasset. Incaseswhereanunobservabledataisused,thedifferencebetweenthetransactionpriceandmodelvalueisonlyrecognizedinprofitorlosswhentheinputsbecomeobservableorwhentheinstrumentisderecognized.Foreachtransaction,theGroupdeterminestheappropriatemethodofrecognizingthe‘Day1’profitamount.
Financial assets and liabilities at FVPLFinancialassetsandfinancialliabilitiesatFVPLincludefinancialassetsandliabilitiesheld-for-tradingandfinancialassetsandliabilities designated upon initial recognition as at FVPL.
Financialassetsandliabilitiesareclassifiedasheld-for-tradingiftheyareacquiredforpurposesofsellingandrepurchasinginthenearterm.Derivatives,includinganyseparatedembeddedderivatives,arealsoclassifiedasfinancialassetsorfinancialliabilitiesat FVPL, unless these are designated as hedging instruments in an effective hedge.L
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FinancialassetsandliabilitiesatFVPLarerecordedintheconsolidatedstatementoffinancialpositionatfairvalue.Subsequentchangesinfairvaluearerecognizedin”Investmentandotherincome”intheconsolidatedstatementofincome.Interestearnedor incurred is recorded as interest income or expense, respectively, while dividend income is recorded as other income when the right to receive the payment has been established.
Derivative instrumentsThe Group uses derivatives such as non-deliverable forward contracts as a means of reducing its foreign exchange exposure. Derivativeinstruments(includingbifurcatedembeddedderivatives)areinitiallyrecognizedatfairvalueonthedateonwhichthe derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gain or loss arising from changes in fair value of derivativesthatdonotqualifyforhedgeaccounting is recognized in”Investmentandother income” intheconsolidatedstatement of income.
Embedded derivativesAn embedded derivative is a component of a hybrid (combined) instrument that also includes non-derivative host contract with theeffectthatsomeofthecashflowsofthecombinedinstrumentvaryinawaysimilartostand-alonederivative.
Embedded derivatives are bifurcated from their host contracts, when the following conditions are met:
a) the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financialassetsandliabilitiesatFVPL;
b) whentheireconomicrisksandcharacteristicsarenotcloselyrelatedtothoseoftheirrespectivehostcontracts;and
c) aseparateinstrumentwiththesametermsastheembeddedderivativewouldmeetthedefinitionofaderivative.
TheGroupassesseswhetherembeddedderivativesarerequiredtobeseparatedfromthehostcontractwhenitfirstbecomespartytothecontract.Reassessmentonlyoccursifthereisachangeinthetermsofthecontractthatsignificantlymodifiesthecashflowsthatwouldotherwiseberequired.
AFSfinancialassetsAFSinvestmentsarethosewhicharedesignatedassuchordonotqualifytobeclassifiedasdesignatedatFVPL,HTMorloansandreceivables.Theyarepurchasedandheldindefinitely,andmaybesoldinresponsetoliquidityrequirementsorchangesinmarket conditions.
After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in earnings. Interest earned on holding AFS investments are reported as interest income using the effective interest rate. Dividends earned onholdingAFSinvestmentsarerecognizedinprofitorlosswhentherighttoreceivethepaymenthasbeenestablished.TheunrealizedgainsandlossesarisingfromthefairvaluationofAFSinvestmentsarereportedas‘Revaluationreserveonavailable-for-salefinancialassets’inothercomprehensiveincome.Thelossesarisingfromimpairmentofsuchinvestmentsarerecognizedinprofitorloss.Whenthesecurityisdisposedof,thecumulativegainorlosspreviouslyrecognizedinothercomprehensiveincomeisrecognizedasrealizedgainsorlossesinprofitorloss.WhentheGroupholdsmorethanoneinvestmentinthesamesecurity, the cost is determined using the weighted average method.
WhenthefairvalueofAFSinvestmentscannotbemeasuredreliablybecauseoflackofreliableestimatesoffuturecashflowsanddiscount rates necessary to calculate the fair value of unquoted equity instruments, these investments are carried at cost.
Loans and receivablesLoansandreceivablesarefinancialassetswithfixedordeterminablepaymentsandfixedmaturitiesthatarenotquotedinanactivemarket.Theyarenotenteredintowiththeintentionofimmediateorshort-termresaleandarenotclassifiedasfinancialassetsheldfortrading,designatedasAFSorFVPL.Thisaccountingpolicyrelatestotheconsolidatedstatementoffinancialposition captions: (a) “Cash and Cash Equivalents”, (b) “Short-term Investments”, (c) “Insurance Receivables”, (d) “Loans and Receivables” and (e) “Accrued Income”.
Afterinitialmeasurement,theloansandreceivablesaresubsequentlymeasuredatamortizedcostusingtheeffectiveinterestratemethod,lessallowanceforimpairment.Amortizedcostiscalculatedbytakingintoaccountanydiscountorpremiumonacquisitionandfeesthatareanintegralpartoftheeffectiveinterestrate.TheamortizationisincludedintheInvestmentandotherincomeaccountinprofitorloss.Thelossesarisingfromimpairmentofsuchloansandreceivablesarerecognizedinprofitor loss.
OtherfinancialliabilitiesIssuedfinancial instrumentsortheircomponents,whicharenotdesignatedatFVPLareclassifiedasotherfinancial liabilities,where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financialassettotheholder,ortosatisfytheobligationotherthanbytheexchangeofafixedamountofcashoranotherfinancialassetforafixednumberofownequityshares.
Afterinitialmeasurement,otherfinancialliabilitiesaresubsequentlymeasuredatamortizedcostusingtheeffectiveinterestratemethod.Amortizedcostiscalculatedbytakingintoaccountanydiscountorpremiumontheissueandfeesthatareanintegralpartoftheeffectiveinterestrate.Anyeffectsofrestatementofforeigncurrency-denominatedliabilitiesarerecognizedintheconsolidated statement of income.
This accounting policy applies primarily to the Group’s insurance payables and accounts payable, accrued expenses and other liabilitiesthatmeettheabovedefinition(otherthanliabilitiescoveredbyotheraccountingstandards,suchaspensionliabilityand income tax payable).
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Impairment of Financial AssetsTheGroupassessesateachendofthereportingperiodwhetherthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassetsisdeemedtobeimpairedif,andonlyif,thereisobjective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred‘lossevent’)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorthegroupoffinancialassetsthatcanbereliablyestimated.
Evidenceofimpairmentmayincludeindicationsthattheborroweroragroupofborrowersisexperiencingsignificantfinancialdifficulty,defaultordelinquencyininterestorprincipalpayments,theprobabilitythattheywillenterbankruptcyorotherfinancialreorganizationandwhereobservabledataindicatethatthereismeasurabledecreaseintheestimatedfuturecashflows,suchaschanges in arrears or economic conditions that correlate with defaults.
AFS investments carried at fair valueIncaseofequityinvestmentsclassifiedasAFS,impairmentindicatorswouldincludeasignificantorprolongeddeclineinthefairvalue of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference betweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognizedintheconsolidatedstatementofincomeisremovedfromothercomprehensiveincomeandrecognizedinprofitorloss.Impairmentlossesonequityinvestmentsarenotreversedthroughprofitorloss.Increasesinfairvalueafterimpairmentarerecognizeddirectly in other comprehensive income.
InthecaseofdebtinstrumentsclassifiedasAFSfinancialassets,impairmentisassessedbasedonthesamecriteriaasfinancialassetscarriedatamortizedcost.Futureinterestincomeisbasedonthereducedcarryingamountandisaccruedbasedontherateofinterestusedtodiscountfuturecashflowsforthepurposeofmeasuringimpairmentloss.Suchaccrualisrecordedaspartof“Interestincome”inprofitorloss.If,insubsequentyear,thefairvalueofadebtinstrumentincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognizedinprofitorloss,theimpairmentlossisreversedthroughprofitorloss.
AFS investments carried at costIf there is an objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carryingamountandthepresentvalueofestimatedfuturecashflowsdiscountedatthecurrentmarketrateofreturnforasimilarfinancialasset.
Loans and ReceivablesForloansandreceivablescarriedatamortizedcost,theGroupfirstassesseswhetherobjectiveevidenceofimpairmentexistsforfinancialassetsthatareindividuallysignificant,orcollectivelyforfinancialassetsthatarenotindividuallysignificant.IftheGroupdeterminesthatnoobjectiveevidenceofimpairmentexistsforindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsandcollectivelyassessesforimpairment.
Assetsthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossis,orcontinuestobe,recognizedarenotincluded in a collective assessment for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference betweentheasset’scarryingamountandthepresentvalueoftheestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedatthefinancialasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccountandtheamountoflossischargedagainstprofitorloss.Receivables,togetherwith the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral hasbeenrealized.If,inasubsequentperiod,theamountoftheestimatedimpairmentlossdecreasesbecauseofaneventoccurringafterthe impairmentwasrecognized,thepreviouslyrecognized impairment loss is reversed. Anysubsequentreversalofanimpairmentlossisrecognizedinprofitorloss,totheextentthatthecarryingvalueoftheassetdoesnotexceeditsamortizedcostatthereversaldate.
Time value is generally not considered when the effect of discounting is not material. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. The calculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralizedfinancialassetreflectsthecashflowsthatmay result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
Forthepurposeofacollectiveevaluationofimpairment,financialassetsaregroupedonthebasisofcreditriskcharacteristicssuch as past-due status and term.
Futurecashflows inagroupoffinancialassetsthatarecollectivelyevaluatedfor impairmentareestimatedonthebasisofhistorical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhich the historical loss experience is based and to remove the effects of conditions in the historical period that do not existcurrently.ThemethodologyandassumptionsusedforestimatingfuturecashflowsarereviewedregularlybytheGroupto reduce any difference between loss estimates and actual loss experience.
Offsetting of Financial InstrumentsFinancialassetsandfinancialliabilitiesareoffsetandthenetamountisreportedintheconsolidatedstatementoffinancialpositionif,andonlyif,thereisacurrentlyenforceablelegalrighttooffsettherecognizedamountsandthereisanintentiontosettleonanetbasis,ortorealizetheassetandsettletheliabilitysimultaneously.
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Derecognition of Financial Assets and LiabilitiesFinancial Asset Afinancialasset(or,whereapplicableapartofafinancialassetorpartofagroupofsimilarfinancialassets)isderecognizedwhere:
• therightstoreceivecashflowsfromtheassethaveexpired;• theGroupretainstherighttoreceivecashflowsfromtheasset,buthasassumedanobligationtopaytheminfullwithout
materialdelaytoathirdpartyundera‘pass-through’arrangement;or• theGrouphastransferreditsrightstoreceivecashflowsfromtheassetandeither(a)hastransferredsubstantiallyallthe
risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
WheretheGrouphastransferreditsrighttoreceivecashflowsfromanassetandhasneithertransferrednorretainedsubstantiallyalltherisksandrewardsoftheassetnortransferredcontroloftheasset,theassetisrecognizedtotheextentoftheGroup’scontinuing involvement in the asset.
Financial LiabilityAfinancialliabilityisderecognizedwhentheobligationundertheliabilityisdischargedorcancelledorhasexpired.Whereanexistingfinancialliabilityisreplacedbyanotherfromthesamelenderonsubstantiallydifferentterms,orthetermsofanexistingliabilityaresubstantiallymodified,suchanexchangeormodificationistreatedasaderecognitionoftheoriginalliabilityandtherecognitionofanewliability,andthedifferenceintherespectivecarryingamountsisrecognizedinprofitorloss.
ReinsuranceThe Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies for its share on the unpaid losses incurred by the Group. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. Reinsurance recoverable on paid losses are included as part of Insurance receivables.
Reinsurance assets are reviewed for impairment at each end of the reporting period or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Group may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Group will receive from the reinsurer can be measured reliably. The impairment loss is recorded in the statement of income.
Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders.
The Group also assumes reinsurance risk in the normal course of business for insurance contracts. Premiums and claims on assumedreinsurancearerecognized inprofitor lossas incomeandexpenses inthesamemannerastheywouldbe ifthereinsurancewereconsidereddirectbusiness,takingintoaccounttheproductclassificationofthereinsuredbusiness.Reinsuranceliabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the associated reinsurance contract.
Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance.
Reinsuranceassetsorliabilitiesarederecognizedwhenthecontractualrightsareextinguishedorexpiredorwhenthecontractis transferred to another party.
When the Group enters into a proportional treaty reinsurance agreement for ceding out its insurance business, the Group initially recognizesaliabilityattransactionprice.Subsequenttoinitialrecognition,theportionoftheamountinitiallyrecognizedasaliabilitywhichispresentedasInsurancepayablesintheliabilitiessectionoftheconsolidatedstatementoffinancialpositionwillbewithheldandrecognizedasFundsheldforreinsurersandincludedaspartoftheInsurancepayablesintheliabilitiessectionoftheconsolidatedstatementoffinancialposition.Theamountwithheldisgenerallyreleasedafterayear.Fundsheldbycedingcompanies is accounted for in the same manner.
RetrocessionTheGroupretrocedesinthenormalcourseofbusinessforthepurposeoflimitingitsnetlosspotentialthroughthediversificationof its risks. Assets, liabilities, income and expenses arising from retrocession contracts are presented separately from the related assets, liabilities, income and expense from the related reinsurance contracts because the retrocession arrangements do not relieve the Group from its direct obligations to cedants.
Onlycontractsthatgiverisetoasignificanttransferofreinsuranceriskareaccountedforasretrocessioncontracts.Rightsundercontractsthatdonottransfersignificantreinsuranceriskareaccountedforasfinancialinstruments.
Outwardreinsurancepremiumsarerecognizedasanexpenseonabasisthatisconsistentwiththerecognitionbasisforthegross premiums written on the related reinsurance contracts. Outward reinsurance premiums are expensed over the period that the retrocession cover is provided based on the expected pattern of the retroceded risks. The unexpensed portion of outward reinsurance premiums is included in the reinsurers’ share of insurance contract liabilities.
Recoveriesduefromretrocessionairesinrespectofclaimspaidareclassifiedasreceivablesandareincludedwithininsurancereceivablesintheconsolidatedstatementoffinancialposition.
Recoveries due from retrocessionaires are assessed for impairment at the end of each reporting period. An asset is deemed impaired if there is objective evidence, as a result of an event that occurred after its initial recognition, that the Group may not recover all amounts due, and that the event has a reliably measurable impact on the amounts that the Group will receive from the retrocessionaire.
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Deferred Acquisition Costs (DAC)Commissionsandotheracquisitioncostsincurredduringthefinancialperiodthatvarywithandarerelatedtosecuringnewinsurancecontractsandorrenewingexistinginsurancecontracts,butwhichrelatestosubsequentfinancialperiods,aredeferredto the extent that they are recoverable out of future revenue margins. Acquisition costs include referral fee of FNAC which is classifiedunderOtherunderwritingexpense.Allotheracquisitioncostsarerecognizedasexpensewhenincurred.
Subsequenttoinitialrecognition,thesecostsareamortizedonastraight-linebasisusingthe24thmethodoverthelifeofthecontractexceptforthemarinecargowherecommissionsforthelasttwomonthsoftheyeararerecognizedasexpensethefollowingyear.Amortizationischargedagainsttheprofitorloss.TheunamortizedacquisitioncostsareshownasDeferredacquisitioncostsintheassetssectionoftheconsolidatedstatementoffinancialposition.
An impairment review is performed at each end of the reporting period or more frequently when an indication of impairment arises.Thecarryingvalueiswrittendowntotherecoverableamount.Theimpairmentlossischargedtoprofitorloss.DACisalso considered in the liability adequacy test for each end of the reporting period.
Investment PropertiesProperties held for rental yields and for capital appreciation or both rather than for use in the production or supply of goods and servicesorforadministrativepurposesorsaleintheordinarycourseofbusinessisclassifiedasinvestmentproperty.
Investment properties are measured initially at cost, including transaction costs.
Investment properties consist of land, buildings and construction in progress. The land is carried at cost. The buildings are carriedatcost,lessaccumulateddepreciationandamortizationandanyaccumulatedimpairmentlosses.
Construction in-progress is carried at cost and transferred to the related account when the construction and related activities to prepare the property for its intended use are complete, and the property is ready for occupation. Construction in-progress is not depreciated until such time that the relevant assets are completed and put into operational use.
Depreciationandamortizationiscomputedusingthestraight-linemethodovertheestimateduseful lifeof40years.Theestimatedusefullifeanddepreciationandamortizationmethodarereviewedperiodicallytoensurethattheperiodandmethodof depreciation and amortization are consistentwith the expected pattern of economic benefits from items of investmentproperty.
Investmentpropertiesarederecognizedeitherwhentheyhavebeendisposedof,orwhentheinvestmentpropertyispermanentlywithdrawnfromuseandnofuturebenefitisexpectedfromitsdisposal.Anygainsorlossesontheretirementordisposalofaninvestmentpropertyarerecognizedintheprofitorlossintheyearofretirementordisposal.
Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner-occupation and commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.
Property and EquipmentPropertyandequipment,exceptfor land,arestatedatcost,netofaccumulateddepreciationandamortizationandanyimpairment in value. Land is stated at cost less any impairment losses.
The initial cost of property and equipment comprises its purchase price, including nonrefundable taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included intheasset’scarryingamountorrecognizedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheGroupandthecostoftheitemcanbemeasuredreliably.Allotherrepairsandmaintenancearechargedtothestatementofincomeduringthefinancialperiodinwhichtheyareincurred.
Depreciationandamortizationarecomputedusingthestraight-linemethodovertheestimatedusefullivesofthepropertiesas follows:
Years Building and improvements 40 Building equipment 5 Officefurniture,fixturesandequipment 5 Transportation equipment 5
Leaseholdimprovementsareamortizedoverthetermoftheleaseorestimatedusefullifeof5years,whicheverisshorter.
Theestimatedusefullivesanddepreciationandamortizationmethodarereviewedperiodicallytoensurethattheperiodandmethodofdepreciationandamortizationareconsistentwiththeexpectedpatternofeconomicbenefitsfromitemsofpropertyand equipment.
When property and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortizationandaccumulatedprovisionforimpairmentlosses,ifany,areremovedfromtheaccounts.Anygainorlossarisingon derecognition of the assets, which is calculated as the difference between the net disposal proceeds and the carrying amount oftheasset,isincludedintheconsolidatedstatementofincomeintheyeartheassetisderecognized.L
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Creditable Withholding Taxes (CWTs)Creditable withholding pertains to the 15% indirect tax paid by the Group that is withheld by its counterparty for the payment of its expenses and other purchases. These CWTs are initially recorded at cost as an asset under “Other assets” account. At each end of the tax reporting deadline, these CWTs may either be offset against future tax income payable or be claimed as a refund from the taxation authorities at the option of the Group. If these CWTs are claimed as a refund, these will be recorded as a receivable under “Loans and receivables” account.
Computer SoftwareCostsassociatedwiththeacquisitionofcomputersoftwarearecapitalizedonly iftheassetcanbereliablymeasured,willgeneratefutureeconomicbenefits,andthereisanabilitytouseorselltheasset.
Computersoftwareiscarriedatcostlessaccumulatedamortization.Computersoftwarecostisamortizedovertheexpectedusefullifeoftheasset,butnottoexceedfive(5)years.Allcomputersoftwarecomponentsareamortizedoverfive(5)years.Amortizationcommenceswhentheassetisavailableforuseorwhenitisinthelocationandconditionnecessaryforittobecapable of operating in the manner intended by the Group.
ImpairmentofNonfinancialAssetsThe Group assesses at each end of the reporting period whether there is an indication that investment properties, property and equipment and computer software may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unlesstheassetdoesnotgeneratecashinflowsthatarelargelyindependentofthosefromotherassetsorgroupsofassets.Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to itsrecoverableamount.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.
Anassessmentismadeateachendofthereportingperiodastowhetherthereisanyindicationthatpreviouslyrecognizedimpairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. Apreviouslyrecognizedimpairmentlossisreversedonlyiftherehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverableamountsincethelastimpairmentlosswasrecognized.Ifthatisthecase,thecarryingamountoftheasset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined,netofdepreciation,hadnoimpairmentlossbeenrecognizedfortheassetinprioryears.Suchreversalisrecognizedinprofitorlossunlesstheassetiscarriedatrevaluedamount,inwhichcase,thereversalistreatedasarevaluationincrease.After such reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Value-added Tax (VAT)The input value added tax pertains to the 12% indirect tax paid by the Group in the course of the Group’s trade or business on local purchase of goods or services.
Output VAT pertains to the 12% tax due on the sale of insurance policies and other goods or services by the Group.
If at the end of any taxable month, the output VAT exceeds the input VAT, the outstanding balance is included under “Accounts payable and accrued expenses” account. If the input VAT exceeds the output VAT, the excess shall be carried over to the succeeding months and included under “Other assets” account.
Real Estate Properties for SaleRealestatepropertiesforsalearemeasuredatthelowerofcostandnetrealizablevalue(NRV).NRVistheestimatedsellingprice in the ordinary course of business, based on market prices at the reporting date, less estimated costs of completion and theestimatedcoststosell.Thecostofinventoryrecognizedinprofitorlossondisposalisdeterminedwithreferencetothespecificcostsincurredontheproperty. Insurance Contract LiabilitiesProvision for Unearned PremiumsThe proportion of written premiums, gross of commissions payable to intermediaries, attributable to subsequent periods or to risks that have not yet expired is deferred as provision for unearned premiums. Premiums from short-duration insurance contractsarerecognizedasrevenueovertheperiodofthecontractsusingthe24thmethodexceptforthemarinecargowherepremiums for the last two months are considered earned the following year. The portion of the premiums written that relate to the unexpired periods of the policies at end of the reporting period are accounted for as Provision for unearned premiums as part ofInsurancecontractliabilitiesandpresentedintheliabilitiessectionoftheconsolidatedstatementoffinancialposition.Thechangeintheprovisionforunearnedpremiumsistakentoprofitorlossinorderthatrevenueisrecognizedovertheperiodofrisk. Further provisions are made to cover claims under unexpired insurance contracts which may exceed the unearned premiums and the premiums due in respect of these contracts.
Claims Provision and Incurred But Not Reported (IBNR) LossesThese liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the end of the reporting period together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Delays can be experiencedinthenotificationandsettlementofcertaintypesofclaims,thereforetheultimatecostofwhichcannotbeknownwith certainty at the end of the reporting period. The liability is not discounted for the time value of money and includes provisionforIBNRlosses.Theliabilityisderecognizedwhenthecontractisdischarged,cancelledorhasexpired.
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Liability Adequacy TestAt each end of the reporting period, liability adequacy tests are performed, to ensure the adequacy of insurance contract liabilities,netofrelatedDACassets.Inperformingthetest,currentbestestimatesoffuturecashflows,claimshandlingandpolicy administration expenses are used. Changes in expected claims that have occurred, but which have not been settled, are reflectedbyadjustingtheliabilityforclaimsandfuturebenefits.Anyinadequacyisimmediatelychargedtotheconsolidatedstatement of income by establishing an unexpired risk provision for losses arising from the liability adequacy tests. The provision for unearned premiums is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed future premiums plus the current provision for unearned premiums.
Insurance PayablesInsurancepayablesarerecognizedwhendueandmeasuredoninitialrecognitionatthefairvalueoftheconsiderationreceivedlessattributabletransactioncost.Subsequenttoinitialrecognition,theyaremeasuredatamortizedcostusingtheeffectiveinterest rate method.
Insurancepayablesarederecognizedwhentheobligationundertheliabilityissettled,cancelledorexpired.
Pension CostPensioncost isactuariallydeterminedusingtheprojectedunitcreditmethod. Thismethodreflectsservices renderedbyemployees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial valu-ationsareconductedwithsufficientregularity,withoptiontoacceleratewhensignificantchangestounderlyingassumptionsoccur. Pension cost includes current service cost, interest cost, actuarial gains and losses and the effect of any curtailment or settlement.
ThepensionassetrecognizedbytheGroupinrespectofthedefinedbenefitpensionplanisthe(a)fairvalueoftheplanassetslesspresentvalueofthedefinedbenefitobligationatthereportingdate,togetherwithadjustmentsforunrecognizedactuarialgainsorlossesthatshallberecognizedinlaterperiods;or(b)thetotalofanycumulativeunrecognizednetactuariallossesandpastservicecostandthepresentvalueofanyeconomicbenefitsavailableintheformofrefundsfromtheplanorreductionsinfuture contributions to the plan.
ThenetpensionliabilityrecognizedbytheGroupinrespectofthedefinedbenefitpensionplanisthefairvalueoftheplanassetslessthepresentvalueofthedefinedbenefitobligationattheendofreportingdate,togetherwithadjustmentsforunrecognizedactuarialgainsorlossesthatshallberecognizedinlaterperiods.
Thedefinedbenefitobligationiscalculatedannuallybyanindependentactuaryusingtheprojectedunitcreditmethod.Thepresentvalueofthedefinedbenefitobligationisdeterminedbyusingrisk-freeinterestratesoflong-termgovernmentbondsthat have terms to maturity approximating the terms of the related pension liability.
Actuarialgainsandlossesisrecognizedinprofitorlossifthecumulativeunrecognizedactuarialgainsandlossesattheendofthepreviousreportingperiodexceededthegreaterof10%ofthepresentvalueofdefinedbenefitobligationor10%ofthefairvalueofplanassets.Thesegainsandlossesarerecognizedovertheexpectedaverageremainingworkinglivesoftheemployeesparticipating in the plan.
EquityCapitalstockisrecognizedasissuedwhenthestockispaidfororsubscribedunderabindingsubscriptionagreementandismeasured at par value. When the shares are sold at a premium, the difference between the proceeds and the par value is credited to Additional Paid-in Capital account. Share issuance costs incurred as necessary part of completing an equity transaction are accounted for as part of that transaction and are treated as a deduction from Additional Paid-in Capital from previous share issuance.IftheAdditionalPaid-inCapitalaccountisnotsufficient,theexcessisdeductedfromretainedearnings.
Other revaluation reserve pertains to the appraisal increment on building relating to MICO’s previously held interest in Tokio Marine Malayan Insurance Co., Inc. (TMMIC) at the time of the business combination. The balance of the other revaluation reserve willbetransferredtoretainedearningswhenthebuildingisdisposedorderecognized.
Retained earnings include all the accumulated earnings of the Group, net of dividends declared and share issuance costs. Revenue RecognitionRevenueisrecognizedtotheextentthatitisprobablethattheeconomicbenefitswillflowtotheGroupandtherevenuecanbereliablymeasured.Thefollowingspecificrecognitioncriteriamustalsobemetbeforerevenueisrecognized:
Premiums RevenueGross insurance written premiums comprise the total premiums receivable for the whole period of cover provided by contracts enteredintoduringtheaccountingperiodandarerecognizedonthedateonwhichthepolicyincepts.Premiumsincludeanyadjustments arising in the accounting period for premiums receivable in respect of business written in prior periods.
Premiumsfromshort-durationinsurancecontractsarerecognizedasrevenueovertheperiodofthecontractsusingthe24thmethod except for the marine cargo where premiums for the last two months are considered earned the following year. The portion of the premiums written that relate to the unexpired periods of the policies at end of the reporting period are accounted for as Provision for unearned premiums as part of Insurance contract liabilities and presented in the liabilities section of the consolidatedstatementsoffinancialposition.Therelatedreinsurancepremiumscededthatpertainstotheunexpiredperiods
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at end of the reporting period are accounted for as Deferred reinsurance premiums and shown as part of reinsurance assets in theconsolidatedstatementsoffinancialposition.Thenetchangesintheseaccountsbetweeneachendofreportingperiodsarerecognizedinprofitorloss.
Reinsurance CommissionsCommissionsearnedfromshort-durationinsurancecontractsarerecognizedasrevenueovertheperiodofthecontractsusingthe 24th method except for the marine cargo where the deferred reinsurance commissions for the last two months of the year are considered earned the following year. The portion of the commissions that relate to the unexpired periods of the policies at end of the reporting period are accounted for as deferred reinsurance commissions and presented in the Liabilities section of the consolidatedstatementoffinancialposition.
Dividend incomeDividendincomeisrecognizedwhentheshareholders’righttoreceivethepaymentisestablished.
Interest incomeForallfinancialinstrumentsmeasuredatamortizedcostandinterest-bearingfinancialinstruments,interestincomeisrecordedat the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life ofthefinancialinstrumentorashorterperiod,whereappropriate,tothenetcarryingamountofthefinancialasset.Thecalcula-tiontakesintoaccountallcontractualtermsofthefinancialinstrument(forexample,prepaymentoptions),includesanyfeesor incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The adjusted carrying amount is calculated based on the original effective interest rate. The change in carrying amount is recorded as interest income.
Oncetherecordedvalueofafinancialassetoragroupofsimilarfinancialassetshasbeenreducedduetoanimpairmentloss,interestincomecontinuestoberecognizedusingtheoriginaleffectiveinterestrateappliedtothenewcarryingamount.
Rental incomeRentalincomefrominvestmentpropertiesarerecognizedonastraight-linebasisoverthetermofthelease.
Other incomeIncomefromothersourcesisrecognizedwhenearned.
Expense RecognitionExpensesaredecreasesineconomicbenefitsduringtheaccountingperiodintheformofoutflowsordepletionsofassetsorincurrence of liabilities that result in decrease in equity, other than those relating to distribution to equity participants.
BenefitsandClaimsBenefitsandclaimsconsistsofbenefitsandclaimspaidtopolicyholders,whichincludeschangesinthevaluationofInsurancecontract liabilities, except for changes in the provision for unearned premiums which are recorded in insurance revenue. It further includes internal and external claims handling costs that are directly related to the processing and settlement of claims. Amounts receivable in respect of salvage and subrogation are also considered. General insurance claims are recorded on the basisofnotificationsreceived.
Commission ExpenseCommissionsarerecognizedasexpenseovertheperiodofthecontractsusingthe24thmethod.Theportionofthecommissionsthat relates to the unexpired periods of the policies at the end of the reporting period is accounted for as “Deferred acquisition cost”intheassetssectionoftheconsolidatedstatementoffinancialposition.
Other underwriting expenseOther underwriting expense pertains to the costs incurred by the Group prior to the issuance of policies to its policyholders. These costs include expenses for technical inspections, actuarial reviews and other work that is deemed necessary to determine whetherornottoaccepttheriskstobewritten.Thesecostsarerecognizedasexpenseastheyareincurred.
ExpensesGeneralandadministrativeexpenseandotherinvestmentexpense,exceptforleaseagreements,arerecognizedasexpenseasthey are incurred.
Interest expenseInterest expense is charged against operations as they are incurred.
LeasesThe determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement and requires anassessmentofwhetherthefulfillmentofthearrangementisdependentontheuseofaspecificassetorassetsandthearrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:
a. Thereisachangeincontractualterms,otherthanarenewalorextensionofthearrangement;b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the
leaseterm;c. Thereisachangeinthedeterminationofwhetherfulfillmentisdependentonaspecifiedassetor;d. There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario (b).
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Group as a lessorLeaseswheretheGroupdoesnottransfersubstantiallyalltherisksandbenefitsofownershipoftheassetsareclassifiedasoperatingleases.Leasepaymentsreceivedarerecognizedasanincomeintheconsolidatedstatementofincomeonastraight-line basis over the lease term. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of theleasedassetandrecognizedovertheleasetermonthesamebasisastherentalincome.
Group as a lesseeLeaseswherethelessorretainssubstantiallyalltherisksandbenefitsofownershipoftheassetareclassifiedasoperatingleases.Fixedleasepaymentsarerecognizedasanexpenseintheconsolidatedstatementofincomeonastraight-linebasis.
Foreign Exchange TransactionsThe functional and presentation currency of the Group is the Philippine Peso (P). Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the end of the reporting period. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. All foreign exchange differences are taken toprofitorloss,exceptwhereitrelatestoequitysecuritieswheregainsorlossesarerecognizeddirectlyinothercomprehensiveincome.
Provisions and Contingencies ProvisionsarerecognizedwhentheGrouphasapresentobligation(legalorconstructive)asaresultofapasteventanditisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligationandareliableestimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example,underaninsurancecontract,thereimbursementisrecognizedasaseparateassetbutonlywhenthereimbursementisvirtuallycertain.Theexpenserelatingtoanyprovisionispresentedinprofitorloss,netofanyreimbursement.Iftheeffectofthetimevalueofmoneyismaterial,provisionsaredeterminedbydiscountingtheexpectedfuturecashflowsatapre-taxratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyand,whereappropriate,therisksspecifictotheliability.Wherediscountingisused,theincreaseintheprovisionduetothepassageoftimeisrecognizedasaninterestexpense.
ContingentliabilitiesarenotrecognizedintheGroup’sfinancialstatementsbutaredisclosedunlessthepossibilityofanoutflowofresourcesembodyingeconomicbenefitsisremote.Contingentassetsarenotrecognizedbutaredisclosedintheconsolidatedfinancialstatementswhenaninflowofeconomicbenefitsisprobable.
Income TaxCurrent taxCurrent tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.
Deferred taxDeferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the taxbasesofassetsandliabilitiesandtheircarryingamountsforfinancialreportingpurposes.
Deferredtaxliabilitiesarerecognizedforalltaxabletemporarydifferences,includingassetrevaluations.Deferredtaxassetsarerecognizedforalldeductibletemporarydifferences,carryforwardofunusedtaxcreditsfromtheexcessofminimumcorporateincome tax (MCIT) over the regular income tax, and unused net operating loss carryover (NOLCO), to the extent that it is probablethatsufficienttaxableprofitwillbeavailableagainstwhichthedeductibletemporarydifferencesandcarryforwardofunusedtaxcreditsfromMCITandunusedNOLCOcanbeutilized.Deferredtax,however,isnotrecognizedontemporarydifferences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss.
The carrying amount of deferred tax assets is reviewed at each end of the reporting period and reduced to the extent that it isnolongerprobablethatsufficienttaxableprofitwillbeavailabletoallowallorpartofthedeferredtaxassettobeutilized.Unrecognizeddeferredtaxassetsarereassessedateachendofthereportingperiodandarerecognizedtotheextentthatithasbecomeprobablethatfuturetaxableprofitwillallowthedeferredtaxassettoberecovered.
Deferredtaxassetsandliabilitiesaremeasuredatthetaxratesthatareapplicabletotheperiodwhentheassetisrealizedortheliability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period. Movements in the deferred tax assets and liabilities arising from changes in tax rates are charged against or credited to income for the period.
Currenttaxanddeferredtaxrelatingtoitemsrecognizedasothercomprehensiveincomeisalsorecognizedintheconsolidatedstatement of other comprehensive income.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority.
Events after End of the Reporting PeriodAny post year-end events that provide additional information about the Group’s position at the end of the reporting period (adjustingevent)arereflectedintheconsolidatedfinancialstatements.Postyear-endeventsthatarenotadjustingevents,ifany,aredisclosedintheconsolidatedfinancialstatementswhenmaterial.
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3. SignificantAccountingJudgmentsandEstimates
ThepreparationoftheaccompanyingconsolidatedfinancialstatementsinaccordancewithPFRSrequirestheGrouptomakejudgmentsandestimatesthataffecttheamountsreportedintheconsolidatedfinancialstatementsandaccompanyingnotes.Theestimatesandassumptionsused in theaccompanyingconsolidatedfinancial statementsarebaseduponmanagement’sevaluationofrelevantfactsandcircumstancesasofthedateoftheconsolidatedfinancialstatements.Actualresultscoulddiffer from such estimates.
JudgmentsIn the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involvingestimations,whichhave themostsignificanteffecton theamounts recognized in theconsolidated financialstatements:
ProductclassificationThesignificanceofinsuranceriskisdependentonboththeprobabilityofaninsuredeventandthemagnitudeofitspotentialeffect.Asageneralguideline,theGroupdefinessignificantinsuranceriskasthepossibilityofhavingtopaybenefitsontheoccurrenceofaninsuredeventthatareatleast5%morethanthebenefitspayableiftheinsuredeventdidnotoccur.
TheGrouphasdeterminedthattheinsurancepoliciesitissueshavesignificantinsurancerisksandthereforemeetthedefinitionof insurance contracts and should be accounted for as such.
Functional CurrencyBased on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the Group has been determined to be the Philippine Peso. The Philippine Peso is the currency of the primary economic environment in which theGroupoperates.ItisthecurrencythatmainlyinfluencestherevenueandcostsoftheGroupoperations.
Operating lease commitments - Group Company as lessorThe Group entered into commercial property leases on its investment properties. The Group determined that it retains all the significantrisksandrewardsofownershipoftheproperty,thusaccountsforthemasoperatinglease.
Operating lease commitments - Group as lesseeThe Group entered into various property leases with various lessors. The Group determined that the lessors retain all the significantrisksandrewardsofownershipoftheleasedpropertiesthusaccountsforthemasoperatingleases.
Distinction between investment properties and owner-occupied propertiesTheGroupdetermineswhether a property qualifies as investment property. Inmaking this judgment, theGroup considerswhether thepropertygeneratescashflows largely independentof theotherassetsheldbyanentity. Owner-occupiedpropertiesgeneratecashflowsthatareattributablenotonlytopropertybutalsototheotherassetsusedintheproductionorsupply process.
When properties comprise a portion that is held to earn rentals or for capital appreciation and another portion is held for use in the production or supply of goods or services or for administrative purpose, and these portions cannot be sold separately, thepropertyisaccountedforasinvestmentpropertyonlyifaninsignificantportionisheldforuseintheproductionorsupplyof goods or services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significantthatapropertydoesnotqualifyasinvestmentproperty.TheGroupconsiderseachpropertyseparatelyinmakingthis judgment.
Management’s Use of Estimates The key assumptions concerning the future and other key sources of estimation uncertainty at each reporting date, that have asignificantriskofcausingamaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyearare discussed below.
FairvaluesoffinancialassetsTheGroupcarriescertainfinancialassetsatfairvalue,whichrequiresextensiveuseofaccountingestimatesandjudgments.Fairvaluedeterminationsforfinancialassetsarebasedgenerallyonlistedorquotedmarketprices. Ifpricesarenotreadilydeterminable or if liquidating positions is reasonably expected to affect market prices, fair value is based on either internal valuationmodelsormanagement’sestimateofamountsthatcouldberealizedundercurrentmarketconditions,assuminganorderlyliquidationoverareasonableperiodoftime.Whilesignificantcomponentsoffairvalueweredeterminedusingverifiableobjective evidence (i.e., foreign exchange rates, interest rates, volatility rates), the amount of changes in fair value of these financialassetsandliabilitieswouldaffectthestatementofothercomprehensiveincome.
ThecarryingvalueofAFSfinancialassetsisP10.86 billion and P9.06 billion as of December 31, 2012 and 2011, respectively (see Note 7).
Valuation of insurance contract liabilitiesEstimates have to be made both for the expected ultimate cost of claims reported and for the expected ultimate cost of claims IBNRattheendofreportingperiod.Itcantakeasignificantperiodoftimebeforetheultimateclaimscostcanbeestablishedwith certainty.
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TheprimarytechniqueadoptedbymanagementinestimatingthecostofnotifiedandclaimsIBNR,isthatofusingpastclaimssettlement trends to predict future claims settlement trends. At each reporting date, prior year claims estimates are assessed for adequacy and changes made are charged to provision. Insurance contract liabilities are not discounted for the time value of money.
As of December 31, 2012 and 2011, the carrying values of provision for claims reported and IBNR amounted to P5.50 billion and P4.18 billion, respectively (see Note 14).
Estimation of allowance for impairment lossesThe Group maintains allowance for impairment losses at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectability of the accounts.Thesefactorsinclude,butarenotlimitedto,ageofbalances,financialstatusofcounterparties,andlegalopiniononrecoverabilityincaseoflegaldisputes.TheGroupreviewstheageandstatusofreceivables,andidentifiesaccountsthataretobe provided with allowance on a regular basis.
TheamountandtimingofrecordedexpensesforanyperiodwoulddifferiftheGroupmadedifferentjudgmentsorutilizeddifferent estimates. An increase in allowance for impairment losses would increase recorded expenses and decrease the related asset accounts.
The carrying value of insurance receivables, net of impairment losses amounted to P3.38 billion and P2.81 billion as of December 31, 2012 and 2011, respectively. The related allowance for impairment losses amounted to P125.27 million and P67.86 million as of December 31, 2012 and 2011 respectively (see Note 6).
As of December 31, 2012 and 2011, the carrying value of loans and receivables amounted to P1.28 billion and P0.43 billion, respectively. As of December 31, 2012 and 2011, the related allowance for impairment losses amounted to P3.70 million (see Note 7).
ImpairmentofAFSequityfinancialassetsTheGroupdeterminesthatAFSequityfinancialassetsareimpairedwhentherehasbeenasignificantorprolongeddeclineinthefairvaluebelowitscost.Thedeterminationofwhatissignificantorprolongedrequiresjudgment.TheGrouptreats‘significant’generally as 20% or more and ‘prolonged’ as continuous decline for a period of six (6) months or more. In making this judgment, the Group evaluates among other factors, the normal volatility in share price for quoted securities. In addition, impairment may beappropriatewhenthereisevidenceofdeteriorationinthefinancialhealthoftheinvestee,industryandsectorperformance,changesintechnology,andoperationalandfinancingcashflows.
AsofDecember31,2012and2011,thecarryingvalueoftheGroup’sAFSequityfinancialassetsamountedtoP7.55 billion and P5.79 billion, respectively (see Note 7).
ImpairmentlossrecognizedonGroup’sAFSequityfinancialassetsamountedtoP2.18 million and P15.53 million in 2012 and 2011, respectively (see Note 7).
Estimation of useful lives of computer software, investment properties and property and equipmentThe Group reviews annually the estimated useful lives of computer software, investment properties and property and equipment, based on the period over which the assets are expected to be available for use. It is possible that future results of operations could be materially affected by changes in these estimates. A reduction in the estimated useful lives of computer software, investmentpropertiesandpropertyandequipmentwouldincreaserecordeddepreciationandamortizationexpenseanddecreasethe related asset accounts.
As of December 31, 2012 and 2011, the carrying value of the investment properties amounted to P108.90 million and P88.47 million, respectively (see Note 11).
As of December 31, 2012 and 2011, the carrying value of the property and equipment amounted to P230.42 million and P244.86 million, respectively (see Note 12).
As of December 31, 2012 and 2011, the carrying value of the computer software amounted to P64.91 million and P64.50 million, respectively (see Note 13).
EvaluationofnetrealizablevalueofrealestatepropertiesforsaleReal estate properties for sale are valued at the lower of cost and NRV. This requires the Group to make an estimate of the real estate properties’ estimated selling price in the ordinary course of business, cost of completion and costs necessary to make a saletodeterminetheNRV.TheGroupadjuststhecostofitsrealestatepropertiestonetrealizablevaluebasedonitsassessmentof the recoverability of its real estate properties for sale. In determining the recoverability of its real estate properties for sale, management considers whether its real estate properties for sale are damaged or if their selling prices have declined.
Likewise, management also considers whether the estimated costs of completion or the estimated costs to be incurred to make thesalehaveincreased.IntheeventthatNRVislowerthanthecost,thedeclineisrecognizedasanexpense.Theamountandtimingofrecordedexpensesforanyperiodwoulddifferifdifferentjudgmentsweremadeordifferentestimateswereutilized.See Note 13 for the related balances.
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ImpairmentofnonfinancialassetsTheGroupassessestheimpairmentofitsnonfinancialassets(i.e.,investmentproperties,propertyandequipmentandcomputersoftware) whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following:
• significantunderperformancerelativetoexpectedhistoricalorprojectedfutureoperatingresults;• significantchangesinthemannerofuseoftheassets;and• significantnegativeindustryoreconomictrends.
TheGrouprecognizesanimpairmentlosswheneverthecarryingamountofanassetexceedsitsrecoverableamount.Recoverableamounts are estimated for individual asset or, if it is not possible, for the cash-generating unit to which the asset belongs.
AsofDecember31,2012and2011,theGrouphasnotrecognizedanyimpairmentlossesonitsnonfinancialassets.SeeNotes11, 12 and 13 for related balances.
Recognition of deferred tax assetsDeferredtaxassetsarerecognizedforalldeductibletemporarydifferencestotheextentthatitisprobablethattaxableincomewillbeavailableagainstwhichthesecanbeutilized.Significantmanagementjudgmentisrequiredtodeterminetheamountofdeferredtaxassetsthatcanberecognized.Theseassetsareperiodicallyreviewedforrealization.Periodicreviewscoverthenature and amount of deferred income and expense items, expected timing when assets will be used or liabilities will be required tobereported,reliabilityofhistoricalprofitabilityofbusinessesexpectedtoprovidefutureearningsandtaxplanningstrategieswhichcanbeutilizedtoincreasethelikelihoodthattaxassetswillberealized.SeeNote24fortherelatedbalances.
EstimatingpensionobligationandotherretirementbenefitsThe determination of pension obligation and cost of pension is dependent on the selection of certain assumptions used in calculating such amounts. Those assumptions include, among others, discount rates, expected return on plan asset and salary increase rates.
Duetothelong-termnatureofthisplan,suchestimatesaresubjecttosignificantuncertainty.
The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent withtheexpectedemployeebenefitpayoutasofthereportingdate.InaccordancewithPAS19,actualresultsthatdifferfromtheGroup’sassumptionsareaccumulatedandamortizedover futureperiodsandtherefore,generallyaffect the recognizedexpense and recorded asset or obligation in such future periods. While the Group believes that the assumptions are reasonable andappropriate,significantdifferencesintheactualexperienceorsignificantchangesintheassumptionsmaymateriallyaffectthe pension obligations.
As of December 31, 2012 and 2011, the carrying value of pension obligation amounted to P41.25 million and P40.50 million, respectively (see Note 17).
As of December 31, 2012 and 2011, the carrying value of pension assets amounted to P0.60 million and P7.03 million, respectively (see Note 17).
ContingenciesThe Group is currently involved in various legal proceedings. The estimate of probable costs for the resolution of these claims has been developed in consultation with the legal counsels and based upon analysis of potential results. The Group does not believethattheseproceedingswillhaveamaterialadverseeffectontheGroup’sfinancialposition.
4. Cash and Cash Equivalents
This account consists of:
2012 2011 Cash on hand: Petty cash fund P1,185,183 P1,186,222 Cash in banks: Commercial banks and trust company (Note 28) 352,882,611 378,656,527 Thrift banks, rural banks and cooperatives 15,054,459 845,876 Short-term deposits (Note 28) 1,100,234,692 1,516,123,350 P1,469,356,945 P1,896,811,975
Cash in banks earns interest at the respective bank rates.
Short-term deposits are placed for varying periods of up to three (3) months depending on the immediate cash requirements of the Group.
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The range of interest rates of the short-term deposits follows:
2012 2011 Philippine Peso 0.25% to 4.50% 0.50% to 4.50% US Dollar 0.09% to 1.35% 0.25% to 2.00%
As of December 31, 2012 and 2011, time deposits amounting to P37,072,255 and P22,564,886, respectively are held in the name of the Insurance Authority account of the Group imposed by the Hong Kong Insurance Authority (HKIA) pursuant to Hong Kong Insurance Companies Ordinance (Cap. 41). These deposits shall be kept free from any liens, charges encumbrances, equities, or third party rights and cannot be released without the permission of the HKIA and that the account could only be operatedbythedesignatedauthorizedofficersoftheHKIA.
5. Short-term Investments
This account consists of time deposits with maturity of more than three months but less than one year from dates of placement and earns interest with annual rates ranging from 1.00% to 4.25% and 1.00% to 6.00% in 2012 and 2011, respectively.
Interest earned on short-term investments amounted to P0.86 million and P0.56 million in 2012 and 2011, respectively (see Note 20).
6. Insurance Receivables - net
This account consists of:
2011 2012 (As restated) Due from policyholders, agents and brokers P2,210,915,388 P1,616,704,536 Due from ceding companies: Facultative 55,117,474 184,440,379 Treaty 904,898,749 755,301,654 Funds held by ceding companies - treaty 163,265,537 146,535,942 Premium and loss reserve 38,093,661 45,814,860 Reinsurance recoverable on paid losses: Facultative 89,373,356 103,645,323 Treaty 42,260,837 29,216,751 3,503,925,002 2,881,659,445 Less allowance for impairment losses 125,268,247 67,861,172 P3,378,656,755 P2,813,798,273
The reinsurance recoverable on paid losses is the amount recoverable from the reinsurers in respect of claims already paid by the Group.
The following table shows aging information of insurance receivables:
December 31, 2012
90 > < 30 days 30 > 60 days 60 > 90 days 120 days > 120 days TotalDue from policyholders, agents and brokers P458,146,733 P224,649,143 P345,703,683 P303,328,692 P879,087,137 P2,210,915,388Due from ceding companies: Facultative 29,940,507 45,997 668,698 6,732,968 17,729,304 55,117,474 Treaty 288,726,127 210,562,323 30,826,871 17,591,748 357,191,680 904,898,749Funds held by ceding companies - treaty 3,000,053 51,339 24,958,953 61,375,728 73,879,464 163,265,537Premium and loss reserve 1,219,185 – 4,012,063 – 32,862,413 38,093,661Reinsurance recoverable on paid losses: Facultative 458,256 3,064,683 2,573,975 4,819,693 78,456,749 89,373,356 Treaty 299,625 498,265 1,145,859 – 40,317,088 42,260,837 P781,790,486 P438,871,750 P409,890,102 P393,848,829 P1,470,312,837 P3,503,925,002
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December 31, 2011 (As restated)
<90 > < 30 days 30 > 60 days 60 > 90 days 120 days > 120 days TotalDue from policyholders, agents and brokers P285,610,067 P180,143,822 P305,513,663 P91,145,676 P754,291,308 P1,616,704,536Due from ceding companies: Facultative 41,753,561 6,161,219 97,890,339 1,789,783 36,845,477 184,440,379 Treaty 617,756,688 5,087,409 10,551,964 2,418,042 119,487,551 755,301,654Funds held by ceding companies - treaty 10,401,669 28,110,168 19,445,173 1,490,851 87,088,081 146,535,942Premium and loss reserve 1,128,222 – 2,561,615 – 42,125,023 45,814,860Reinsurance recoverable on paid losses: Facultative – 609,423 3,476,764 5,935,382 93,623,754 103,645,323 Treaty – 923 1,230 – 29,214,598 29,216,751 P956,650,207 P220,112,964 P439,440,748 P102,779,734 P1,162,675,792 P2,881,659,445
The allowance for impairment loss on insurance receivables has been determined as follows:
2012 Due from Due from Due from Reinsurance Policyholders, Ceding Ceding Funds Held by Recoverable Agents and Companies - Companies - Ceding on Paid Losses Brokers Facultative Treaty Companies - Facultative TotalBalance at beginning of year P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172Impairment loss (Note 22) 66,032,188 – – – – 66,032,188Written-off (8,625,113) – – – – (8,625,113)Balance at end of year P101,505,280 P17,547,961 P496,316 P1,380,777 P4,337,913 P125,268,247Individually impaired P7,885,979 P17,547,961 P496,316 P1,380,77 P4,337,913 P31,648,946Collectively impaired 93,619,301 – – – – 93,619,301Total P101,505,280 P17,547,961 P496,316 P1,380,777 P4,337,913 P125,268,247
2011 Due from Due from Due from Reinsurance Policyholders, Ceding Ceding Funds Held by Recoverable Agents and Companies - Companies - Ceding on Paid Losses Brokers Facultative Treaty Companies - Facultative TotalBalance at beginning of year P47,058,842 P6,076,008 P500,868 P1,380,777 P– P55,016,495Impairment loss (Note 22) – 11,824,823 155,314 – 4,337,913 16,318,050Reversal of impairment loss (Note 22) (211,535) (352,870) (159,866) – – (724,271)Written-off (2,749,102) – – – – (2,749,102)Balance at end of year P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172Individually impaired P16,944,841 P17,547,961 P496,316 P1,380,777 P4,337,913 P40,707,808Collectively impaired 27,153,364 – – – – 27,153,364Total P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172
7. Financial Assets
TheGroup’sfinancialassets,categorizedbasedonsubsequentmeasurement,follow:
2012 2011 AFSfinancialassets P10,857,169,577 P9,063,830,701 Financial assets at FVPL 217,541,191 224,561,299 Loans and receivables - net 1,277,167,477 432,531,764 P12,351,878,245 P9,720,923,764
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The assets included in each of the categories above are detailed below.
a) AFSfinancialassets
2012 2011 Quoted securities - at fair value Listed equity securities (Note 28): Common shares P7,277,090,290 P5,650,964,630 Preferred shares 60,981,155 26,021,840 Government debt securities: Local currency 874,413,212 561,760,112 Foreign currency 32,968,440 434,862,299 Private debt securities (Note 28) 2,403,211,698 2,279,014,290 10,648,664,795 8,952,623,171 Non-quoted securities - at cost Unlisted equity securities: Common shares 111,363,156 81,188,158 Preferred shares 17,540 – 111,380,696 81,188,158 Funds 97,124,086 30,019,372 P10,857,169,577 P9,063,830,701
In accordance with the provisions of the Code, government securities amounting to P213.38 million and P163.32 million aredepositedwiththeInsuranceCommission(IC)assecurityforthebenefitofpolicyholdersandcreditorsoftheGroupasof December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011, the Group has certain investments in debt securities with embedded call option featurewhichallowstheissuerstoredeem,onspecifieddates,thesecuritiesatfaceamount.BasedontheGroup’sassessment,theembeddedcalloptionsidentifiedareclearlyandcloselyrelatedtothehostcontractsandthereforedonot require bifurcation.
AsofDecember31,2012and2011,allowancefor impairment lossrecognizedonAFSinvestmentsamountedtoP2.18 million and P25.97 million in 2012 and 2011, respectively.
ThecarryingvaluesofAFSfinancialassetshavebeendeterminedasfollows:
2012 2011Balance at beginning of year P9,063,830,701 P8,581,368,142Acquisitions 1,697,544,518 1,219,611,567Unrealizedforeigncurrencyexchangeloss (121,765,673) (30,264,822)Fair value changes 2,084,085,504 132,036,419Disposals and maturities (1,840,544,521) (806,401,328)Amortizationofpremium (8,268,437) (34,401,828)Foreign exchange adjustment (17,712,515) 1,882,551Balance at end of year P10,857,169,577 P9,063,830,701
AsofDecember31,2012and2011,therevaluationreserveonAFSfinancialassetsamountedtoP4.77 billion and P3.13 billion, respectively.
TherollforwardanalysisoftherevaluationreserveonAFSfinancialassetsfollow:
2012 2011Balance at beginning of year P3,452,501,798 P3,361,198,185Fair value gain credited to equity 2,084,085,504 132,036,419Impairment loss (Note 20) 2,181,316 15,529,779Realizedgaintransferredtoprofitorloss(Note20) (227,415,482) (58,141,707)Tax effect of net fair value gain (Note 24) (28,893,413) 2,079,311Foreign exchange adjustment (1,082,845) (200,189) P5,281,376,878 P3,452,501,798Attributable to: Equity holders of the Parent Company P4,771,487,147 P3,131,432,419 Non-controlling interests 509,889,731 321,069,379 P5,281,376,878 P3,452,501,798
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ReclassificationoffinancialassetsPursuanttotheamendmentstoPAS39on“ReclassificationofFinancialAssets”(the“Amendments”)whichareeffectivefromJuly1,2008,theGrouphasreclassifiedlistedequitysecuritiesoutoftheheld-for-tradingcategorytoavailable-for-salecategoryonJuly31,2008(the“Reclassification”)asthesefinancialassetswerenolongerheldforthepurposeofbeingsold or purchased in the near term but for long term investment purpose as a result of the exceptional turbulence in the world’sfinancialmarketsin2008.AsofDecember31,2012and2011,thetotalcarryingamountwhichwasalsothefairvalueofthefinancialassetsbeingclassifiedwasP13.10 million and P44.43 million, respectively.
During2012and2011,afairvaluegainonfinancialassetsbeingreclassifiedamountingtoP2.78 million and P10.93 million, respectivelyhasbeenrecognizedintherevaluationreserveinothercomprehensiveincome.
TheeffectofthereclassificationontheGroup’sconsolidatedfinancialstatementsfortheyearisshownasfollows:
Had no Reclassification Effectofthe Afterthe beenmade Reclassification reclassificationEffect on consolidated statement of financialposition: Financial assets at FVPL - Held for trading investments P230,645,418 (P13,104,227) P217,541,191Available-for-sale investments 10,844,065,350 13,104,227 10,857,169,577Deferred tax liabilities 1,840,140 507,132 2,347,272Revaluation reserve on AFS 4,765,217,580 6,269,567 4,771,487,147Retained earnings 5,102,664,203 (6,269,567) 5,096,394,636 Effect on net income for the year (included in investment and other income): Netfairvaluegain/(loss)onfinancial assets at FVPL 16,280,493 (2,784,705) 13,495,788 Effect on other comprehensive income for the year: Net fair value change in AFS assets 2,086,870,209 (2,784,705) 2,084,085,504Cumulativegainreclassifiedtoprofit or loss upon disposal of AFS assets (218,800,593) (8,614,889) (227,415,482)Income tax relating to components of other comprehensive income (29,757,799) 864,386 (28,893,413)
Available-for-sale investments are measured at their respective fair values which are determined based on the quoted market bid prices available in active markets and/or made available by brokers.
b) Financial assets at FVPL
This account consists of foreign currency-denominated securities with details as follow:
2012 2011Held for trading Equity securities: Listed P136,871,209 P148,876,055Designated as at FVPL on initial recognition Private debt securities 74,073,740 73,738,836Investment funds 4,340,996 –Listed equity securities 2,255,246 –Monet market fund - unlisted – 1,946,408 80,669,982 75,685,244 P217,541,191 P224,561,299
Thefairvaluegain(loss)onfinancialassetsatFVPLrecognizedintheconsolidatedstatementsofincomeamountedtoP13.5 million gain and P8.33 million loss in 2012 and 2011, respectively (see Note 20).
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ThecarryingvaluesoffinancialassetsatFVPLhavebeendeterminedasfollows:
2012 2011Balances at beginning of year P224,561,299 P378,094,876Acquisitions 6,630,519 4,289,434Fair value gain (loss) (Note 20) 13,495,788 (8,331,918)Disposals and maturities (12,602,662) (147,650,550)Foreign exchange adjustment (14,543,753) (1,840,543)Balance at end of year P217,541,191 P224,561,299
c) Loans and receivables - net
This account consists of:
2011 2012 (As restated)Long-term commercial papers (Note 28) P746,635,665 P344,835,665Notes receivable (Note 28) 403,884,441 9,801,384Creditable withholding tax 62,677,478 62,677,478Due from related party (Note 28) 51,184,711 1,888,360Claims recoverable 11,770,886 –Accounts receivable 3,514,994 5,464,504Cash advances 859,934 1,198,492Security fund 342,294 342,294Long-term investments (Note 28) – 10,026,513 1,280,870,403 436,234,690Less allowance for impairment losses 3,702,926 3,702,926 P1,277,167,477 P432,531,764
Long-term commercial papers pertain to the Group’s investments in unquoted private debt securities and corporate notes with terms of 4 to 15 years and interest rates ranging from 5.25% to 9.33% in 2012 and 2011.
TheGroupprovidesforthe50%ofthecostofthecarandmotorplansextendedtoitsmanagersandofficersaspartoftheirbenefits.Theemployee’sshareisrecordedasNotesreceivablewhichiscollectedthroughsalarydeductionsforaperiodoffive(5)yearswithannualinterestratesof8.00%forcarloansand8.50%formotorloans.
The Group also granted advances to its related parties, House of Investments (HI) and First Malayan Leasing Corporation (FMLC), by way of receipt of promissory notes from these related parties (see Note 28).
Creditablewithholdingtaxforyears2009and2010werefiledforrefundbytheGrouptotheBIR.
Due from related party pertains to the estimated amount to be distributed to MIIC upon completion of the winding up of its subsidiary, Malayan Insurance Company (U.K.) Limited (In Liquidation).
Long-terminvestmentspertaintofixeddepositswithoriginalmaturityofmorethan1yearwithinterestratesrangingfrom2.00% in 2011.
The allowance for impairment losses on loans and receivable had been determined as follows:
2012 Accounts Notes Due from Receivable Receivable Related Parties TotalBalance at beginning / end of year P2,005,675 P1,697,251 P– P3,702,926Individually impaired P2,005,675 P1,697,251 P– P3,702,926
2011 Accounts Notes Due from Receivable Receivable Related Parties TotalBalance at beginning of year P2,005,675 P599,374 P7,415,927 P10,020,976Impairment loss (Note 22) – 1,097,877 – 1,097,877Reversal of impairment loss (Note 22) – – (7,415,927) (7,415,927)Balance at end of year P2,005,675 P1,697,251 P– P3,702,926Individually impaired P2,005,675 P1,697,251 P– P3,702,926
As of December 31, 2012 and 2011, accounts and notes receivable with carrying value of P3.70millionwasspecificallydetermined as impaired and was fully provided with allowance. There was no movement in the allowance for impairment losses in 2012.L
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8. Accrued Income
This account consists of:
2012 2011Accrued interest income on (Note 28): AFSfinancialassets P38,935,897 P36,973,508 Long-term commercial papers 6,052,261 2,549,440 Financial assets at FVPL 1,140,698 2,507,002 Cash and cash equivalents 835,927 335,054 Notes receivables 588,611 – Funds held by ceding companies - treaty 178,549 169,429 Security fund 123,936 108,424 Short-term investments 11,739 80,545 Long-term investments – 361,180Accrued rent income 4,298,968 3,291,580Accrued dividend income 3,347,531 –
P55,514,117 P46,376,162
9. Deferred Acquisition Costs - net
The details of deferred acquisition costs net of deferred reinsurance commissions follow:
2012 2011Deferred acquisition costs Balance at beginning of year P273,845,906 P302,047,984 Cost deferred during the year (Note 28) 932,891,445 822,214,121 Amortizedduringtheyear (868,896,454) (850,416,199) Balance at end of year 337,840,897 273,845,906Deferred reinsurance commissions Balance at beginning of year 114,520,762 108,903,268 Income deferred during the year (Note 28) 234,506,403 251,066,099 Amortizedduringtheyear (242,243,182) (245,448,605) Balance at end of year 106,783,983 114,520,762 P231,056,914 P159,325,144
10. Reinsurance Assets
This account consists of:
2011 2012 (As restated) Deferred reinsurance premiums (Note 14) P1,559,476,852 P1,386,049,528 Reinsurance recoverable on unpaid losses (Note 14) 3,606,385,741 2,285,454,016 P5,165,862,593 P3,671,503,544
11. Investment Properties - net
The rollforward analysis of this account follows:
2012 Construction Land Buildings in-Progress Total Cost At beginning of year P29,023,039 P12,691,827 P57,653,314 P99,368,180 Additions – – 20,541,294 20,541,294 At end of year 29,023,039 12,691,827 78,194,608 119,909,474 Accumulated depreciation and amortization At beginning of year – 10,900,793 – 10,900,793 Depreciationandamortization(Note22) – 107,591 – 107,591 At end of year – 11,008,384 – 11,008,384 Net book value P29,023,039 P1,683,443 P78,194,608 P108,901,090
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2011 Construction Land Buildings in-Progress Total Cost At beginning of year P30,036,226 P46,147,860 P37,112,019 P113,296,105 Additions 160,000 147,335 20,541,295 20,848,630 Transfers (Note 12) (1,013,187) (33,603,368) – (34,616,555) Disposals (160,000) – – (160,000) At end of year 29,023,039 12,691,827 57,653,314 99,368,180 Accumulated depreciation and amortization At beginning of year – 13,875,329 – 13,875,329 Depreciationandamortization(Note22) – 173,467 – 173,467 Transfers (Note 12) – (3,148,003) – (3,148,003) At end of year – 10,900,793 – 10,900,793 Net book value P29,023,039 P1,791,034 P57,653,314 P88,467,387
During2011,transferspertaintothereclassificationfrominvestmentpropertiestopropertyandequipmentduetochangeintheintentionoftheGroupontheuseofitsbuilding,frombeingheldforrenttobeingoccupiedasbuildingofficespaces.
RentalincomefrominvestmentpropertiesrecognizedintheconsolidatedstatementofincomeamountedtoP24.32 million and P22.50 million in 2012 and 2011, respectively (see Note 20). Direct operating expenses arising from the investment properties amounted to P13.81 million and P10.42 million in 2012 and 2011, respectively.
OnOctober1,2009,MICO,RCBCSavingsBank,Inc.(RSB),RizalCommercialBankingCorporation(RCBC),BankardInc.,GreatPacificLifeAssuranceCorporation(Grepalife)andHexagonlandCorporationsignedaJointVentureAgreementfortheconstructionanddevelopmentofatwentyseven(27)-storey,high-risemixedusedcommercial/officebuildingtobeknownasthe“RCBCSavings Bank Building Project”.
The total construction period is estimated at thirty-nine (39) months and the total cost is estimated at P2.20 billion, of which MICO shall contribute 4.47% in cash contributions.
On October 2, 2012, MICO, RSB, RCBC, Bankard, Inc. and Grepalife executed a Memorandum of Understanding (MOU) agreeing in principle to cancel or revoke the JVA, subject to the approval of the Bangko Sentral ng Pilipinas (BSP). In the said MOU, RCBC was allowed to continue the construction and completion of the Building Project by purchasing the land from RSB and returning the cash contributions of RSB, Bankard, Inc. and MICO.
As of December 31, 2012 and 2011, MICO’s total cash contributions to the RCBC Savings Bank Building Project amounted to P78.19 million and P57.65 million, respectively.
On March 13, 2013, through Monetary Board (MB) Resolution No. 405 dated March 7, 2013, the BSP confirmed the acquisition of RCBC of the land contributed by RSB, as well as the rights and interests of MICO, RSB, Bankard, Inc. and Grepalife to the Building Project.
Buildings with book value of P1.61 million and P1.68 million have fair value amounting to P3.34 million and P13.43 million as of December 31, 2012 and 2011, respectively. Parcels of land with book value of P26.6 million and P0.44 million have fair value amounting to P52.89 million and P40.40 million as of December 31, 2012 and 2011, respectively. The fair values of the investment propertiesweredeterminedbyindependentprofessionallyqualifiedappraisers.Thefairvaluerepresentstheamountatwhichthe assets could be exchanged between a knowledgeable, willing buyer and knowledgeable, willing seller in an arm’s length transaction at the date of valuation.
The fair value of the land and buildings were arrived at using the Market Data Approach. In this approach, the value of the land and buildings are based on sales and listings of comparable property registered within the vicinity. The technique of this approach requires the establishment of comparable property by reducing reasonable comparative sales and listings to a common denominator. This is done by adjusting the differences between the subject property and those actual sales and listings regarded as comparable. The properties used as basis of comparison are situated within the immediate vicinity of the subject property. DepreciationandamortizationexpensepertainingtoinvestmentpropertiesamountedtoP0.11 million and P0.17 million in 2012 and 2011, respectively (see Note 22).
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12. Property and Equipment - net
The rollforward analysis of this account as of December 31, 2012 and 2011 follows:
2012 Building, Office Building Furniture, Equipment and Fixtures and Transportation Leasehold Land Improvements Equipment Equipment Improvements TotalCost At beginning of year P1,013,187 P202,484,560 P336,231,656 P57,930,876 P55,314,276 P652,974,555Additions – 5,291,394 16,889,192 8,637,080 4,423,161 35,240,827Disposals – – (713,838) (3,454,377) – (4,168,215)Foreign exchange adjustment – – (60,818) – – (60,818)At end of year 1,013,187 207,775,954 352,346,192 63,113,579 59,737,437 683,986,349Accumulateddepreciationandamortization At beginning of year – 54,296,305 280,255,387 40,398,354 33,166,569 408,116,615Depreciationandamortization(Note22) – 9,070,460 27,006,815 6,516,410 6,312,237 48,905,922Disposals – – (95,733) (3,303,828) – (3,399,561)Foreign exchange adjustment – – (56,123) – – (56,123)At end of year – 63,366,765 307,110,346 43,610,936 39,478,806 453,566,853Net book value P1,013,187 P144,409,189 P45,235,846 P19,502,643 P20,258,631 P230,419,496
2011 Building, Office Building Furniture, Equipment and Fixtures and Transportation Leasehold Land Improvements Equipment Equipment Improvements TotalCost At beginning of year P– P164,583,207 P309,489,382 P56,610,541 P43,534,308 P574,217,438Additions – 4,297,985 27,676,157 5,878,296 11,779,968 49,632,406Transfers (see Note 11) 1,013,187 33,603,368 – – – 34,616,555Disposals – – (934,329) (4,557,961) – (5,492,290)Foreign exchange adjustment – – 446 – – 446At end of year 1,013,187 202,484,560 336,231,656 57,930,876 55,314,276 652,974,555 Accumulateddepreciationandamortization At beginning of year – 45,032,000 255,596,472 37,250,950 28,250,997 366,130,419Transfers (see Note 11) – 1,293,342 1,671,301 176,428 6,932 3,148,003Depreciationandamortization(Note22) – 7,970,963 23,032,162 6,699,496 4,908,640 42,611,261Disposals – – (45,764) (3,728,520) – (3,774,284)Foreign exchange adjustment 1,216 1,216At end of year – 54,296,305 280,255,387 40,398,354 33,166,569 408,116,615Net book value P1,013,187 P148,188,255 P55,976,269 P17,532,522 P22,147,707 P244,857,940
DepreciationandamortizationexpensechargedagainstoperationsamountedtoP48.91 million and P42.61 million 2012 and 2011, respectively (see Note 22).
13. Other Assets
This account consists of:
2011 2012 (As restated) Creditable withholding taxes P191,133,436 P149,408,856 Real estate properties for sale - at cost 93,019,300 92,212,603 Computer software - net 64,910,065 64,496,741 Refundable deposits 27,866,924 12,690,850 Prepayments 5,946,758 7,641,820 Forms and supplies inventory 4,953,315 13,460,711 Miscellaneous assets 31,135,700 11,753,528 P418,965,498 P351,665,109
Creditable withholding tax pertains to the Group’s tax withheld at source by its customers and is creditable against the income tax liability of the Group.
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RealestatepropertiesforsaleconsistsofinvestmentsinMalayanPlazacondominiumunitsandmemoriallots.AsofDecember31, 2012 and 2011, amounts of the real estate properties for sale are as follows:
2012 2011 MalayanPlazacondominiumunits P83,294,300 P80,362,603 Memorial lots 9,725,000 11,850,000 P93,019,300 P92,212,603
Cost of real estate properties disposed in 2012 and 2011 amounted to P2.13 million and P3.23 million, respectively.
The rollforward analysis of the computer software account follows:
2012 2011 Cost At the beginning of the year P78,716,962 P66,280,073 Additions 5,535,791 12,436,889 At the end of the year 84,252,753 78,716,962 Accumulatedamortization At the beginning of the year 14,220,221 8,566,923 Amortization(Note22) 5,122,467 5,653,298 At the end of the year 19,342,688 14,220,221 Net book value P64,910,065 P64,496,741
14. Insurance Contract Liabilities and Reinsurance Assets
Short-terminsurancecontractliabilitiesandreinsurers’shareofliabilitiesmaybeanalyzedasfollows:
2012 2011 (As restated) Reinsurers’ Reinsurers’ Insurance Share of Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) NetProvision for claims reported and loss adjustment P5,289,523,181 P3,518,615,340 P1,770,907,841 P4,092,690,075 P2,285,454,016 P1,807,236,059Provision for IBNR losses 206,931,673 87,770,401 119,161,272 82,878,858 – 82,878,858Total claims reported and IBNR 5,496,454,854 3,606,385,741 1,890,069,113 4,175,568,933 2,285,454,016 1,890,114,917Provision for unearned premiums 3,041,799,036 1,559,476,852 1,482,322,184 2,677,505,855 1,386,049,528 1,291,456,327Total insurance contract liabilities P8,538,253,890 P5,165,862,593 P3,372,391,297 P6,853,074,788 P3,671,503,544 P3,181,571,244
ProvisionsforclaimsreportedbypolicyholdersandclaimsIBNRmaybeanalyzedasfollows:
2012 2011 (As restated) Reinsurers’ Reinsurers’ Insurance Share of Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) NetBalance at beginning of year P4,175,568,933 P2,285,454,016 P1,890,114,917 P4,776,710,841 P3,113,655,423 P1,663,055,418Claims incurred during the year 3,554,424,754 1,900,388,501 1,654,036,253 1,826,935,745 228,326,078 1,598,609,667Increase in IBNR 124,052,815 87,770,401 36,282,414 15,867,270 – 15,867,270Total claims reported and claims IBNR 7,854,046,502 4,273,612,918 3,580,433,584 6,619,513,856 3,341,981,501 3,277,532,355Claims paid during the year (Note 21) 2,357,591,648 667,227,177 1,690,364,471 2,443,944,923 1,056,527,485 1,387,417,438Balance at end of year P5,496,454,854 P3,606,385,741 P1,890,069,113 P4,175,568,933 P2,285,454,016 P1,890,114,917
Provision for unearnedpremiumsmaybeanalyzedasfollows:
2012 2011 Reinsurers’ Reinsurers’ Insurance Share of Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) NetBalance at beginning of year P2,677,505,855 P1,386,049,528 P1,291,456,327 P2,764,476,955 P1,490,964,205 P1,273,512,750New policies written during the year (Note 19) 6,920,552,746 4,001,849,761 2,918,702,985 6,048,420,953 3,282,909,940 2,765,511,013Premiums earned during the year (Note 19) (6,556,259,565) (3,828,422,437) (2,727,837,128) (6,135,392,053) (3,387,824,617) (2,747,567,436)Balance at end of year P3,041,799,036 P1,559,476,852 P1,482,322,184 P2,677,505,855 P1,386,049,528 P1,291,456,327
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15. Insurance Payables
This account consists of:
2011 2012 (As restated) Due to reinsurers (Note 28) P1,797,539,163 P1,113,335,436 Funds held for reinsurers (Note 28) 572,749,754 496,338,630 P2,370,288,917 P1,609,674,066
The rollforward analysis of insurance payables follows:
Due to Funds held Reinsurers for reinsurers Total At January 1, 2011 P738,907,076 P373,137,571 P1,112,044,647 Arising during the year 2,675,896,054 228,459,821 2,904,355,875 Paid during the year (2,301,467,694) (105,258,762) (2,406,726,456) At December 31, 2011 1,113,335,436 496,338,630 1,609,674,066 Arising during the year 3,828,775,332 173,466,719 4,002,242,051 Paid during the year ((3,144,571,605) (97,055,595) (3,241,627,200) At December 31, 2012 P1,797,539,163 P572,749,754 P2,370,288,917
16. Accounts Payable, Accrued Expenses and Other Liabilities
This account consists of:
2011 2012 (As restated) Accounts payable P359,988,106 P343,367,016 Commissions payable 242,197,471 263,790,116 Deferred output value-added tax (VAT) 144,510,035 108,593,807 Accrued expenses 109,883,853 74,158,809 Documentary stamp taxes payable 99,875,124 52,807,654 Accrued taxes 74,328,898 75,022,317 Surety deposits 34,290,301 31,841,060 Output VAT 15,539,222 40,725,119 Deposits payable 13,510,198 11,306,889 Others 8,231,060 10,236,962 P1,102,354,268 P1,011,849,749
AccruedexpensespertaintoaccrualofmonthlyexpendituresoftheGroup.Thisincludesexpensesforutilities,fringebenefittax, allocated common expenses for the use of Y Tower 1 and 2 and other expenses that are necessary to carry out the operations of the Group.
17. Pension
TheGrouphasadefinedbenefitplan,coveringsubstantiallyallof itsemployees,whichrequirescontributiontobemadetoadministered funds. The plan is administered by a local bank as trustee. The Group’s trustee bank is RCBC. The transactions of the fund are being approved by the President of the Group.
Thefollowingtablessummarizethecomponentsofnetpensionbenefitexpenserecognizedintheconsolidatedstatementsofincomeandthefundedstatusandamountsrecognizedintheconsolidatedstatementsoffinancialpositionfortheretirementplan. Thenetpensionbenefitexpenserecognizedintheconsolidatedstatementsofincome,underemployeebenefits(seeNote22),follows:
2012 2011 Current service cost P33,363,240 P25,316,531 Interest cost 23,541,761 26,018,110 Actuariallossrecognized 4,674,100 2,820,468 Expected return on plan assets (12,424,537) (11,781,867) P49,154,564 P42,373,242
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The net pension obligation of MEI and MICO follows:
2012 2011 Presentvalueofpensionbenefitobligation P446,425,380 P337,430,587 Fair value of plan assets (292,644,495) (183,378,153) 153,780,885 154,052,434 Unrecognizednetactuariallosses (112,526,221) (113,550,501) P41,254,664 P40,501,933
The net plan assets of FNAC and BAC follows:
2012 2011 Fair value of plan assets P7,271,778 P65,112,577 Presentvalueofpensionbenefitobligation (8,163,155) (75,182,772) (891,377) (10,070,195) Unrecognizednetactuariallosses 1,492,537 17,102,730 P601,160 P7,032,535
Thereconciliationofthepresentvalueofthepensionbenefitobligationfollows:
2012 2011 Balance at beginning of year P412,613,359 P361,994,582 Current service cost 33,363,240 25,316,531 Interest cost 23,541,761 26,018,110 Actuarial loss 5,116,025 36,150,111 Present value of obligation of resigned employee – (2,613,004) Benefitspaid (20,045,850) (34,252,971) P454,588,535 P412,613,359
The reconciliation of the fair value of the plan assets follows:
2012 2011 Balance at beginning of year P248,490,730 P235,637,350 Expected return on plan assets 12,424,537 11,781,867 Contributions by employer 41,970,458 42,431,236 Actuarial loss 17,076,398 (7,106,752) Benefitspaid (20,045,850) (34,252,971) Balance at end of year P299,916,273 P248,490,730 Actual return on plan assets P29,500,935 P4,675,115
Movementsintheunrecognizednetactuariallossfollow:
2012 2011 Balance at beginning of year P130,653,231 P90,216,836 Actuarial loss on obligation 5,116,025 36,150,111 Actuarial loss on plan assets (17,076,398) 7,106,752 Actuariallossrecognized (4,674,100) (2,820,468) Balance at end of year P114,018,758 P130,653,231
The distribution of the plan assets as of December 31, 2012 and 2011 follows:
2012 2011 Cash P51,177,768 P57,618,362 Receivables 9,992,357 3,214,455 Investments in: Equity securities 114,291,117 93,964,457 Government securities 84,609,181 63,614,309 Other securities and debt instruments 41,954,322 31,684,431 Others 11,632 – 302,036,377 250,096,014 Less accrued trust fees and other payables 2,120,104 1,605,284 P299,916,273 P248,490,730
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The following presents the transactions of the Group’s retirement fund with related parties:
2012 2011 Category Balance Balance Terms ConditionsOther related parties RCBC Interest rate at 0.25%to4.50% Unsecured;no Savings deposits P257,058 P58,804 p.a impairment 31 to 91 days, interestrateat Unsecured;no Time deposits 5,385,326 5,769,047 0.0625% to 4.75% impairment Interest rates at 0.00% to 7.75%: termsof Unsecured;no Corporate bonds 15,711,507 13,851,377 2.5 to 7.5 years impairment
Unsecured;no Common stocks 13,299,320 7,942,308 – impairment HI Unsecured;no Common stocks 2,472,285 1,210,594 – impairment FMLC Unsecured;no Common stocks 2,547,990 4,111,025 – impairment
The principal actuarial assumptions used in determining plan assets and obligations are as follows:
2012 2011 Salary increase rate 5.00% to 7.00% 5.00% Discount rate 5.16% to 5.31% 5.69% to 5.88% Expected return on plan assets 5.00% to 7.00% 5.00%
The overall expected return on plan assets is determined based on the market expectations prevailing as of December 31, 2012 and 2011 applicable to the period over which the obligation is to be settled.
The amounts for the current and the previous periods follows:
2012 2011 2010 2009 2008Present valueofpensionbenefitobligation P454,588,535 P412,613,359 P361,994,582 P312,595,916 P288,543,347Fair value of plan assets (299,916,273) (248,490,730) (235,637,350) (217,794,550) (160,642,361)Deficit P154,672,262 P164,122,629 P126,357,232 P94,801,366 P127,900,986 Experience adjustment follows:
2012 2011 2010 2009 2008Experience adjustments on plan liabilities - loss (gain) (P5,338,229) P18,851,887 P3,952,360 (P5,684,791) P27,945,675Experience adjustments on plan assets - gain (loss) P17,076,398 (P7,106,752) (P2,974,796) P15,794,882 (P7,318,901)
The Group expects to contribute P46,240,535 to the retirement fund in 2013.
18. Cash Dividends and Other Revaluation Reserve
The Company’s capital stock consists of:
2012 2011 Shares Amount Shares Amount Authorized:Commonstock P100 par value 10,000,000 P1,000,000,000 10,000,000 P1,000,000,000 Issued and outstanding: At beginning of year 6,000,000 600,000,000 4,000,000 400,000,000 Stock dividends – – 2,000,000 200,000,000 At end of the year 6,000,000 P600,000,000 6,000,000 P600,000,000
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Retained EarningsOn August 8, 2011, the BODapprovedtheincreaseintheauthorizedcapitalstockfromP400 million divided into 4 million shares with par value of P100 per share to P1 billion divided into 10 million shares with par value of P100pershare.TheSECfilingfeerelatingtotheincreaseinauthorizedcapitalstockamountingtoP1,212,510,netoftherelatedtaxbenefits,hasbeendeductedfrom retained earnings in 2011. On the same date, the BOD approved the declaration of P200 million worth of stock dividends out of the unrestricted retained earnings as of December 31, 2010, in favor of the stockholders of record as of August 8, 2011. The documentary stamp tax related to the stock dividends amounting to P1.0 million has been accrued and the amount (net of therelatedtaxbenefits)isaccountedforasadeductionfromretainedearningsin2011.
Retained earnings include the accumulated equity in undistributed net earnings of consolidated subsidiaries amounting to P4,880,081,205 as of December 31, 2012 which are not available for dividend declaration by the Parent Company.
Other Revaluation ReserveOn April 10, 2008, MICO’s BOD and stockholders approved the articles of merger and plan of merger between TMMIC and MICO. TMMIC is a 50-50 joint venture company owned by MICO and Tokio Marine Asia Pte., Ltd. (Tokio Marine). On July 2, 2008, the SEC approved the articles and plan of merger. The effects of the merger were reckoned from January 1, 2008. The merger was accounted for as a business combination in accordance with PFRS 3. TMMIC and MICO became a single corporation, with MICO as the surviving corporation. TMMIC ceased to exist and its legal personality was terminated. As at the date of acquisition, the identifiableassetsandliabilitiesofTMMIChavebeenmeasuredatfairvalueresultinginadifferenceofP46,933,294 against its carrying values. The difference between the carrying value and fair value pertains mainly to the increase in the appraised value of the building. MICO recorded the appraisal increase amounting to P23,466,647 pertaining to its previously held interest as “Otherrevaluationreserve”intheequitysectionoftheconsolidatedstatementoffinancialposition.
19. Net Premiums Earned
Gross premiums earned and reinsurers’ share of gross premiums earned consist of the following:
2012 2011Gross premiums written Direct P4,987,310,524 P4,552,146,949 Assumed (Note 28) 1,933,242,222 1,496,274,004Total gross premiums on insurance contracts (see Note 14) 6,920,552,746 6,048,420,953Gross change in provision for unearned premiums (364,293,181) 86,971,100gross premiums earned (see Note 14) 6,556,259,565 6,135,392,053Reinsurers’ share of gross premiums written Direct insurance 3,063,024,687 2,407,367,327 Assumed reinsurance (Note 28) 938,825,074 875,542,613Total reinsurers’ share of gross premiums on insurance contracts (see Note 14) 4,001,849,761 3,282,909,940Reinsurers’ share of gross change in provision for unearned premiums (173,427,324) 104,914,677Reinsurers’ share of gross premiums earned on insurance contacts (see Note 14) 3,828,422,437 3,387,824,617Net premiums earned P2,727,837,128 P2,747,567,436
20. Investment and Other Income and Investment and Other Expense
Investment and other income
This account consists of:
2011 2012 (As restated) Dividend income (Note 28) P286,144,668 P305,579,021 Interest income (Note 28): AFSfinancialassets 190,042,892 186,992,467 Long-term commercial papers 36,233,698 22,892,393 Cash and cash equivalents 32,727,860 44,381,171 Notes receivables 22,452,254 6,447,083 Financial assets at FVPL 3,286,484 5,986,803 Funds held by ceding companies 1,930,730 535,280 Short-term investments (Note 5) 859,228 557,795 Long-term investments – 270,651 Others 525,538 8,241,908 Gain on sale of: AFSfinancialassets(Note7) 225,542,472 56,684,763 Real estate for sale 4,647,144 3,011,250 Financial assets at FVPL 3,888,112 – Property and equipment (Note 12) 212,610 1,151,198 Long-term commercial paper – 100,000 Rental income (Note 11) 24,319,430 22,500,776 FairvaluegainsonfinancialassetsatFVPL(Note7) 13,495,788 – Foreign currency exchange gains 1,349,904 22,105,672 Others 18,645,728 16,120,053 P866,304,540 P703,558,284L
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Investment and other expense
This account consists of the following
2011 2012 (As restated) Foreign exchange losses P106,845,032 P240,709 Investment expense 17,655,667 7,681,692 Impairment loss on AFS (Note 7) 2,181,316 15,529,779 Interest expense on reinsurance funds held 1,541,166 7,518,460 FairvaluelossonfinancialassetsatFVPL(Note7) – 8,331,918 P128,223,181 P39,302,558
As of December 31, 2012 and 2011, the foreign exchange gain from non-deliverable foreign exchange forward contracts entered into by MICO to hedge its exposure on foreign currency risk amounted to P71.0 million and P50.04 million, respectively. In 2012 and 2011, the weighted average rate of exchange rate of these forward currency contracts are P43.69 and P43.65, respectively.
Theunrealizedforeignexchange lossasofDecember31,2012and2011amountedtoP130,129,788 and P37,929,364, respectively.
21. InsuranceContractBenefitsandClaimsPaid
Grossinsurancecontractbenefitsandclaimspaidconsistof:
2012 2011 Grossinsurancecontractbenefitsandclaimspaid: Direct insurance P1,473,112,487 P1,764,604,101 Assumed reinsurance 884,479,161 679,340,822 Totalgrossinsurancecontractbenefits and claims paid (see Note 14) P2,357,591,648 P2,443,944,923
Reinsurers’shareofgrossinsurancecontractbenefitsandclaimspaidconsistof:
2012 2011 Reinsurers’ share of insurance contractbenefits and claims paid: Direct insurance P536,425,276 P987,135,585 Assumed reinsurance 130,801,901 69,391,900 Total reinsurers’ share of gross insurance contractbenefitsandclaimspaid (see Note 14) P667,227,177 P1,056,527,485
Gross change in insurance contract liabilities consist of:
2011 2012 (As restated) Change in provision for claims reported: Direct insurance P1,056,058,090 (P347,790,043) Assumed reinsurance 140,775,016 (237,484,595) Change in provision for IBNR 124,052,815 (15,867,270) Total gross change in insurance contract liabilities (see Note 14) P1,320,885,921 (P601,141,908)
Reinsurers’ shares of gross change in insurance contract liabilities consist of:
2011 2012 (As restated) Reinsurers’ share of gross insurance contract liabilities: Direct insurance (P1,316,467,599) P682,056,240 Assumed reinsurance (92,234,527) 146,145,167 Change in provision for IBNR 87,770,401 – Total reinsurers’ share of gross change in insurance contract liabilities (see Note 14) (P1,320,931,725) P828,201,407
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22. general and Administrative Expenses
This account consists of:
2012 2011Salaries, wages and allowances (Note 28) P465,955,695 P433,158,748Provisions for impairment loss - net of reversals (Notes 6 and 7) 66,032,188 9,275,729Rent, light and water (Notes 23 and 28) 54,701,350 61,491,430Depreciationandamortization(Notes11,12and13) 54,135,980 48,438,026Professional fees 47,850,916 51,148,640Transportation and travel 47,648,412 43,196,735Advertising and promotions 33,162,652 36,294,722Postage, telephone and cable 30,274,557 30,430,741Printingandofficesupplies 25,782,855 22,193,954Entertainment, amusement and recreation 22,678,842 20,372,390Repairs and maintenance 14,958,236 14,810,616Taxes, licenses and fees 12,975,768 11,214,740Business development 7,318,315 7,561,675Membership and association dues 7,110,992 7,199,597Loss winding up of subsidiary 3,432,372 –Donations and contributions 1,211,653 10,265,209Insurance 572,119 1,154,715Management fees – 589,440Others 23,389,156 21,514,577 P919,192,058 P830,311,684
Winding up of a subsidiaryMalayan Insurance Company (U.K.) Limited (In liquidation) (“MICO-UK”), a wholly-owned subsidiary of MIIC, passed a special resolution on the general meeting on April 4, 2012 pursuant to which MICO-UK entered into a members’ voluntary winding up and joint liquidators were appointed on the same date for such purpose. Upon the appointment of the joint liquidators, the assetsandliabilitiesofMICO-UKweredeconsolidatedandalossonwindingupofthissubsidiarywasrecognizedinprofitorlossfor the year.
Analysis of assets and liabilities over which control was lost
Cash and cash equivalents P52,492,482 Other receivables 5,501 Accrued expenses (479,259) Net assets disposed of P52,018,724 Loss on winding up of a subsidiary
Estimated amount receivable from winding up of a subsidiary P51,184,711 Net assets disposed of (52,018,724) Cumulative exchange differences in respect of the netassetsofthesubsidiaryreclassifiedfrom equitytoprofitorlossonlossofcontrolofasubsidiary (2,598,359) Loss on winding up of a subsidiary (P3,432,372)
The estimated amount receivable from winding up of the subsidiary of P51,184,711 had not been received in cash at the end of the reporting period.
23. Leases
Operating leases - Group as lessorTheGroupenteredintovariousleaseagreementsforitsofficespaces.Theseleasesgenerallyhavetermsofoneyear,renewableevery year.
Operating leases - Group as lesseeTheGroupenteredintovariouspropertyleaseswithvariouslessorsforofficespaceofitsheadofficeandlocalandprovincialbranches. These leases generally have terms of one year, renewable every year.
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24. Income Tax
The provision for income tax consists of:
2012 2011 Final P26,219,039 P18,401,681 Current 6,892,805 8,686,059 Deferred (6,456,388) 10,752,048 P26,655,456 P37,839,788
The Group’s net deferred tax assets (liabilities) consist of:
2012 2011Deferred tax assets: Excess of provision for unearned premiums per books over tax basis P576,852,481 P477,841,581 Allowance for impairment losses 37,742,722 20,453,914 Deferred reinsurance commissions 33,987,216 31,840,859 Unamortizedpastservicecosts 17,356,369 22,631,117 Pension obligation 13,896,674 12,150,580 Unrealizedforeignexchangelosses 6,215,762 1,663,611 NOLCO 2,477,315 – Provision for IBNR losses – 24,863,657 Accrualforshort-termbenefits – 9,894,512 688,528,539 601,339,831Deferred tax liabilities: Deferred reinsurance premiums (477,979,289) (419,178,867) Deferred acquisition costs (101,352,269) (79,643,269) Pension assets (1,700,623) (2,109,761) Excess of provision for unearned premiums per books over tax basis (1,054,129) – Unrealizedforeignexchangegains (131,102) (553,195) (582,217,412) (501,485,092)Deferred tax liability through equity: NetunrealizedgainonAFSfinancialassets (60,859,769) (31,966,356) P45,451,358 P67,888,383
Thenetdeferredtaxassetsarepresentedintheconsolidatedstatementsoffinancialpositionasfollows:
2012 2011 Deferred tax assets P47,798,630 P70,024,767 Deferred tax liabilities (2,347,272) (2,136,384) P45,451,358 P67,888,383
AsofDecember31,2012and2011,theGroupdidnotrecognizethedeferredincometaxassetsonthefollowingdeductibletemporary differences, carryforward of unused tax credits from excess of MCIT over RCIT, and unused NOLCO:
2012 2011 NOLCO P746,045,371 P469,478,225 Accrued expenses 102,949,554 123,510,520 Provision for IBNR 83,492,905 – MCIT 26,847,123 26,657,568 Unamortizedpastservicecost 18,554,110 – Allowance for doubtful accounts 3,162,098 3,384,386 Impairment loss – 15,430,478
Therelatedtaxbenefitswillberecognizedonlyasreassessmentdemonstratesthattheyarerealizable.Realizationisentirelydependent upon future taxable income.
As of December 31, 2012, details of the NOLCO and MCIT, which is available for offset against future taxable income and future income tax liability, respectively, follows:
Tax EffectInception Year NOLCO of NOLCO MCIT Expiration Year2012 P401,227,248 P105,683,384 P6,892,805 20152011 287,869,128 86,360,739 8,457,482 20142010 66,773,180 20,031,955 11,496,836 2013
P755,869,556 P212,076,078 P26,847,123
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The following are the movements in NOLCO:
2012 2011 Balance at beginning of year P469,478,225 P932,381,823 Addition 401,227,248 287,869,128 Expiration (31,044,659) (750,772,726) Applied (83,791,258) – Balance at end of year P755,869,556 P469,478,225
The following are the movements in MCIT:
2012 2011 Balance at beginning of year P26,657,568 P20,798,178 Addition 6,892,805 8,457,482 Expiration (6,703,250) (2,598,092) Balance at end of year P26,847,123 P26,657,568
The reconciliation of provision for income tax computed at the statutory corporate income tax rate to provision for income tax shown in the consolidated statements of income follows:
2011 2012 (As restated) At statutory income tax rate P29,011,166 P85,716,276 Adjustments for: Changeinunrecognizeddeferredtaxassets 135,395,400 113,425,460 Nondeductible expenses 54,204,765 2,529,711 Dividend income (86,842,616) (102,373,396) Interestincomeexemptoralreadysubjectedtofinaltax (40,426,815) (46,391,963) Income of tax-exempt subsidiary (9,047,935) – GainonsaleofAFSfinancialassets (52,202,173) (15,066,300) Nontaxable income (3,436,336) – P26,655,456 P37,839,788
25. Reconciliation of Net Income under PFRS to Statutory Net Income
The reconciliation of net income under PFRS to statutory net income of the Group follows:
2011 2012 (As restated) Net income under PFRS P101,091,116 P247,881,131 Adjustments: Difference in change in provision for unearned premiums – net 130,521,167 (9,260,124) Netpensionbenefitexpense(income) 5,855,101 (2,670,998) Deferred reinsurance commission (6,803,399) (2,607,633) Deferred acquisition costs - net (58,405,414) 32,570,980 Net adjustments to interest income (2,771,605) (2,546,822) Others 17,272,691 1,481,175 Eliminated dividend income 92,375,902 110,940,000 Tax effect of adjustments (20,899,108) 3,995,179 P258,236,451 P379,782,888
26. Insurance and Financial Risk Management
Insurance RiskTheprincipalrisktheGroupfacesunderinsurancecontractsisthattheactualclaimsandbenefitpaymentsorthetimingthereof,differfromexpectations.Thisisinfluencedbythefrequencyofclaims,severityofclaims,actualbenefitspaidandsubsequentdevelopmentofclaims.Therefore,theobjectiveoftheGroupistoensurethatsufficientreservesareavailabletocovertheseliabilities.
Theaboveriskexposureismitigatedbydiversificationacrossalargeportfolioofinsurancecontractsandgeographicalareas.The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements.
The Group purchases reinsurance as part of its risks mitigation program. Reinsurance ceded is placed on both a proportional and non-proportional basis with retention limits varying by product line and territory. The majority of proportional reinsurance is quota-share reinsurance which is taken out to reduce the overall exposure of the Group to certain classes of business.
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Non-proportional reinsurance is primarily excess-of-loss reinsurance designed to mitigate the Group’s net exposure to catastrophe losses. Retention limits for the excess-of-loss reinsurance vary by product line and territory.
Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Group has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements.
TheGroup’splacementofreinsuranceisdiversifiedsuchthatitisneitherdependentonasinglereinsurernoraretheoperationsof the Group substantially dependent upon any single reinsurance contract.
The Group principally issues the following types of general insurance contracts: fire, motorcar, personal accident, marine, engineering,bondsandmiscellaneouscasualty.Themostsignificantrisksarisefromclimatechangesandnaturaldisasters.TheserisksdonotvarysignificantlyinrelationtothelocationoftheriskinsuredbytheGroup,typeofriskinsuredandbyindustry.
To further reduce the risk exposure, the Group requires strict claim review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims.
The Group further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Group.
The Group also has limited its exposure level by imposing maximum claim amounts on certain contracts as well as the use of reinsurance arrangements in order to limit exposure to catastrophic events. The purpose of these underwriting and reinsurance strategies is to limit exposure to catastrophes to a predetermined maximum amount based on the Group’s risk appetite as decided by management.
The tables below set out the concentration of the claims liabilities by type of contract (see Note 14).
2012 gross Reinsurers’ Share Net Fire P3,242,383,100 P2,297,057,355 P945,325,745 Marine cargo 669,507,137 524,627,317 144,879,820 Miscellaneous casualty 598,315,703 400,310,563 198,005,140 Motor 362,106,573 14,737,785 347,368,788 Engineering 360,629,034 276,080,927 84,548,107 Bonds 203,718,828 93,571,794 110,147,034 Others 59,794,479 – 59,794,479 P5,496,454,854 P3,606,385,741 P1,890,069,113
2011 (As restated) Gross Reinsurers’ Share Net Fire P2,618,601,730 P1,673,372,209 P945,229,521 Motor 411,028,052 14,007,531 397,020,521 Engineering 361,176,063 301,750,849 59,425,214 Miscellaneous casualty 249,998,346 66,280,552 183,717,794 Marine cargo 226,496,861 109,387,925 117,108,936 Bonds 114,095,499 85,191,534 28,903,965 Others 194,172,382 35,463,416 158,708,966 P4,175,568,933 P2,285,454,016 P1,890,114,917
The tables below set out the geographical concentration of the group’s claims liabilities based on the countries where the insurance business is written.
2012 gross Reinsurers’ Share Net Philippines P5,381,333,472 P3,606,385,741 1,774,947,731 greece 115,121,382 – 115,121,382 P5,496,454,854 P3,606,385,741 1,890,069,113
2011 (As restated) Gross Reinsurers’ Share Net Philippines P3,986,983,616 P2,276,966,104 P1,710,017,512 Greece 183,263,871 8,487,912 174,775,959 Netherlands 5,321,446 – 5,321,446 P4,175,568,933 P2,285,454,016 P1,890,114,917
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Key AssumptionsThe principal assumption underlying the liability estimates is the Group’s future claims development will follow a similar pattern to past claims development experience. This includes assumptions in respect of average claim costs, claims handling costs, claims inflationfactorsandclaimnumbersforeachaccidentyear.Additionalqualitativejudgmentsareusedtoassesstheextenttowhich past trends may not apply in the future, for example once-off occurrence, changes in market factors such as public attitude to claiming, economic conditions, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures. Judgment is further used to assess the extent to which external factors such as judicial decisions and government legislation affect the estimates.
Other key assumptions include variations in interest, delays in settlement and changes in foreign currency rates.
SensitivitiesThe insurance claims provision is sensitive to the above key assumptions. Because of delays that arise between occurrence of aclaimanditssubsequentnotificationandeventualsettlement,theoutstandingclaimprovisionsarenotknownwithcertaintyat the reporting dates.
The table below shows the impact of changes in certain important assumptions in general insurance business while other assumptionsremainunchanged.Thecorrelationofassumptionswillhaveasignificanteffectindeterminingtheclaimsbuttodemonstrate the impact due to changes in assumptions, assumptions had to be changed on individual basis.
2012 Impact on Impact on gross Insurance Net Insurance Impact on Contract Contract Income Before Liabilities Liabilities Income Tax Change in Increase Increase Increase Assumptions % (Decrease) (Decrease) (Decrease)Average claim costs +5% P141,435,584 P45,403,049 (P45,403,049)Average number of claims +5% 142,020,012 45,396,696 (45,396,696)
2011 Impact on Impact on gross Insurance Net Insurance Impact on Contract Contract Income Before Liabilities Liabilities Income Tax Change in Increase Increase Increase Assumptions % (Decrease) (Decrease) (Decrease)Average claim costs +5% P103,106,174 P63,121,828 (P63,121,828)Average number of claims +5% 199,402,037 101,644,553 (101,644,553)
Claims Development TableThefollowingtablesreflectthecumulativeincurredclaims,includingbothclaimsnotifiedandIBNRforeachsuccessiveaccidentyear at each reporting dates, together with cumulative payments to date.
The Group aims to maintain strong reserves in respect of its insurance business in order to protect against adverse future claims experience and developments. As claims develop and the ultimate cost of claims becomes more certain, adverse claims experiences are eliminated which results in the release of reserves from earlier accident years. In order to maintain strong reserves, the Group transfers much of this release to current accident year reserves when the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims.
TherisksvarysignificantlyinrelationtothelocationoftheriskinsuredbytheGroup,typeofrisksinsuredandinrespectofcommercial and business interruption insurance by industry.
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Gr
oss i
nsur
ance
con
tract
liabi
lities
in 2
012
20
05 a
ndAc
ciden
t yea
r pr
ior y
ear
2006
20
07
2008
20
09
2010
20
11
2012
To
tal
Accid
ent y
ear
P7,0
33,1
57,5
44
P4,8
50,9
17,5
03
P2,3
32,5
20
P3,4
54,8
04,0
95
P4,5
59,3
81,1
29
P2,4
81,3
32,4
74
P2,0
87,6
04,4
06
P3,4
99,3
53,7
05
P3,4
99,3
53,7
05On
e ye
ar la
ter
7,21
1,29
3,10
4 6,
805,
336,
003
2,70
2,86
8,68
5 3,
081,
954,
264
4,06
4,46
3,97
2 2,
385,
646,
855
2,38
6,44
1,29
7 –
2,38
6,44
1,29
7Tw
o ye
ars l
ater
7,
270,
837,
804
6,14
1,36
2,93
3 3,
309,
288,
417
3,04
5,80
7,22
9 4,
123,
594,
783
2,34
0,06
5,00
8 –
– 2,
340,
065,
008
Thre
e ye
ars l
ater
7,
280,
263,
333
6,21
1,82
2,14
9 3,
238,
220,
388
3,05
4,34
0,56
6 4,
003,
068,
008
– –
– 4,
003,
068,
008
Four
yea
rs la
ter
7,32
1,31
0,33
7 6,
109,
296,
498
3,21
8,22
5,23
5 3,
050,
278,
500
– –
– –
3,05
0,27
8,50
0Fiv
e ye
ars l
ater
7,
204,
204,
826
6,11
9,69
5,90
6 3,
236,
696,
940
– –
– –
– 3,
236,
696,
940
Six y
ears
late
r 7,
194,
462,
945
6,11
5,76
1,61
4 –
– –
– –
– 6,
115,
761,
614
Seve
n ye
ars l
ater
7,
165,
373,
183
– –
– –
– –
– 7,
165,
373,
183
Curre
nt e
stim
ate
of
cu
mula
tive
claim
s 7,
165,
373,
183
6,11
5,76
1,61
4 3,
236,
696,
940
3,05
0,27
8,50
0 4,
003,
068,
008
2,34
0,06
5,00
8 2,
386,
441,
297
3,49
9,35
3,70
5 31
,797
,038
,255
Cum
ulativ
e pa
ymen
ts to
dat
e 6,
759,
688,
115
5,93
8,21
5,79
1 3,
206,
921,
323
2,48
5,93
0,63
6 3,
229,
371,
157
2,23
4,36
2,00
3 1,
472,
339,
813
973,
754,
563
26,3
00,5
83,4
01Lia
bilit
y re
cogn
ized
P4
05,6
85,0
68
P177
,545
,823
P2
9,77
5,61
7 P5
64,3
47,8
64
P773
,696
,851
P1
05,7
03,0
05
P914
,101
,484
P2
,525
,599
,142
P5
,496
,454
,854
Ne
t ins
uran
ce c
ontra
ct lia
bilit
ies in
201
2
2005
and
Ac
ciden
t yea
r pr
ior y
ear
2006
20
07
2008
20
09
2010
20
11
2012
To
tal
Accid
ent y
ear
P3,0
85,6
14,4
72
P1,2
42,3
78,7
49
P1,4
31,2
58,0
14
P2,4
33,4
32,0
36
P1,2
34,5
22,3
97
P1,5
78,7
98,8
98
P1,5
76,3
54,1
41
P1,4
75,7
58,3
68
P1,4
75,7
58,3
68On
e ye
ar la
ter
3,22
6,42
7,20
9 1,
567,
045,
893
1,42
4,54
1,61
2 2,
405,
326,
598
1,27
2,44
9,44
1 1,
657,
670,
126
1,89
1,03
0,40
9 –
1,89
1,03
0,40
9Tw
o ye
ars l
ater
3,
254,
192,
237
1,61
6,86
4,78
0 1,
941,
147,
712
2,45
7,96
7,40
9 1,
336,
083,
747
1,64
5,25
0,40
8 –
– 1,
645,
250,
408
Thre
e ye
ars l
ater
3,
278,
762,
812
1,62
6,29
3,38
6 1,
902,
396,
647
2,42
3,57
0,89
4 1,
324,
354,
965
– –
– 1,
324,
354,
965
Four
yea
rs la
ter
3,27
1,63
0,63
7 1,
622,
788,
908
1,88
2,84
5,85
7 2,
424,
721,
915
– –
– –
2,42
4,72
1,91
5Fiv
e ye
ars l
ater
3,
042,
764,
568
1,63
6,82
0,60
7 1,
878,
433,
994
– –
– –
– 1,
878,
433,
994
Six y
ears
late
r 2,
754,
576,
468
1,63
5,76
8,39
3 –
– –
– –
– 1,
635,
768,
393
Seve
n ye
ars l
ater
2,
742,
399,
403
– –
– –
– –
2,
742,
399,
403
Curre
nt e
stim
ate
of
cu
mula
tive
claim
s 2,
742,
399,
403
1,63
5,76
8,39
3 1,
878,
433,
994
2,42
4,72
1,91
5 1,
324,
354,
965
1,64
5,25
0,40
8 1,
891,
030,
409
1,47
5,75
8,36
8 15
,017
,717
,855
Cum
ulativ
e pa
ymen
ts to
dat
e 2,
605,
150,
767
1,62
3,10
4,60
4 1,
861,
274,
799
2,29
1,80
7,67
6 1,
261,
462,
392
1,54
5,26
7,41
0 1,
190,
593,
747
748,
987,
347
13,1
27,6
48,7
42Ne
t liab
ility
reco
gnize
d
P137
,248
,636
P1
2,66
3,78
9 P1
7,15
9,19
5 P1
32,9
14,2
39
P62,
892,
573
P99,
982,
998
P700
,436
,662
P7
26,7
71,0
21
P1,8
90,0
69,1
13
20
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Financial RiskTheGroupisexposedtofinancialriskthroughitsfinancialassetsandfinancialliabilities.Inparticular,thekeyfinancialriskisthattheproceedsfromitsfinancialassetsarenotsufficienttofundtheobligationsarisingfromitsinsurancecontracts.Themostimportantcomponentsofthisfinancialriskarecreditrisk,liquidityriskandmarketrisk.
Credit RiskCredit risk is a risk due to uncertainty in a counterparty’s (also called an obligor) ability to meet its obligation.
Prior to extending credit, the Group manages its credit risk by assessing credit quality of its counterparty.
TheGrouphasacreditpolicygroupthatreviewsallinformationaboutthecounterpartywhichmayincludeitsstatementoffinancialposition, statements of income and other market information. The nature of the obligation is likewise considered. Based on this analysis, the credit analyst assigns the counterparty a credit rating to determine whether or not credit may be provided.
Creditrisklimitisalsousedtomanagecreditexposurewhichspecifiesexposurecreditlimitforeachintermediarydependingonthesizeofitsportfolioanditsabilitytomeetitsobligationbasedonpastexperience.
Thetablebelowshowsthemaximumexposuretocreditriskforthecomponentsoftheconsolidated statement of financialposition, net of impairment loss.
2011 2012 (As restated) AFSfinancialassets: Equity securities: Listed equity securities P7,338,071,445 P5,676,986,470 Unlisted equity securities 111,380,696 81,188,158 Debt securities: Private debt securities 2,403,211,698 2,279,014,290 Government debt securities: Local currency 874,413,212 561,760,112 Foreign currency 32,968,440 434,862,299 FVPLfinancialassets: Debt securities: Private debt securities 74,073,740 73,738,836 Funds 4,340,996 – Equity securities: Listed equity securities 139,126,455 148,876,055 Money market fund, unlisted – 1,946,408 Investment funds 4,340,996 – Loans and receivables: Cash and cash equivalents 1,468,171,762 1,895,625,753 Short-term investments 38,021,248 11,099,040 Insurance receivables: Due from policyholders, agents and brokers 2,109,410,108 1,572,606,331 Due from ceding companies: Treaty 904,402,433 754,805,338 Facultative 37,569,513 166,892,418 Funds held by ceding companies 161,884,760 145,155,165 Premium and loss reserve 38,093,661 45,814,860 Reinsurance recoverable on paid losses: Facultative 85,035,443 99,307,410 Treaty 42,260,837 29,216,751 Loans and receivables: Long-term commercial papers 746,635,665 344,835,665 Notes receivable 402,187,190 8,104,133 Creditable withholding tax 62,677,478 62,677,478 Due from related party 51,184,711 1,888,360 Claims recoverable 11,770,886 – Accounts receivable 1,509,319 3,458,829 Cash advances 859,934 1,198,492 Security fund 342,294 342,294 Long-term investments – 10,026,513 Accrued income: Accrued interest income: AFSfinancialassets 38,935,897 36,973,508 Long-term commercial papers 6,052,261 2,549,440 Financial assets at FVPL 1,140,698 2,507,002 Cash and cash equivalents 835,927 335,054 Notes receivable 588,611 – Funds held by ceding companies 178,549 169,429 Security fund 123,936 108,424 Short-term investments 11,739 80,545 Long-term investments – 361,180 Accrued rent income 4,298,968 3,291,580 Accrued dividend income 3,347,531 – P17,292,242,127 P14,487,822,992L
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ThefollowingtablesprovideinformationregardingthecreditriskexposureoftheGroupbyclassifyingthefinancialassetsaccording to the Group’s credit ratings of the counter parties.
2012 Neither past due nor impaired Past due but Individually High Grade Medium Grade not impaired Impaired TotalAFSfinancialassets: Equity securities: Listed equity securities P7,320,135,700 P– P– P31,472,107 P7,351,607,807 Unlisted equity securities – 111,380,696 – – 111,380,696Debt securities: Private debt securities 452,001,835 1,951,209,863 – – 2,403,211,698 Government debt securities: Local currency 874,413,212 – – – 874,413,212 Foreign currency 32,968,440 – – – 32,968,440Funds 97,124,086 – – – 97,124,086FVPLfinancialassets: Debt securities: Private debt securities 74,073,740 – – – 74,073,740Equity securities: Listed equity securities 139,126,455 – – – 139,126,455Investment Funds 4,340,996 – – – 4,340,996Loans and receivables: Cash and cash equivalents 1,453,117,303 15,054,459 – – 1,468,171,762Short-term investments 38,021,248 – – – 38,021,248Insurance receivables: Due from policyholders, agents, and brokers 1,364,503,085 515,009,870 323,516,454 7,885,979 2,210,915,388 Due from ceding companies: Facultative 27,129,947 10,258,223 181,343 17,547,961 55,117,474 Treaty 289,272,266 556,747,592 58,382,575 496,316 904,898,749 Funds held by ceding companies 98,402,874 1,634,984 61,846,902 1,380,777 163,265,537 Premium and loss reserve 1,219,185 36,874,476 – – 38,093,661 Reinsurance recoverable on paid losses: Facultative 30,420,140 15,186,976 39,428,327 4,337,913 89,373,356 Treaty 1,012,088 – 41,248,749 – 42,260,837Accrued income: Accrued interest: AFSfinancialassets 22,579,805 16,356,092 – – 38,935,897 Long-term commercial papers 6,052,261 – – – 6,052,261 Financial assets at FVPL 1,140,698 – – – 1,140,698 Cash and cash equivalents 835,927 – – – 835,927 Notes receivable 588,611 – – – 588,611 Funds held by ceding companies 29,420 23,547 125,582 – 178,549 Security fund 123,936 – – – 123,936 Short-term investments 11,739 – – – 11,739 Accrued rent income 4,298,968 – – – 4,298,968 Accrued dividend income 3,347,531 – – – 3,347,531Loans and receivables: Long-term commercial papers 746,635,665 – – – 746,635,665 Notes receivable 401,683,544 503,646 – 1,697,251 403,884,441 Creditable withholding tax 62,677,478 – – – 62,677,478 Due from related party 51,184,711 – – – 51,184,711 Claims recoverable 11,770,886 – – – 11,770,886 Accounts receivable 1,438,172 71,147 – 2,005,675 3,514,994 Cash advances 859,934 – – – 859,934 Security fund 342,294 – – – 342,294 P13,612,884,180 P3,230,311,571 P524,729,932 P66,823,979 P17,434,749,662
2011 (As restated) Neither past due nor impaired Past due but Individually High Grade Medium Grade not impaired Impaired TotalAFSfinancialassets: Equity securities: Listed equity securities P5,676,986,470 P– P– P34,788,415 P5,711,774,885 Unlisted equity securities – 81,188,158 – – 81,188,158Debt securities: Private debt securities 1,296,561,266 982,453,024 – – 2,279,014,290 Government debt securities Local currency 561,760,112 – – – 561,760,112 Foreign currency 434,862,299 – – – 434,862,299 Funds 30,019,372 30,019,372Financial assets at FVPL Debt securities: Private debt securities 73,738,836 – – – 73,738,836Equity securities: Listed equity securities 148,876,055 – – – 148,876,055Money market fund, unlisted – 1,946,408 – – 1,946,408Loans and receivables: Cash and cash equivalents 1,894,779,877 845,876 – – 1,895,625,753Short-term investments 11,099,040 – – – 11,099,040
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2011 (As restated) Neither past due nor impaired Past due but Individually High Grade Medium Grade not impaired Impaired Total Insurance receivables: Due from policyholders, agents, and brokers P731,743,924 P462,080,812 P405,934,959 P16,944,841 P1,616,704,536 Due from ceding companies: Facultative 19,734,830 121,191,205 25,966,383 17,547,961 184,440,379 Treaty 617,212,637 17,033,260 120,559,441 496,316 755,301,654 Funds held by ceding companies 60,749,734 11,432,770 72,972,661 1,380,777 146,535,942 Premium and loss reserve 45,814,860 – – – 45,814,860 Reinsurance recoverable on paid losses: Facultative – 4,086,187 95,221,223 4,337,913 103,645,323 Treaty 7,825,486 – 21,391,265 – 29,216,751Accrued income: Accrued interest: AFSfinancialassets 22,184,213 14,789,295 – – 36,973,508 Long-term commercial papers 2,363,075 186,365 – – 2,549,440 Financial assets at FVPL 2,507,002 – – – 2,507,002 Long-term investments 361,180 – – – 361,180 Cash and cash equivalents 335,054 – – – 335,054 Funds held by ceding companies 169,429 – – – 169,429 Security fund 108,414 10 – – 108,424 Short-term investments 80,545 – – – 80,545 Accrued rent income 3,291,580 – – – 3,291,580Loans and receivables: Long-term commercial papers 344,835,665 – – – 344,835,665 Creditable withholding tax 62,677,478 – – – 62,677,478 Accounts receivable 3,400,282 58,547 – 2,005,675 5,464,504 Long-term investments 10,026,513 – – – 10,026,513 Notes receivable 8,104,133 – – 1,697,251 9,801,384 Due from related party 1,888,360 – – – 1,888,360 Cash advances 1,198,492 – – – 1,198,492 Security fund 342,294 – – – 342,294 P12,075,638,507 P1,697,291,917 P742,045,932 P79,199,149 P14,594,175,505
The credit rating is based on the following:
a) Cash and cash equivalents, short-term investments and related accrued income High grade pertains to those deposited, placed or invested in foreign and local banks belonging to the top banks in the
Philippinesintermsofresourcesandprofitability,whilemediumgradepertainstothosedeposited,placedorinvestedinthrift banks and rural banks in the Philippines.
b) Insurance receivables, loans and receivables, accrued rent income and dividend income For insurance receivables and loans and receivables except Due from ceding companies, Funds held by ceding companies, and Long-term commercial papers, the Group uses a credit rating concept based on the borrowers and counterparties’ overall creditworthiness. High grade is given to borrowers and counterparties who possess strong to very strong capacity to meet its obligations. Medium grade is given to borrowers and counterparties who possess above average capacity to meet its obligations. These counterparties are somewhat susceptible to adverse changes in business and economic conditions.
For Due from ceding companies and Funds held by ceding companies from local sources, the Group uses a credit rating concept based on the debt-to-equity ratios of the borrowers and counterparties. High grade is given to borrowers and counterparties with debt-to-equity ratio of less than or equal to 2:1, while medium grade is given to borrowers and counterparties with debt-to-equity ratio of more than 2:1.
For Due from ceding companies and Funds held by ceding companies from foreign sources, the Group uses Standard & Poor’s (S&P) and A.M. Best’s credit rating of insurance companies. High grade pertains to insurance companies rated by S&PandA.M.BestashigherthanBB+,whichmeansthatthe insurancecompanyhasgoodtostrongfinancialsecuritycharacteristics, but may be affected by adverse business conditions. Medium grade pertains to insurance companies that are ungraded and rated by S&P and A.M. Best as lower than BB+, which means that the insurance company has marginal financialsecuritycharacteristics.Positiveattributesexist,butadversebusinessconditionscouldleadtoinsufficientabilitytomeetfinancialcommitments.
c) Equity securities Listedequitysecuritiesareclassifiedashighgrade.Unlistedequitysecuritiesareclassifiedasmediumgrade.
d) Debt securities, long-term commercial papers, and related accrued income These are based on the credit ratings by the international rating agency, Standard & Poors (S&P), and by Philippine Ratings
Services Corporation (Philratings), the only domestic credit rating services in the Philippines accredited by Bangko Sentral ng Pilipinas (BSP) and SEC, in cases where an S&P rating is not available. High grade pertains to investments rated by S&P as BBB- and higher, which means that the counterparties have extremely strong to adequate capacity of paying interest and repaying principal, as well as Investments in Securities issued by the Philippine Government. Medium grade pertains to investments rated as Baa and higher by Philratings, as well as investments rated by S&P as BB+ to B- (except Philippine Government Securities). The Group’s holdings under this category are rated either BB- by S&P (due to sovereign credit ratingceiling)orAaabyPhilratingswhichisdefinedbyPhilratingstomeanthattheobligor’scapacitytomeetitsfinancialcommitment on the obligation is extremely strong.
e) Notes receivables Receivables from related entities are considered as high grade.
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Thefollowingshowstheaginganalysisoffinancialassets:
2012 Total past due
but not <30 days > 30 days impairedLoans and receivables: Due from policyholders, angets and brokers P3,827,274 P319,689,180 P323,516,454 Due from ceding companies: Facultative 175,024 6,319 181,343 Treaty 26,825,050 31,557,525 58,382,575 Funds held by ceding companies - treaty 1,164,467 60,682,435 61,846,902 Reinsurance recoverable on paid losses: Facultative 9,612,558 29,815,769 39,428,327 Treaty 380,907 40,867,842 41,248,749Accrued income: Funds held by ceding companies - treaty – 125,582 125,582 P41,985,280 P482,744,652 P524,729,932
2011 Total past due but not <30 days > 30 days impairedLoans and receivables: Due from policyholders, agents and brokers P310,664 P405,624,295 P405,934,959 Due from ceding companies: Facultative 1,789,783 24,176,600 25,966,383 Treaty 6,438,477 114,120,964 120,559,441 Funds held by ceding companies - treaty 2,661,324 70,311,337 72,972,661 Reinsurance recoverable on paid losses: Facultative 5,935,382 89,285,841 95,221,223 Treaty 1,230 21,390,035 21,391,265 P17,136,860 P724,909,072 P742,045,932
Liquidity RiskLiquidityorfundingriskistheriskthatanentitywillencounterdifficultyinraisingfundstomeetcommitmentsassociatedwithfinancialinstruments.Liquidityriskmayresultfromeithertheinabilitytosellfinancialassetsquicklyattheirfairvalues;orcounterpartyfailingonrepaymentofacontractualobligation;orinsuranceliabilityfallingdueforpaymentearlierthanexpected;orinabilitytogeneratecashinflowsasanticipated.
An institution may suffer from a liquidity problem when its credit rating falls. The Group is also exposed to liquidity risk if markets on which it depends on are subject to loss of liquidity. The major liquidity risk faced by the Group is the potential daily calls on its available cash resources in respect of claims from insurance contracts.
The Group manages liquidity through a management team which determines liquidity risk for the Group by identifying events that would trigger liquidity problems, providing contingency plans, identifying potential sources of funds and monitoring compliance of liquidity risk policy.
ThetablesbelowanalyzefinancialassetsandfinancialliabilitiesoftheGroupintotheirrelevantmaturitygroupsbasedontheremaining period at the reporting date to their contractual maturities or expected repayment dates.
2012 More than Up to a year* 1-3 years 3 years No term TotalCash and cash equivalents P1,469,356,945 P– P– P– P1,469,356,945Short-term investments 38,021,248 – – – 38,021,248Insurance receivables 3,503,925,002 – – – 3,503,925,002 AFSfinancialassets 54,354,167 348,039,361 2,908,199,822 7,546,576,227 10,857,169,577Financial assets at FVPL 8,231,674 21,885,028 43,957,038 143,467,451 217,541,191Loans and receivables 542,207,835 184,159,751 554,502,817 – 1,280,870,403Accrued income 55,514,117 – – – 55,514,117Reinsurance recoverable on unpaid losses 3,606,385,741 – – – 3,606,385,741Totalfinancialassets P9,277,996,729 P554,084,140 P3,506,659,677 P7,690,043,678 P21,028,784,224Insurance contract liabilities P5,496,454,854 P– P– P– P5,496,454,854Insurance payables 2,370,288,917 – – – 2,370,288,917Accounts payable, accrued expenses and other liabilities 754,590,791 – – – 754,590,791Totalfinancialliabilities P8,621,334,562 P– P– P– P8,621,334,562*Up to a year are all commitments which are either due within one year or are payable in demand
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2011 More than Up to a year* 1-3 years 3 years No term TotalCash and cash equivalents P1,896,811,975 P– P– P– P1,896,811,975Short-term investments 11,099,040 – – – 11,099,040Insurance receivables 2,881,659,445 – – – 2,881,659,445AFSfinancialassets 192,473,648 91,163,833 2,991,999,220 5,788,194,000 9,063,830,701Financial assets at FVPL 73,738,836 – – 150,822,463 224,561,299Loans and receivables 82,326,805 83,639,570 270,268,315 – 436,234,690Accrued income 46,376,162 – – – 46,376,162Reinsurance recoverable on unpaid losses 2,285,454,016 – – – 2,285,454,016Totalfinancialassets P7,469,939,927 P174,803,403 P3,262,267,535 P5,939,016,463 P16,846,027,328Insurance contract liabilities P4,175,568,933 P– P– P– P4,175,568,933Insurance payables 1,609,674,066 – – – 1,609,674,066Accounts payable, accrued expenses and other liabilities 723,393,963 – – – 723,393,963Totalfinancialliabilities P6,508,636,962 P– P– P– P6,508,636,962
*Up to a year are all commitments which are either due within one year or are payable in demand
In 2012 and 2011, certain insurance receivables, AFS securities and loans and receivables have been provided with allowance for impairment.
ThetablebelowanalyzesnonfinancialassetsandliabilitiesoftheGroupintoamountsexpectedtoberecoveredorsettledwithin12 months (current) and beyond 12 months (noncurrent).
2012 2011 Current Noncurrent Current NoncurrentDeferred acquisition costs P337,840,897 P– P273,845,906 P–Deferred reinsurance premiums 1,559,476,852 – 1,386,049,528 –Investment properties – 108,901,090 – 88,467,387Property and equipment – 230,419,496 – 244,857,940Pension assets – 601,160 – 7,032,535Deferred tax assets – 47,798,630 – 70,024,767Other assets 69,902,697 349,062,801 45,546,909 306,118,200Totalnonfinancialassets P1,967,220,446 P736,783,177 P1,705,442,343 P716,500,829Provision for unearned premiums P3,041,799,036 P– P2,677,505,855 P–Deferred reinsurance commissions 106,783,983 – 114,520,762 –Deferred tax liabilities – 2,347,272 – 2,136,384Pension liability – 41,254,664 – 40,501,933Income tax payable 133,579 – – –Other liabilities 347,763,477 – 288,455,786 –Totalnonfinancialliabilities P3,496,480,075 P43,601,936 P3,080,482,403 P42,638,317
It is unusual for the Group primarily transacting insurance business to predict the requirements of funding with absolute certainty as theory of probability is applied on insurance contracts to ascertain the likely provision and the time period when such liabilities will require settlement. The amounts and maturities in respect of insurance liabilities are thus based on management’s best estimate based on past experience.
Market RiskMarketriskistheriskofchangeinfairvalueoffinancialinstrumentsfromfluctuationsinforeignexchangerates(currencyrisk),marketinterestrates(interestraterisk)andmarketprices(pricerisk),whethersuchchangeinpriceiscausedbyfactorsspecificto the individual instrument or its issuer or factors affecting all instruments traded in the market.
Marketriskistherisktoaninstitution’sfinancialconditionfromvolatilityinthepricemovementsoftheassetscontainedina portfolio. Market risk represents what the Group would lose from price volatilities. Market risk can be measured as the potentialgainorlossinapositionorportfoliothatisassociatedwithapricemovementofagivenprobabilityoveraspecifiedtimehorizon.
The Group manages market risk by evenly distributing capital among investment instruments, sectors and geographical areas.
TheGroupstructureslevelsofmarketriskitacceptsthroughasoundmarketriskpolicybasedonspecificguidelinessetbyanInvestment Committee. This policy constitutes certain limits on exposure of investments mostly with top-rated banks, which are selectedonthebasisofthebank’screditratings,capitalizationandqualityservicingbeingrenderedtotheGroup.Also,thesaidpolicyincludesdiversificationbenchmarksofinvestmentportfoliotodifferentinvestmenttypesdulyapprovedbytheIC,assetallocation and portfolio limit structure.
Moreover, control of relevant market risks can be addressed through compliance reporting of market risk exposures, regular monitoring and review of the Group’s investment performance and upcoming investment opportunities for pertinence and changing environment.
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a) Currency Risk
The Group’s principal transactions are carried out in Philippine Peso and its exposure to foreign exchange risk arises primarily with respect to U.S. Dollar and Euro. In addition, the Parent Company enters into non-deliverable forward contracts to hedge its exposure on foreign currency exchange risks.
ThetablesbelowsummarizetheGroup’sexposuretoforeigncurrencyexchangeraterisksbycategorizingassetsandliabilities by major currencies.
2012 Philippine Peso U.S. Dollar Euro Others TotalAFSfinancialassets: Equity securities: Listed equity securities P7,167,925,607 P100,414,850 P14,337,028 P55,393,960 P7,338,071,445 Unlisted equity securities 111,380,696 – – – 111,380,696Private debt securities 97,996,543 2,190,926,667 107,244,315 7,044,173 2,403,211,698Government debt securities 874,413,212 32,968,440 – – 907,381,652Funds – 97,124,086 – – 97,124,086Financial assets at FVPL Debt securities: Private debt securities – 74,073,740 – – 74,073,740Equity securities: Listed equity securities – 139,126,455 – – 139,126,455Investment funds – 4,340,996 – – 4,340,996Loans and receivables: Cash and cash equivalents 926,327,507 422,807,427 40,253,340 79,968,671 1,469,356,945Short-term investments 11,540,714 26,480,534 – – 38,021,248Insurance receivables - net 2,802,965,144 519,353,242 9,799,376 46,538,993 3,378,656,755Loans and receivables 1,225,929,280 51,238,197 – – 1,277,167,477Accrued income 28,990,623 24,704,932 1,701,517 117,045 55,514,117Total assets P13,247,469,326 P3,683,559,566 P173,335,576 P189,062,842 P17,293,427,310Accounts payable, accrued expenses and other liabilities P751,695,124 P2,895,667 P– P– P754,590,791Insurance payables 1,737,457,012 572,305,189 38,644,157 21,882,559 2,370,288,917Total liabilities P2,489,152,136 P575,200,856 P38,644,157 P21,882,559 P3,124,879,708 2011 Philippine Peso U.S. Dollar Euro Others TotalAFSfinancial assets: Equity securities: Listed equity securities P5,464,619,530 P92,714,714 P78,635,812 P41,016,414 P5,676,986,470 Unlisted equity securities 81,188,158 – – – 81,188,158Private debt securities – 2,196,431,433 71,240,939 11,341,918 2,279,014,290Government debt securities 561,760,112 342,870,492 91,991,807 – 996,622,411Funds – 30,019,372 – – 30,019,372Financial assets at FVPL Debt securities: Private debt securities – 73,738,836 – – 73,738,836Equity securities: Listed equity securities – 148,876,055 – – 148,876,055Money market fund, unlisted – 1,946,408 – – 1,946,408Loans and receivables: Cash and cash equivalents 1,755,300,753 66,611,075 46,704,904 28,195,243 1,896,811,975Short-term investments 11,099,040 – – – 11,099,040Insurance receivables – net 2,129,263,488 612,132,423 2,700,007 69,702,355 2,813,798,273Loans and receivables 422,505,558 10,026,206 – – 432,531,764Accrued income 19,307,902 23,346,907 3,516,430 204,923 46,376,162Total assets P10,445,044,541 P3,598,713,921 P294,789,899 P150,460,853 P14,489,009,214 Accounts payable, accrued expenses and other liabilities P717,371,092 P6,022,871 P– P– P723,393,963Insurance payables 1,186,083,391 420,387,410 – 3,203,265 1,609,674,066Total liabilities P1,903,454,483 P426,410,281 P– P3,203,265 P2,333,068,029
The following table demonstrates the sensitivity to a reasonably possible change in the US Dollar, euro and other currency exchangerates,withallothervariablesheldconstant,oftheGroup’sprofitbeforetax(duetochangesintheforeignexchange rate).
Impact on income before tax Increase (Decrease) Currency Change in rate 2012 2011 US Dollar + 5% P119,065,826 P147,342,269 –5% (119,065,826) (147,342,269) Euro + 5% 6,759,993 16,652,314 – 5% (6,759,993) (16,652,314) Others + 5% 6,771,819 3,184,567 – 5% (6,771,819) (3,184,567)
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b) Interest Rate Risk
Interestrateriskistheriskthatthevalue/futurecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.TheGroup’sfixedrateinvestmentsinparticularareexposedtosuchrisk.
TheGroup’smarketriskpolicyrequiresittomanageinterestrateriskbymaintainingappropriatemixoffixedandvariablerateinstruments.Thepolicyalsorequiresittomanagethematuritiesofinterestbearingfinancialassets.
ThefollowingtablesetsouttheGroup’sfinancialassetsexposedtointerestrateriskbymaturity:
2012 More than Interest Rate Within one year 1-3 years 3 years Total Cash and cash equivalents 0.09% - 4.50% P1,468,171,762 P– P– P1,468,171,762 Short-term investments 1.00% - 4.25% 38,021,248 – – 38,021,248 Notes receivable 1.00% - 8.50% 391,857,538 3,561,604 8,465,299 403,884,441 Long-term commercial papers 5.25% - 9.33% 20,000,000 180,598,147 546,037,518 746,635,665 Security fund 4.76% 342,294 – – 342,294 Financial debt assets at FVPL 2.95% - 7.50% 8,231,674 21,885,028 43,957,038 74,073,740 AFSdebtfinancialassets 1.25% - 13.50% 54,354,167 348,039,361 2,908,199,822 3,310,593,350 Totalinterest-bearingfinancialassets P1,980,978,683 P554,084,140 P3,506,659,677 P6,041,722,500
2011 More than Interest Rate Within one year 1-3 years 3 years Total Cash and cash equivalents 0.25% - 4.50% P1,895,625,753 P– P– P1,895,625,753 Short-term investments 1.00% - 6.00% 11,099,040 – – 11,099,040 Notes receivable 8.00% 729,164 3,641,405 5,430,815 9,801,384 Long-term commercial papers 5.25% - 9.33% – 79,998,165 264,837,500 344,835,665 Long-term investments 2.00% 10,026,513 – – 10,026,513 Security fund 4.76% 342,294 – – 342,294 Financial debt assets at FVPL 2.95% - 7.50% 73,738,836 – – 73,738,836 AFSdebtfinancialassets 2.50%-12.38% 192,473,648 91,163,833 3,118,328,667 3,401,966,148 Totalinterest-bearingfinancialassets P2,184,035,248 P174,803,403 P3,388,596,982 P5,747,435,633
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on the AFS debt securities, with all other variables held constant, of the Group’s equity:
Impact on equity Increase (decrease) Change in basis Currency points 2012 2011 Philippine Peso + 100 (P55,752,252) (P19,501,830) U.S. Dollar + 100 (113,957,585) (135,307,088) Euro + 100 (1,828,116) (2,776,029) Philippine Peso – 100 P61,565,620 P28,250,970 U.S. Dollar – 100 122,832,381 141,661,019 Euro – 100 1,961,121 2,909,236
c) Equity Price Risk
TheGroup’spriceriskexposureatyear-endrelatestofinancialassetsandliabilitieswhosevalueswillfluctuateasaresultofchangesinmarketprices,principally,AFSequityfinancialassets.
Suchfinancialassetsaresubjecttopriceriskduetochangesinmarketvaluesofinstrumentsarisingeitherfromfactorsspecifictoindividualinstrumentsortheirissuersorfactorsaffectingallinstrumentstradedinthemarket.
The Group’s market risk policy requires it to manage such risks by setting and monitoring objectives and constraints on investments;diversificationplan;limitsoninvestmentineachcountry,sectorandmarket;andcarefulandplanneduseofderivative instruments. The price risk on investments securities is also actively managed through the use of derivative financialinstrumentstomitigatetheriskofadversemarketmovements.
The following table shows the equity impact of reasonably possible change of Philippine Stock Exchange index (PSEi), Morgan Stanley Capital International (MSCI) Euro, Dow Jones Euro Stoxx 50 (SX5E Index) and Hang Seng index (HIS Index):
Impact on equity Increase (decrease) Change in equity prices PSEi MSCI Euro SX5E Index HIS Index 2012 +15% P848,516,696 P– P13,817,379 P76,102,102 -15% (848,516,696) – (13,817,379) (76,102,102) 2011 +28% P1,304,966,708 P30,964,907 P– P– -28% (1,304,966,708) (30,964,907) – –L
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27. Financial Assets and Liabilities
ThetablebelowpresentsacomparisonbycategoryofcarryingamountsandestimatedfairvaluesofalltheGroup’sfinancialinstruments.
2012 2011 Carrying Value Fair Value Carrying Value Fair ValueAFSfinancialassets:
Listed equity securities: Common shares P7,277,090,290 P7,277,090,290 P5,650,964,630 P5,650,964,630 Preferred shares 60,981,155 60,981,155 26,021,840 26,021,840 Unlisted equity securities: Common shares 111,363,156 111,363,156 81,188,158 81,188,158 Preferred shares 17,540 17,540 – – Private debt securities 2,403,211,698 2,403,211,698 2,279,014,290 2,279,014,290 Government debt securities: Local currency 874,413,212 874,413,212 561,760,112 561,760,112 Foreign currency 32,968,440 32,968,440 434,862,299 434,862,299 Funds 97,124,086 97,124,086 30,019,372 30,019,372 Financial assets at FVPL: Debt securities: Private debt securities 74,073,740 74,073,740 73,738,836 73,738,836 Equity securities: Listed equity securities 139,126,455 139,126,455 148,876,055 148,876,055 Money market fund, unlisted – – 1,946,408 1,946,408 Investment funds 4,340,996 4,340,996 – – Loans and receivables: Cash and cash equivalents 1,469,356,945 1,469,356,945 1,896,811,975 1,896,811,975 Short-term cash investments 38,021,248 38,021,248 11,099,040 11,099,040 Insurance receivables: Due from policyholders, agents and brokers 2,109,410,108 2,109,410,108 1,572,606,331 1,572,606,331 Due from ceding companies: Facultative 37,569,513 37,569,513 166,892,418 166,892,418 Treaty 904,402,433 904,402,433 754,805,338 754,805,338 Premium and loss reserve 38,093,661 38,093,661 45,814,860 45,814,860 Reinsurance recoverable on paid losses: Facultative 85,035,443 85,035,443 99,307,410 99,307,410 Treaty 42,260,837 42,260,837 29,216,751 29,216,751 Funds held by ceding companies 161,884,760 161,884,760 145,155,165 145,155,165 Accrued income: AFSfinancialassets 38,935,897 38,935,897 36,973,508 36,973,508 Long-term commercial papers 6,052,261 6,052,261 2,549,440 2,549,440 Financial assets at FVPL 1,140,698 1,140,698 2,507,002 2,507,002 Cash and cash equivalents 835,927 835,927 335,054 335,054 Notes receivable 588,611 588,611 – – Funds held by ceding companies 178,549 178,549 169,429 169,429 Security fund 123,936 123,936 108,424 108,424 Short-term cash investments 11,739 11,739 80,545 80,545 Long-term investments – – 361,180 361,180 Accrued dividend income 3,347,531 3,347,531 – – Accrued rent income 4,298,968 4,298,968 3,291,580 3,291,580 Loans and receivables: Long-term commercial papers 746,635,665 901,025,312 344,835,665 401,017,218 Notes receivable 402,187,190 402,187,190 8,104,133 8,104,133 Creditable withholding tax 62,677,478 62,677,478 62,677,478 62,677,478 Due from related party 51,184,711 51,184,711 1,888,360 1,888,360 Account receivable 1,509,319 1,509,319 3,458,829 3,458,829 Claims receivable 11,770,886 11,770,886 – – Cash advances 859,934 859,934 1,198,492 1,198,492 Security fund 342,294 342,294 342,294 342,294 Long-term investments – – 10,026,513 10,026,513 Totalfinancialassets P17,293,427,310 P17,447,816,957 P14,489,009,214 P14,545,190,767 Otherfinancialliabilities Insurance payables Due to reinsurers and ceding companies P1,797,539,163 P1,797,539,163 P1,113,335,436 P1,113,335,436 Funds held for reinsurers 572,749,754 572,749,754 496,338,630 496,338,630 Accounts payable, accrued expenses and other liabilities: Accounts payable 359,988,106 359,988,106 343,367,016 343,367,016 Commissions payable 242,197,471 242,197,471 263,790,116 263,790,116 Accrued expenses 109,883,853 109,883,853 74,158,809 74,158,809 Surety deposits 34,290,301 34,290,301 31,841,060 31,841,060 Others 8,231,060 8,231,060 10,236,962 10,236,962 Totalfinancialliabilities P3,124,879,708 P3,124,879,708 P2,333,068,029 P2,333,068,029
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Fairvaluesoffinancialassetsareestimatedasfollows:
Cash and cash equivalents, short-term investments - the fair value approximates the carrying amounts at initial recognition due to their short term nature.
Debt securities - the fair values are based on quoted market prices.
Quotedequitysecurities - the fair values are generally based on quoted market prices.
Unquoted equity securities - these are carried at cost less allowance for impairment losses because fair value cannot be measured reliablyduetolackofreliableestimatesoffuturecashflowsanddiscountratesnecessarytocalculatethefairvalue.Thereisno active market for the equity securities. The entity intends to dispose the securities through selling to a willing buyer in arms length transactions.
Insurance receivables, accrued income, short-term loans and receivables (including notes receivable, long-term investments and security fund), insurance payables, accounts payable and accrued expenses - the fair values approximate the carrying amounts due to the short-term nature of the transactions.
Long-term commercial papers-fairvaluesarebasedonpresentvalueoffuturecashflowsdiscountedusingrisk-freeratesthatranged from 1.08% to 1.29% and 2.30% to 3.58% in 2012 and 2011, respectively.
Fair value hierarchyTheGroupusesthefollowinghierarchyfordetermininganddisclosingthefairvaluesoffinancialinstrumentsbyvaluationtechnique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilitiesLevel2: othertechniquesforwhichallinputswhichhaveasignificanteffectontherecordedfairvalueareobservable,either
directly or indirectlyLevel3: techniqueswhichuses inputswhichhaveasignificanteffectontherecordedfairvaluethatarenotbasedon
observable market data
AsofDecember31,2012and2011,theGroupclassifiesAFSfinancialassetsunderLevel1ofthefairvaluehierarchy.Duringthe reporting period ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
28. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significantinfluenceovertheotherpartyinmakingfinancialandoperatingdecisions.Partiesarealsoconsideredtoberelatediftheyaresubjecttocommoncontrolorcommonsignificantinfluence.
Outstanding balances as of year-end are unsecured and to be settled in cash. There have been no guarantees provided or re-ceived for any related party receivables or payables. In 2012 and 2011, the Group has not recorded any impairment of receiv-ablesrelatingtoamountsowedbyrelatedparties.Thisassessmentisundertakeneachfinancialyearbyexaminingthefinancialposition of the related party and the market in which the related party operates.
Significanttransactionswithrelatedpartiesinclude:
2012 2011 Outstanding Outstanding Amount / Receivable Amount / Receivable Category Volume (Payable) Volume (Payable) Terms Conditions Other related parties a. Y Realty Corporation Non-interest bearing;on Unsecured;no Rent expense P12,070,388 P– P11,160,000 P– demand impairment
b. RCBC Bankard Non-interest bearing;on Unsecured;no Shared expenses 20,193,497 2,069,314 1.29 million 1,357,334 demand impairment
c. HI Interest at 5% p.a.duewithin Unsecured;no Notes receivable 200,000,000 200,000,000 – – one year impairment Interestat Unsecured;no Interest income 7,944,444 437,500 – – 5% p.a. impairment Investment in AFS Unsecured;no Equity securities 171,341 126,614,945 165,521 60,992,5733 – impairment Unsecured;no Dividend income 923,622 – 892,249 – – impairment
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2012 2011 Outstanding Outstanding Amount / Receivable Amount / Receivable Category Volume (Payable) Volume (Payable) Terms Conditions
d. FMLC Due within oneyear; interest at 4.75%to Unsecured;no Notes receivable P190,000,000 P190,000,000 P– P– 6.00% p.a. impairment Interestat5% Unsecured;no Interest income 386,806 1,467 – – p.a. impairment e. grepalife Non-interest bearing;on Unsecured;no Shared expenses 34,019 34,016 315,856 114,108 demand impairment f. RCBC Interest rate at 0.25%to Unsecured;no Cash in bank 14,599,749 112,639,115 11,398,001 202,772,711 4.50% p.a impairment 2 to 35-day term, Interest at0.50%- Unsecured;no Short-term deposits 6,692,806,142 789,592,122 6,213,376,880 1,056,232,219 4.50% p.a. impairment Investment in AFS Maturing in 2016 and2017; Interest rate at5.25% Unsecured;no Debt securities 153,216,300 496,323,071 35,190,068 352,894,018 to 9.88% impairment Unsecured;no Stocks 37,945,758 3,116,955,014 36,273,493 1,570,258,123 – impairment Maturing in 2019 and 2027;Interest Long-term rateat5.25% Unsecured;no commercial papers 120,000,000 165,000,000 25,000,000 37,000,000 to 7.00% impairment Interest and dividend income Interest at 0.25%-4.25% Unsecured;no Cash in bank 3,129,066 – 3,867,350 – p.a. impairment 2 to 35-day term, Interest at0.50%- Unsecured;no Short-term deposits 27,120,415 935,603 20,843,929 279,457 4.50% p.a. impairment Investment in AFS Interest at 4.77%-9.88% Unsecured;no Debt securities 30,816,853 8,979,206 28,976,664 6,090,484 p.a. impairment Unsecured; Stocks 39,943,507 – 34,377,338 – – impaired Interest at Long-term 5.25%-7.00% Unsecured;no commercial papers 4,299,947 1,230,223 870,625 71,867 p.a. impairment Interest at 0.75% to Long-term investments – – 70,127 – 3.50% p.a Unsecured Non-interest bearing, on Referral fee 4,576,343 (681,492) 1,872,599 (340,521) demand Unsecured
g. Ipeople Investment in AFS Unsecured;no Stocks 880,200 84,732,250 17,940 12,223,640 – impairment Unsecured;no Dividend income 810,030 162,006 621,023 – – impairment
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2012 2011 Outstanding Outstanding Amount / Receivable Amount / Receivable Category Volume (Payable) Volume (Payable) Terms Conditions h. PIAA Non-interest bearing;on Unsecured;no Rent income P1,598,914 P409,478 P2,230,348 P129,993 demand impairment
i. Lex Services, Inc. 32days; Note payable 1,500,000 – – – Interest at 6% Unsecured Interest expense 8,500 – – – Interest at 6% Unsecured j. go! Travel Insurance Agency Non-interest bearing;on Referral fee 2,981,361 (267,556) 6,078,866 (229,136) demand Unsecured
The outstanding receivables and payables are to be settled in cash.
MEI,RCBC,HI,FLMCandiPeoplearesubsidiariesofPMMIC,theholdingcompanyoftheflagshipinstitutionsoftheYuchengcoGroup of Companies. Lex Services, Inc., Y Realty, Inc. and Go! Travel Insurance Agency are related to the Yuchengco Group of Companies.
Key management personnel of the Group include senior management. The summary of compensation of key management personnel is as follows:
2012 2011 Salaries and wages P61,723,144 P65,049,990 Short-termemployeebenefits 12,031,775 10,746,609 Post-employmentbenefits 80,833,124 78,628,977 P154,588,043 P154,425,576
29. Capital Management
Governance FrameworkTheprimaryobjectiveoftheGroup’sriskandfinancialmanagementframeworkistoprotecttheGroupfromeventsthathinderthe sustainable achievement of the Group’s performance objectives, including failure to exploit opportunities. The Group recognizestheimportanceofhavingefficientandeffectiveriskmanagementsystemsinplace.
Regulatory FrameworkRegulators are interested in protecting the rights of the policyholders and maintain close vigil to ensure that the Group is satisfactorilymanagingaffairsfortheirbenefit.Atthesametime,theregulatorsarealsointerestedinensuringthattheGroupmaintains appropriate solvency position to meet liabilities arising from claims and that the risk levels are at acceptable levels.
The operations of the Group are subject to the regulatory requirements of the IC. Such regulations not only prescribe approval andmonitoringofactivitiesbutalsoimposecertainrestrictiveprovisions(e.g.,marginofsolvencytominimizetheriskofdefaultandinsolvencyonthepartoftheinsurancecompaniestomeettheunforeseenliabilitiesasthesearise,fixedcapitalizationrequirements, risk-based capital requirements).
As mandated by the IC, most of the additional capital infusions are invested in government securities.
Capital Management FrameworkThe Group has established the following capital management objectives, policies and approach to managing the risks that affect its capital position.
The capital management objectives are:
a) tomaintaintherequiredlevelofstabilityoftheGrouptherebyprovidingadegreeofsecuritytopolicyholders;b) toallocatecapitalefficientlyandsupportthedevelopmentofbusinessbyensuringthatreturnsoncapitalemployedmeet
therequirementsofitscapitalprovidersandofitsshareholders;c) toretainfinancialflexibilitybymaintainingstrongliquidityandaccesstoarangeofcapitalmarkets;d) toaligntheprofileofassetsandliabilitiestakingaccountofrisksinherentinthebusiness;e) tomaintainfinancial strength to supportnewbusinessgrowthand to satisfy the requirementsof thepolicyholders,
regulatorsandstakeholders;andf) tomaintainstrongcreditratingsandhealthycapitalratiosinordertosupporttheGroup’sbusinessobjectivesandmaximize
shareholders’ value.
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The operations of the Group are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy)tominimizetheriskofdefaultandinsolvencyonthepartoftheinsurancecompaniestomeetunforeseenliabilitiesas these arise.
TheGrouphasmetalloftheserequirementsthroughoutthefinancialyear.
TheGroup’scapitalmanagementpolicyforitsinsuranceandnon-insurancebusinessistoholdsufficientcapitaltocoverthestatutory requirements based on the IC directives, including any additional amounts required by the regulator.
TheGroupseekstooptimizethestructureandsourcesofcapital toensurethat itconsistentlymaximizesreturnstotheshareholders and policyholders. The Group’s approach to managing capital involves managing assets, liabilities and risks in a coordinated way, assessing shortfalls between reported and required capital levels (by each regulated entity) on a regular basisandtakingappropriateactionstoinfluencethecapitalpositionoftheGroupinthelightofchangesineconomicconditionsand risk characteristics. An important aspect of the Group’s overall capital management process is the setting of target risk adjusted rates of return which are aligned to performance objectives and ensure that the Group is focused on the creation of value for shareholders.
TheGroupmaintainsacertainlevelofcapitaltoensuresufficientsolvencymarginsandtoadequatelyprotectthepolicyholders.The level of capital maintained is usually higher than the minimum capital requirements set by the regulators and the amount computed under the Risk-based Capital (RBC) Model. The Group fully complied with the externally imposed capital requirements duringthereportedfinancialperiods.
The ICcapital requirementsare themarginofsolvency(MOS),fixedcapitalization requirements,RBC requirements,andunimpaired capital requirement.
ThefollowingtablesshowMICO,BACandFNAC’sstatutorynetworth,MOS,fixedcapitalrequirementsandRBCratioasofDecember 31, 2012 and 2011.
MICO
2012 2011 Minimum Minimum Required Actual* Required Actual*Statutory net worth P500.00 million P6.68 billion P350,000,000 P744,633,367Paid-up capital 250.00 million 0.84 billion 175,000,000 250,000,000MOS 265.58 million 2.83 billion 1,262,250 175,870,402RBC hurdle rate 100% 244% 100% 456%
* The statutory net worth, MOS and RBC ratio for both years are based on amounts estimated by MICO.
BAC
2012 2011 Minimum Minimum required Actual* required Actual*Statutory net worth P500,000,000 P911,266,613 P350,000,000 P744,633,367Paid-up capital 250,000,000 250,000,000 175,000,000 250,000,000MOS 2,048,611 81,065,063 1,262,250 175,870,402RBC Hurdle rate 100% 426% 100% 456%
* The statutory net worth, MOS and RBC ratio for both years are based on amounts estimated by BAC.
FNAC
2012 2011 Minimum Minimum required Actual* required Actual*Statutory net worth P500,000,000 P766,210,853 P350,000,000 P608,881,965Paid up capital 250,000,000 250,000,000 175,000,000 175,000,000MOS 4,210,418 73,697,209 4,833,847 150,290,819RBC hurdle rate 250% 425% 250% 464%
* The statutory net worth, MOS and RBC ratio for both years are based on amounts estimated by FNAC.
No changes were made to its capital base, objectives, policies and processes from the previous year.
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Margin of Solvency (MOS)Under the Code, an insurance company doing business in the Philippines shall maintain at all times a MOS equal to P500,000 or 10% of the total amount of its net premiums written during the preceding year, whichever is higher. The MOS shall be the excessofthevalueofitsadmittedassets(asdefinedundertheCode),exclusiveofitspaid-upcapital,overtheamountofitsliabilities, unearned premiums and reinsurance reserves. Provision for unearned premiums as of December 31, 2012, determined in accordance with the Code for purposes of MOS, amounted to P1,105,876,726.Intheaccompanyingconsolidatedfinancialstatements, the net Provision for unearned premiums amounted to P1,445,031,566 computed as Provision for unearned premiums of P3,041,799,037 less deferred reinsurance premiums of P1,596,767,471 (see Note 14).
Theestimatedamountsoftheconsolidatednon-admittedassetsasofDecember31,2012and2011,asdefinedundertheCode,whichareincludedintheaccompanyingconsolidatedstatementoffinancialpositionfollow:
2012 2011 Deferred reinsurance premiums P1,689,483,863 P1,531,051,358 Insurance receivables 705,595,164 791,496,269 Deferred acquisition costs 338,537,721 273,845,906 Property and equipment - net 174,990,756 63,306,378 Loans and receivables 378,681,663 7,661,141 Net pension assets 601,160 7,032,535 Other assets 232,440,601 289,617,147 P3,520,330,928 P2,964,010,734
ThefinalamountoftheMOScanonlybedeterminedaftertheaccountsoftheGrouphavebeenexaminedbytheIC,particularlywith respect to the determination of admitted and nonadmitted assets.
FixedCapitalizationRequirementsDepartmentofFinanceOrder(DO)27-06providesforthecapitalizationrequirementsforlife,nonlifeandreinsurancecompanieson a staggered basis for the years ended December 31, 2006 up to 2011. Depending on the level of the foreign ownership in the insurance company, the minimum statutory net worth and minimum paid-up capital requirements vary. The statutory net worth shall include the Group’s paid-up capital, capital in excess of par value, contingency surplus, retained earnings and revaluation increments as may be approved by the IC. The minimum paid-up capital is pegged at 50% of the minimum statutory net worth.
Based on the scheduled increases under DO 27-06, the required statutory net worth and minimum paid-up capital for the Parent Company amounted to P500,000,000 and P250,000,000, respectively, as of December 31, 2012 and P350,000,000 and P175,000,000, respectively as of December 31, 2011.
On October 29, 2008, the IC issued Circular Letter No. 26-2008, which recalls that in view of the compliance of insurance companies with the requirement of IMC No. 10-2006, the scheduled increases due December 31, 2007 have been deferred for a year. Hence, the IMC reiterates that by December 31, 2008, insurance companies should comply with the increase previously scheduled for December 31, 2007. Based on this Circular Letter, the required statutory net worth and minimum paid up capital for the Group amounted to P500 million and P250 million, respectively, as of December 31, 2012 and P350.00 million and P175.00 million, respectively as of December 31, 2011.
On June 1, 2012, the Department of Finance issued DO No. 15-2012 which provides for minimum paid up capital requirements of all insurance and professional reinsurance companies to supplement the requirements of DO No. 27-06 after December 31, 2012. Under the said DO, the minimum paid up capital requirements for all existing insurance and professional reinsurers regardlessofitscitizenshipisgoingtobeonastaggeredbasisfortheyearsDecember31,2012upto2020.TheDOalsoallows all existing insurance and professional reinsurance companies a one-time one-year deferral in the compliance to minimum paid up capital requirements provided it has met the RBC hurdle rate based on the schedule set out in the said DO.
The table below shows the amount of minimum paid-up capital and the schedule of compliance per DO No. 15-2012:
Paid up capital Compliance date On or before December 31, 2012 (Pursuant to P250,000,000 DO 27-06 and IMC No. 10-2006) 400,000,000 On or before December 31, 2014 600,000,000 On or before December 31, 2016 800,000,000 On or before December 31, 2018 1,000,000,000 On or before December 31, 2020
On November 22, 2012, the IC issued an advisory to all insurance and reinsurance companies doing business in the Philippines regarding the implementation of DO No. 27-06. According to the advisory, the minimum paid-up capital for December 31, 2012 must at least be equal to the amount previously scheduled for December 31, 2011 per DO 27-06.
On December 11, 2012, DO No. 15-2012 was issued with a temporary restraining order. Accordingly, the minimum paid up capital requirement would be P250,000,000 by the end of 2012 as advised by the IC.
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OnFebruary5,2013,theSenateofthePhilippinesapprovedtheAmendedInsuranceCodewhichprovidesthenewcapitalizationrequirements of all existing insurance companies based on networth on a staggered basis starting June 30, 2013 up to December 31, 2022. The following presents the amount of required networth and the schedule of compliance per Amended Insurance Code:
Networth Compliance date P250,000,000 June 30, 2013 550,000,000 December 31, 2016 900,000,000 December 31, 2019 1,300,000,000 December 31, 2022
As of June 26, 2013, the Amended Insurance Code has not been signed by the President of the Philippines for it to become a law.
As of December 31, 2012, MICO, BAC and FNAC have complied with the minimum paid-up capital requirement while each entity’s statutory net worth based on its computation amounted to P6,679,310,153, P911,266,613 and P766,210,853, respectively.
Unimpaired capital requirementInsurance Memorandum Circular (IMC) 22-2008 provided that for purposes of determining compliance with the law, rules and regulationsrequiringthatthepaid-upcapitalshouldremainintactandunimpairedatalltimes,thestatementoffinancialpositionshould show that the net worth or equity is at least equal to the actual paid-up capital.
Risk-based Capital RequirementsIMC No. 7-2006 provides for the RBC framework for the nonlife insurance industry to establish the required amounts of capital to be maintained by the companies in relation to their investment and insurance risks. Every nonlife insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the trend test. Failure to meet the minimum RBC ratio shallsubjecttheinsurancecompanytothecorrespondingregulatoryinterventionwhichhasbeendefinedatvariouslevels.
The RBC ratio shall be calculated as Net worth divided by the RBC requirement. Net worth shall include the Group’s paid-up capitalcontributedandcontingencysurplusandunassignedsurplus.RevaluationandfluctuationreserveaccountsshallformpartofnetworthonlytotheextentauthorizedbytheIC.
The following table shows how the RBC ratio as of December 31, 2012 and 2011 was determined by MICO, BAC and FNAC:
MICO
2012 2011 Net worth P6,679,310,153 P5,460,287,581 RBC requirement 2,629,923,075 1,926,499,656 RBC ratio 254% 283%
BAC
2012 2011 Net worth P911,266,613 P744,633,367 RBC requirement 213,679,741 167,406,856 RBC ratio 426% 445%
FNAC
2012 2011 Net worth P766,210,853 P608,881,966 RBC requirement 180,270,978 131,118,785 RBC ratio 425% 464%
ThefinalRBCratiocanbedeterminedonlyaftertheaccountsoftheGrouphavebeenexaminedbytheIC.
IfaninsurancecompanyfailedtomeettheminimumrequiredMOS,fixedcapitalizationrequirementsandRBCrequirements,theICisauthorizedtosuspendorrevokeallcertificatesofauthoritygrantedtosuchcompanies,itsofficersandagents,andnonewbusiness shall be done by and for such company until its authority is restored by the IC.
Consolidated Compliance FrameworkTheICissuedIMC10-2006integratingthecompliancestandardsforthefixedcapitalizationandrisk-basedcapitalframework.UnderthisIMC,allinsurersmustpossessthecapitalizationrequiredfortheyear2006.Likewise,allinsurersshallannuallycomplywith the RBC ratio requirements.
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Subsequenttoyear2006,thefixedcapitalizationrequirementforagivenyearmaybesuspendedforinsurersthatcomplywiththe required RBC hurdle rate, provided that the industry complies with the required Industry RBC Ratio Compliance Rate. The IMC provides the annual schedule of progressive rates for the Industry RBC Ratio Compliance Rates and the RBC Hurdle Rate 250%. For the review year 2011 which shall be based on the 2010 synopsis, the Industry RBC Ratio Compliance Rate is 90% and the RBCHurdleRateis250%.Failuretoachieveoneoftherateswillresultintheimpositionofthefixedcapitalizationrequirementfor the year under review.
In cases where the Group will be required to comply with the higher capital requirements of the IC including the RBC ratio, the Group’sstockholdersarecommittedtoinfuseadditionalcontributiontocoverupanydeficiencyitmayhaveandmeetthecapitalrequirements as mandated by the IC.
MIIC
MIIC is required by the Hong Kong Insurance Companies Ordinance (“ICO”) to maintain a paid-up capital of not less than P52,961,068. MIIC is also required by the ICO to have assets value measured in accordance with the Insurance Companies (General Business) (Valuation) Regulation not less than the total of its liabilities plus the relevant amount applicable to MIIC, i.e. P52,961,068.
ASPAC
ASPAC’s ability to pay dividends and other distributions is subject to statutory restrictions. As a licensed reinsurer, ASPAC is required, under the terms of the Insurance Act of 2008 and the Insurance Regulation of 2009, to maintain a minimum MOS (the amount by which its allowable assets exceed its liabilities) of at least P4,105,000.
The total allowable assets required as of December 31, 2012 is determined as follows:
Total liabilities P38,966,918 Required minimum MOS 4,105,000 P43,071,918
As of December 31, 2012, based on allowable assets and limitations contained in the Insurance Regulations of 1995 (as amended), the Company has calculated its allowable assets as follows:
Cash P26,205,047 Financial assets 6,596,899 Reinsurance receivables 6,186,071 Reinsurance assets 5,810,340 P44,798,357
Failure to meet the MOS shall render the license liable for cancellation by the Governor of Financial Services Commission (FSC).
ThefinalamountoftheMOScanbedeterminedonlyaftertheaccountsoftheCompanyhavebeenexaminedbytheFSC,particularly with respect to the determination of total allowable assets.
30. Contingencies
The Group operates in the insurance industry and has various contingent liabilities arising in the ordinary conduct of business, which are either pending decision by the courts or being contested, the outcome of which are not presently determinable. In the opinion of management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will not have a material oradverseeffectontheGroup’sfinancialpositionandresultsofoperations.
31. Note to Consolidated Statements of Cash Flows
The Group’s noncash activities include:
a. Transfer of properties amounting to P31.51 million from investment properties to property and equipment in 2011.b. TransferofcreditablewithholdingtaxfiledwithBIRforrefundamountingtoP62.68 million from other assets to loans and
receivables in 2011.
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The management of MALAYAN INSURANCE CO., INC. and Subsidiaries is responsible for the preparation andfairpresentationoftheconsolidatedfinancialstatementsfortheyearsendedDecember31,2012and 2011, including the additional components attached therein, in accordance with Philippine Financial Reporting Standards. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
TheBoardofDirectorsreviewsandapprovedtheconsolidatedfinancialstatementsandsubmitsthesame to the stockholders.
SyCip, Gorres, Velayo & Co., the independent auditors, appointed by the stockholders has examined the consolidatedfinancialstatementsofthecompanyinaccordancewithPhilippineStandardonAuditing,and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such examination.
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESSTATEMENT OF MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
HELEN Y. DEEChairPErSON
YVONNE S. YUCHENGCOPrESiDENT
JOSEPHINE S. GATCHALIANChiEF FiNaNCiaL OFFiCEr
ALEGRIA R. CASTROCONTrOLLEr
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The Stockholders and the Board of DirectorsMalayan Insurance Co., Inc.4th Floor, Yuchengco Building484QuintinParedesStreetBinondo, Manila
WehaveauditedtheaccompanyingconsolidatedfinancialstatementsofMalayan InsuranceCo., Inc.andSubsidiaries,which comprise the consolidated statements of financial position as atDecember31, 2012 and2011, and theconsolidated statements of income, statements of comprehensive income, statements of changes in equity and statementsofcashflowsfortheyearsthenended,andasummaryofsignificantaccountingpoliciesandotherexplanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determinesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement, whether due to fraud or error.
Auditors’ Responsibility
Ourresponsibilityistoexpressanopinionontheseconsolidatedfinancialstatementsbasedonouraudits.Weconductedour audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirementsandplanandperformtheaudittoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidatedfinancial statements. Theproceduresselecteddependon theauditor’s judgment, including theassessmentoftherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation andfairpresentationoftheconsolidatedfinancialstatementsinordertodesignauditproceduresthatareappropriatein the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESINDEPENDENT AUDITORS’ REPORT
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of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financialstatements.
We believe thattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourauditopinion.
Opinion
Inouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofMalayanInsuranceCo.,Inc.andSubsidiariesasatDecember31,2012and2011,andtheirfinancialperformanceandtheircashflowsfortheyearsthenendedinaccordancewithPhilippineFinancialReportingStandards.
SYCIP GORRES VELAYO & CO.
Lucy L. ChanPartnerCPACertificateNo.88118SEC Accreditation No. 0114-AR-3 (Group A), February 4, 2013, valid until February 3, 2016TaxIdentificationNo.152-884-511BIR Accreditation No. 08-001998-46-2012, April 11, 2012, valid until April 10, 2015PTR No. 3669669, January 2, 2013, Makati City
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31 2012 2011ASSETS Cash and Cash Equivalents (Notes 4, 26, 27 and 28) P1,162,312,352 P1,613,304,553Short-term Investments (Notes 5, 26, 27 and 28) 11,245,787 11,099,040Insurance Receivables - net (Notes 6, 26 and 27) 3,331,706,554 2,791,353,731Financial Assets (Notes 7, 26, 27 and 28) Available-for-salefinancialassets 9,626,111,111 8,057,111,728 Loans and receivables - net 1,325,894,362 432,868,288Accrued Income (Notes 8, 26, 27 and 28) 49,254,629 43,321,543Deferred Acquisition Costs (Notes 9 and 29) 337,840,897 272,708,433Reinsurance Assets (Notes 10, 14, 26 and 29) 5,313,152,718 3,802,693,743Investment Properties - net (Note 11) 108,901,090 88,467,387Property and Equipment - net (Notes 12 and 29) 230,320,401 244,199,753Pension Assets (Note 17) 601,160 833,960Deferred Tax Assets (Note 24) 47,798,630 70,024,768Other Assets (Notes 13 and 29) 407,546,178 342,301,747 P21,952,685,869 P17,770,288,674
LIABILITIES AND EQUITY Liabilities Insurance contract liabilities (Notes 14 and 26) P8,538,253,890 P6,853,074,787Insurance payables (Notes 15, 26 and 27) 2,344,251,332 1,619,517,646Accounts payable, accrued expenses and other liabilities (Notes 16, 26 and 27) 1,098,753,277 998,837,110Income tax payable 133,579 –Deferred reinsurance commissions (Note 9) 113,290,719 113,367,069Deferred tax liability (Note 24) 348,224 276,811Pension liability (Note 17) 38,772,548 40,501,933 12,133,803,569 9,625,575,356Equity (Note 29) Equity attributable to equity holders of the Parent Company Capital stock -P100 par value Preferred shares Authorizedandunissued-5,000shares Common shares Authorized-10,000,000shares Issued and outstanding - 8,452,925 shares P845,292,500 P845,292,500 Capital in excess of par value 780,882,008 780,882,008 Contributed surplus 50,000 50,000 Contingency surplus 4,485,618 4,485,618 Revaluation reserve on available-for-sale financialassets(Note7) 4,512,298,509 2,841,321,940 Other revaluation reserve (Note 18) 23,466,647 23,466,647 Retained earnings (Note 18) 3,307,809,967 3,376,259,031 9,474,285,249 7,871,757,744Non-controlling interests 344,597,051 272,955,574 9,818,882,300 8,144,713,318 P21,952,685,869 P17,770,288,674 See accompanying Notes to Consolidated Financial Statements.
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MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 2011 2012 (As restated) INCOME Gross premiums earned P6,556,449,476 P6,101,524,783Reinsurers’ share of gross premiums earned 3,929,200,133 3,437,859,242Net premiums earned (Notes 14 and 19) 2,627,249,343 2,663,665,541 Investment and other income - net (Note 20) 771,790,682 678,413,444Commission income (Note 9) 252,596,677 265,491,425Other income 1,024,387,359 943,904,869
Total income 3,651,636,702 3,607,570,410 BENEFITS, CLAIMS AND EXPENSES Grossinsurancecontractbenefitsandclaimspaid (Notes 14 and 21) 2,355,173,735 2,535,943,920Reinsurers’shareofgrossinsurancecontractbenefits and claims paid (Notes 14 and 21) (714,096,112) (1,172,867,873)Gross change in insurance contract liabilities (Note 21) 1,320,885,920 (449,105,058)Reinsurers’ share of gross change in insurance contract liabilities (Note 21) (1,325,088,177) 682,749,749Netinsurancecontractbenefitsandclaims 1,636,875,366 1,596,720,738
Commission expense (Note 9) 855,841,928 845,472,913Other underwriting expenses (Note 9) 106,883,303 77,545,371General and administrative expenses (Note 22) 852,629,811 769,682,446Investment and other expense (Note 20) 126,682,015 23,568,038Interest expense on reinsurance funds held 1,941,695 8,474,522Other expenses 1,943,978,752 1,724,743,290
Totalbenefits,claimsandotherexpenses 3,580,854,118 3,321,464,028
INCOME BEFORE INCOME TAX 70,782,584 286,106,382
PROVISION FOR INCOME TAX (Note 24) 27,495,749 34,111,664
NET INCOME (Note 25) P43,286,835 P251,994,718
Attributable to: Equity holders of the Parent Company P31,550,936 P243,987,984 Non-controlling interests 11,735,899 8,006,734 P43,286,835 P251,994,718
See accompanying Notes to Consolidated Financial Statements.
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31 2012 2011 NET INCOME P43,286,835 P251,994,718 OTHER COMPREHENSIVE INCOME Netfairvaluechangesonavailable-for-salefinancial assets - net of tax effect (Note 7) 1,742,207,147 71,331,145
TOTAL COMPREHENSIVE INCOME P1,785,493,982 P323,325,863 Total comprehensive income attributable to: Equity holders of the Parent Company P1,702,527,505 P307,016,567 Non-controlling interests 82,966,477 16,309,296 P1,785,493,982 P323,325,863 See accompanying Notes to Consolidated Financial Statements.
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MAL
AYAN
INSU
RANC
E CO
., IN
C. A
ND S
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) To
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201
2
Balan
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P845
,292
,500
P7
80,8
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08
P50,
000
P4,4
85,6
18
P2,8
41,3
21,9
40
P23,
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647
P3,3
76,2
59,0
31
P7,8
71,7
57,7
44
P272
,955
,574
P8
,144
,713
,318
Net i
ncom
e
–
– –
– –
– 31
,550
,936
31
,550
,936
11
,735
,899
43
,286
,835
Othe
r com
preh
ensiv
e inc
ome
– –
– –
1,67
0,97
6,56
9 –
– 1,
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976,
569
71,2
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78
1,74
2,20
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7To
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e –
– –
– 1,
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976,
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– 31
,550
,936
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82,9
66,4
77
1,78
5,49
3,98
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sh d
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– –
– –
– –
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P3,3
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P9,4
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P344
,597
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,882
,300
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Balan
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,278
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,447
,455
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–
– –
– –
– 24
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7,98
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3,98
7,98
4 8,
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734
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– –
– –
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– –
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,618
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,757
,744
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.
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 2011 2012 (As restated)CASH FLOWS FROM OPERATINg ACTIVITIES Income before income tax P70,782,584 P286,106,382Adjustments for: Unrealizedforeigncurrencyexchangeloss-net(Note20) 141,216,391 3,701,383 Depreciationandamortization(Note22) 54,115,157 48,419,175 ImpairmentlossonAFSfinancialassets(Notes7and20) 2,181,316 15,529,779 Interest expense on reinsurance funds held 1,941,695 8,474,522 Dividend income (Note 20) (245,167,123) (286,305,928) Interest income (Note 20) (275,141,312) (255,270,201) Gain on sale of (Note 20): Available-for-salefinancialassets (203,308,800) (56,716,327) Real estate properties for sale (4,647,144) (3,011,250) Property and equipment (220,593) (1,151,198) Long-term commercial papers - (100,000)Operating loss before working capital changes (458,247,829) (240,323,663) Decrease (increase) in: Loans and receivables (11,252,280) 73,058,499 Insurance receivables (544,540,746) 221,253,007 Pension assets 232,800 3,156,274 Accrued rent income (1,007,388) 1,778,289 Deferred acquisition costs (65,132,464) 29,339,551 Reinsurance assets (1,510,458,975) 761,064,669 Other assets (64,024,410) (52,379,539) Increase (decrease) in: Insurance contract liabilities 1,694,487,067 (498,979,959) Insurance payables 724,733,686 (54,088,756) Deferred reinsurance commissions (76,350) 625,349 Pension liability 5,725,782 (5,827,272) Accounts payable, accrued expenses and other liabilities 92,461,000 60,991,915Net cash provided (used in) by operations (137,100,107) 299,668,364Income tax paid (32,876,529) (27,786,077)Interest paid on reinsurance funds held (1,941,695) (8,474,522)Net cash provided by (used in) operating activities (171,918,331) 263,407,765CASH FLOWS FROM INVESTINg ACTIVITIES Proceeds from sale or maturities of: Available-for-salefinancialassets(Note7) 1,628,216,911 800,899,461 Short-term investments 11,099,040 10,536,503 Investment properties (Note 11) - 160,000 Long-term commercial papers (Note 7) 25,200,000 9,789,700 Property and equipment (Note 12) 374,324 2,870,420 Long-term investments (Note 7) 10,026,206 33,170,106 Real estate properties for sale 6,772,144 6,246,061Dividends received 242,247,992 286,305,928Interest received 281,403,182 298,007,427
(Forward)
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Years Ended December 31 2011 2012 (As restated)Acquisitions of: Available-for-salefinancialassets(Note7) (P1,355,272,382) (P1,046,340,624) Short-term investments (11,245,787) (11,099,040) Long-term commercial papers (Note 7) (427,000,000) (82,799,930) Property and equipment (Note 12) (35,159,478) (49,596,026) Investment properties (Note 11) (20,541,294) (20,848,630) Computer software (Note 13) (5,535,791) (11,831,310) Real estate properties for sale (Note 13) (2,931,697) - Non-trade notes receivable (Note 7) (490,000,000) -Net cash provided by (used in) investing activities (142,346,630) 225,470,046
CASH FLOWS FROM FINANCINg ACTIVITY Dividends paid (Note 18) (111,325,000) (109,060,000)
EFFECT OF EXCHANgE RATE CHANgES ON CASH AND CASH EQUIVALENTS (25,402,240) 26,563,439
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (450,992,201) 406,381,250
CASH AND CASH EQUIVALENTS AT BEgINNINg OF YEAR (Note 4) 1,613,304,553 1,206,923,303
CASH AND CASH EQUIVALENTS AT END OF YEAR P1,162,312,352 P1,613,304,553
See accompanying Notes to Consolidated Financial Statements.
MALAYAN INSURANCE CO., INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Malayan Insurance Co., Inc. (the Parent Company) is a domestic corporation, which was registered with the Philippine Securities and Exchange Commission (SEC) on February 16, 1949. The Parent Company is engaged in the nonlife insurance business dealingwithall kindsof insurancesuchasfire,marine,bond,motorcar,personal accident,miscellaneouscasualty, andengineering, except life insurance.
On October 22, 2001, the SEC approved the Amended Articles of Incorporation extending the Parent Company’s existence to another 50 years from February 16, 1999.
TheconsolidatedfinancialstatementscomprisethefinancialstatementsoftheParentCompanyandthefollowingwhollyandmajority-owned subsidiaries:
Percentage Place of of Ownership Incorporation 2012 2011 Bankers Assurance Corporation (BAC) Philippines 100.0 100.0 The First Nationwide Assurance Corporation (FNAC) Philippines 54.7 54.7
TheParentCompany’sparentisMICOEquities,Inc.(MEI).TheregisteredofficeaddressoftheParentCompanyis4thFloor,YuchengcoBuilding,484QuintinParedesStreet,Binondo,Manila.TheParentCompany’sultimateparent isPanMalayanManagementandInvestmentCorporation(PMMIC)withregisteredofficeaddressat48thFloor,YuchengcoTower,RCBCPlaza,6819 Ayala Avenue, Makati City.
TheaccompanyingconsolidatedfinancialstatementsofMalayanInsuranceCo.,Inc.andSubsidiaries(theGroup)wereapprovedandauthorizedforissuebytheBoardofDirectors(BOD)onApril12,2013.
2. SummaryofSignificantAccountingPolicies
Basis of PreparationTheaccompanyingconsolidatedfinancialstatementsoftheGrouphavebeenpreparedonahistoricalcostbasis,exceptforavailable-for-sale (AFS)financial assetswhichhavebeenmeasuredat fair value. Theconsolidatedfinancial statementsaremeasured in Philippine Peso (P), which is also the Group’s functional and presentation currency. All values are rounded off to the nearest Philippine Peso values, unless otherwise indicated.
Statement of ComplianceTheaccompanyingconsolidatedfinancialstatementsoftheGrouphavebeenpreparedincompliancewithPhilippineFinancialReporting Standards (PFRS).
ReclassificationsCertainaccountsinthe2011consolidatedstatementofincomehavebeenreclassifiedtoconformtothecurrentyearpresentation.Thefollowingpresentsthenatureandamountoftheitemsreclassified:
a) ImpairmentlossonAFSfinancialassetsamountingtoP15,529,779 previously included in “Investment and other income” accounthasbeenreclassifiedto“Investmentandotherexpense”account;
b) Brokers’commissionincidentaltosaleofAFSfinancialassetsamountingtoP1,456,944 previously included in “Other investmentexpense”accounthasbeenoffsetagainstgainonsaleofAFSfinancialassetsincludedin“Investmentandotherincome”account;
c) Foreign exchange loss amounting to P240,709 previously presented in “Investment and other income” account are presentedaspartof“Investmentandotherexpense”account;and
d) Input VAT amounting to P241,457 previously presented under “Other assets” is netted against output VAT included in “Accounts payable, accrued expenses and other liabilities” account.
Thereclassificationshavenoimpactonthe2011consolidatednetincomeandJanuary1,2012and2011consolidatedassets,liabilitiesandequityaccounts,thus,nothirdconsolidatedstatementoffinancialpositionispresented.
Basis of ConsolidationTheconsolidatedfinancialstatementscomprisethefinancialstatementsoftheGroupasofandfortheyearsendedDecember31, 2012 and 2011.
Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue tobeconsolidateduntilthedatewhensuchcontrolceases.Thefinancialstatementsofthesubsidiariesarepreparedforthesame reporting period as the Parent Company, using consistent accounting policies. All intra-group balances, transactions, unrealizedgainsandlossesresultingfromintra-grouptransactionsanddividendsareeliminatedinfull.
Non-controlling interests (NCIs) pertains to the equity in a subsidiary not attributable, directly or indirectly to the Parent Company. Any equity instruments issued by a subsidiary that are not owned by the Parent Company are NCIs.L
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NCIsrepresenttheportionofprofitorlossandnetassetsinsubsidiariesnotwholly-ownedandarepresentedseparatelyintheconsolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equityandconsolidatedstatementsoffinancialposition,separatelyfromtheParentCompany’sequity.
LosseswithinasubsidiaryareattributedtotheNCIevenifthatresultsinadeficitbalance.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. Any difference between the amount by which the NCIs are adjusted and the fair value of the consideration paid or received is recognizeddirectlyinequityas“Equityreserve”andattributedtotheownersoftheParentCompany.
If the Parent Company loses control over a subsidiary it:
• Derecognizestheassets(includinggoodwill)andliabilitiesofthesubsidiary• Derecognizesthecarryingamountofanynon-controllinginterest• Derecognizesthecumulativetranslationdifferencesrecordedinequity• Recognizesthefairvalueoftheconsiderationreceived• Recognizesthefairvalueofanyinvestmentretained• Recognizesanysurplusordeficitinprofitorloss• Reclassifiestheparent’sshareofcomponentspreviouslyrecognizedinothercomprehensiveincometoprofitor lossor
retained earnings, as appropriate.
Changes in Accounting PoliciesTheaccountingpoliciesadoptedareconsistentwiththoseofthepreviousfinancialyearsexceptfortheadoptionofthefollowingamended PFRS which became effective beginning January 1, 2012. Except as otherwise stated, the adoption of these amended standardsdidnothaveanyimpactontheGroup’sfinancialstatements.
• PFRS7(Amendments),Financial Instruments: Disclosures - Transfers of Financial Assets The amendmentsrequireadditionaldisclosuresaboutfinancialassetsthathavebeentransferredbutnotderecognizedto
enhancetheunderstandingoftherelationshipbetweenthoseassetsthathavenotbeenderecognizedandtheirassociatedliabilities.Inaddition,theamendmentsrequiredisclosuresaboutcontinuinginvolvementinderecognizedassetstoenableusersoffinancialstatementstoevaluatethenatureof,andrisksassociatedwith,theentity’scontinuinginvolvementinthosederecognizedassets.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionor performance.
• PAS12(Amendments),Income Taxes - Deferred Tax: Recovery of Underlying Assets This amendmenttoPAS12clarifiesthedeterminationofdeferredtaxoninvestmentpropertymeasuredatfairvalue.The
amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a ‘sale’ basis. The presumption is rebutted if the investment property is depreciable anditisheldwithinabusinessmodelwhoseobjectiveistoconsumesubstantiallyalloftheeconomicbenefitsintheinvestment property over time (‘use’ basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset.
Future Changes in Accounting PoliciesThe Group will adopt the following new and amended standards and Philippine Interpretations of International Financial Reporting Interpretation Committee (IFRIC) interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significantimpactontheconsolidatedfinancialstatements.
Effective 2013
• PFRS7(Amendments),Financial instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities These amendments require an entity to disclose information about rights of set-off and related arrangements (such as
collateralagreements).ThenewdisclosuresarerequiredforallrecognizedfinancialinstrumentsthataresetoffinaccordancewithPAS32.Thesedisclosuresalsoapplytorecognizedfinancial instrumentsthataresubjecttoanenforceable master netting arrangement or ‘similar agreement’, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information.
Thisispresentedseparatelyforfinancialassetsandfinancialliabilitiesrecognizedattheendofthereportingperiod:
a) Thegrossamountsofthoserecognizedfinancialassetsandrecognizedfinancialliabilities;b) The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented
intheconsolidatedstatementoffinancialposition;c) Thenetamountspresentedintheconsolidatedstatementoffinancialposition;d) The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise
included in (b) above, including:i. AmountsrelatedtorecognizedfinancialinstrumentsthatdonotmeetsomeoralloftheoffsettingcriteriainPAS
32;andii. Amountsrelatedtofinancialcollateral(includingcashcollateral);and
e) The net amount after deducting the amounts in (d) from the amounts in (c) above.
The amendments to PFRS 7 are to be applied retrospectively and are effective for annual periods beginning on or after January 1,2013.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionorperformance.
• PFRS10,Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for
consolidatedfinancialstatements.ItalsoincludestheissuesraisedinSIC-12,Consolidation-SpecialPurposeEntities.PFRS10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS10willrequiremanagementtoexercisesignificantjudgmenttodeterminewhichentitiesarecontrolled,andtherefore,are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The standard becomes effective for annual periods beginning on or after January 1, 2013.
• PFRS11,Joint Arrangements PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled Entities - Non-monetary Contributions
by Venturers. PFRS 11 removes the option to account for jointly controlled ntities (JCEs) using proportionate consolidation. Instead,JCEsthatmeetthedefinitionofajointventuremustbeaccountedforusingtheequitymethod.Thestandardbecomes effective for annual periods beginning on or after January 1, 2013.
• PFRS12,Disclosure of Interests with Other Entities PFRS 12 includesallofthedisclosuresthatwerepreviouslyinPAS27relatedtoconsolidatedfinancialstatements,aswell
as all of the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The standard becomes effective for annual periods beginning on or after January 1, 2013.
• PFRS13,Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRS for all fair value measurements. PFRS 13 does not change when
an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The standard becomes effective for annual periods beginning on or after January 1, 2013.
TheGroupdoesnotanticipatethattheadoptionofthisstandardwillhaveasignificantimpactonitsfinancialpositionandperformance.
• PAS1(Amendment),Financial Statement Presentation, Presentation of Items of Other Comprehensive Income or OCI The amendments to PAS 1 changed the grouping of items presented in other comprehensive income. Items that could be
reclassified(or‘recycled’)toprofitorlossatafuturepointintime(forexample,uponderecognitionorsettlement)wouldbepresentedseparatelyfromitemsthatwillneverbereclassified.Theamendmentaffectspresentationonlyandwillhaveno impactontheGroup’sfinancialpositionorperformance. TheamendmentbecomeseffectiveforannualperiodsbeginningonorafterJuly1,2012.Theamendmentswillbeappliedretrospectivelyandwillresulttothemodificationofthe presentation of items of OCI.
• PAS19(Revised),EmployeeBenefits Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of
expectedreturnsonplanassetstosimpleclarificationsandrewording.Therevisedstandardalsorequiresnewdisclosuressuch as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liabilitymatchingstrategies,durationofthedefinedbenefitobligation,anddisaggregationofplanassetsbynatureandrisk.Theamendments become effective for annual periods beginning on or after January 1, 2013. Once effective, the Group has to apply the amendments retroactively to the earliest period presented.
TheGrouprevieweditsexistingemployeebenefitsanddeterminedthattheamendedstandardhassignificantimpactonitsaccountingforretirementbenefits.TheGroupobtainedtheservicesofanexternalactuarytocomputetheimpacttothefinancialstatementsuponadoptionofthestandard.Theeffectsaredetailedbelow:
Consolidated Statement of Financial Position
As at December As at January 31, 2012 1, 2012 Increase in deferred tax asset P31,476,665 P34,231,449 Increase (decrease) in: Pension obligation 104,922,217 114,104,827 Other comprehensive income (94,659,251) (97,912,417) Retained earnings 21,213,699 18,039,039 P31,476,665 P34,231,449
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Consolidated Statement of Income
For the year ended December 31,2012 Increase (decrease) in: Pension expense (P4,535,228) Income tax expense 1,360,568 Increaseinnetprofitfortheyear (P3,174,660) Attributable to: Equity holders of the Parent Company (P3,161,802) Non-controlling interests (12,858) (P3,174,660)
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2012 Increase in: Other comprehensive income P4,647,382 Tax effect (1,394,216) P3,253,166 Attributable to: Equity holders of the Parent Company P3,257,762 Non-controlling interests (4,596) P3,253,166
• PAS27,Separate Financial Statements (as revised in 2011) As a consequence of the new PFRS 10, Consolidated Financial Statements and PFRS 12, Disclosure of Interests in Other
Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financialstatements.TheamendmentbecomeseffectiveforannualperiodsbeginningonorafterJanuary1,2013.
• PAS28,Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new PFRS 11, Joint Arrangements and PFRS 12, PAS 28 has been renamed PAS 28, Investments
in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013.
• PhilippineInterpretationIFRIC20,Stripping Costs in the Production Phase of a Surface Mine This Philippine Interpretation applies to waste removal costs (“stripping costs”) that are incurred in surface mining activity
duringtheproductionphaseofthemine(“productionstrippingcosts”).Ifthebenefitfromthestrippingactivitywillberealizedinthecurrentperiod,anentityisrequiredtoaccountforthestrippingactivitycostsaspartofthecostofinventory.Whenthebenefitistheimprovedaccesstoore,theentityshouldrecognizethesecostsasanon-currentasset,only if certain criteria are met (“stripping activity asset”). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amountlessdepreciationoramortizationandlessimpairmentlosses,inthesamewayastheexistingassetofwhichitisa part. This Philippine Interpretation becomes effective for annual periods beginning on or after January 1, 2013. This Philippine Interpretation is not relevant to the Group.
Annual Improvements to PFRSs (2009-2011 cycle)
The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted.
• PFRS1, First-time Adoption of PFRS - Borrowing Costs Theamendmentclarifiesthat,uponadoptionofPFRS,anentitythatcapitalizedborrowingcosts inaccordancewith its
previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalizedinitsopeningstatementoffinancialpositionatthedateoftransition.SubsequenttotheadoptionofPFRS,borrowingcostsarerecognizedinaccordancewithPAS23,BorrowingCosts.TheamendmentdoesnotapplytotheGroupasitisnotafirst-timeadopterofPFRS.
• PAS1,PresentationofFinancialStatements-Clarificationoftherequirementsforcomparativeinformation The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are
mandatorydueto retrospectiveapplicationofanaccountingpolicy,or retrospective restatementor reclassificationofitemsintheconsolidatedfinancialstatements.Anentitymustincludecomparativeinformationintherelatednotestotheconsolidatedfinancialstatementswhenitvoluntarilyprovidescomparativeinformationbeyondtheminimumrequiredcomparativeperiod.Theadditionalcomparativeperioddoesnotneedtocontainacompletesetoffinancialstatements.On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accountingpolicy,orretrospectiverestatementorreclassificationofitemsintheconsolidatedfinancialstatements)arenotrequired.TheamendmentsaffectdisclosuresonlyandhavenoimpactontheGroup’sfinancialpositionorperformance.
• PAS16,Property,PlantandEquipment-Classificationofservicingequipment Theamendmentclarifiesthatspareparts,stand-byequipmentandservicingequipmentshouldberecognizedasproperty,
plantandequipmentwhentheymeetthedefinitionofproperty,plantandequipmentandshouldberecognizedasinventoryifotherwise.TheamendmentwillnothaveanysignificantimpactontheGroup’sfinancialpositionorperformance.
• PAS32,Financial Instruments: Presentation - Tax effect of distribution to holders of equity instruments Theamendmentclarifiesthatincometaxesrelatingtodistributionstoequityholdersandtottransactioncostsofanequity
transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not haveanyimpactonitsfinancialpositionorperformance.
• PAS34,InterimFinancialReporting-Interimfinancialreportingandsegmentinformationfortotalassetsandliabilities Theamendmentclarifiesthatthetotalassetsandliabilitiesforaparticularreportablesegmentneedtobedisclosedonly
when the amounts are regularly provided to the chief operating decision maker and there has been a material change from theamountdisclosedintheentity’spreviousannualfinancialstatementsforthatreportablesegment.TheamendmentaffectsdisclosuresonlyandhasnoimpactontheGroup’sfinancialpositionorperformance.
Effective 2014
• PAS32(Amendments),Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities The amendments to PAS 32 clarify the meaning of “currently has a legally enforceable right to set-off” and also clarify the
application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact ontheGroup’sfinancialpositionorperformance.Theseamendmentsaretoberetrospectivelyappliedforannualperiodsbeginning on or after January 1, 2014.
Effective 2015
• PFRS9,FinancialInstruments:ClassificationandMeasurement PFRS9,asissued,reflectsthefirstphaseonthereplacementofPAS39andappliestotheclassificationandmeasurement
offinancialassetsandliabilitiesasdefinedinPAS39,FinancialInstruments:RecognitionandMeasurement.Workonim-pairmentoffinancialinstrumentsandhedgeaccountingisstillongoing,withaviewtoreplacingPAS39initsentirety.PFRS9requiresallfinancialassetstobemeasuredatfairvalueatinitialrecognition.Adebtfinancialassetmay,ifthefairvalueoption(FVO)isnotinvoked,besubsequentlymeasuredatamortizedcostifitisheldwithinabusinessmodelthathastheobjectivetoholdtheassetstocollectthecontractualcashflowsanditscontractualtermsgiverise,onspecifieddates,tocashflowsthataresolelypaymentsofprincipalandinterestontheprincipaloutstanding.Allotherdebtinstrumentsaresubsequentlymeasuredatfairvaluethroughprofitorloss.AllequityfinancialassetsaremeasuredatfairvalueeitherthroughOCIorprofitorloss.Equityfinancialassetsheldfortradingmustbemeasuredatfairvaluethroughprofitorloss.For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presentedinOCI.Theremainderofthechangeinfairvalueispresentedinprofitorloss,unlesspresentationofthefairvaluechangeinrespectoftheliability’screditriskinOCIwouldcreateorenlargeanaccountingmismatchinprofitorloss.AllotherPAS39classificationandmeasurementrequirementsforfinancialliabilitieshavebeencarriedforwardintoPFRS9, including the embedded derivative separation rules and the criteria for using the FVO. PFRS 9 is effective for annual periods beginning on or after January 1, 2015. The Group conducted an impact evaluation of the early adoption of PFRS 9andbasedontheresultsofthisstudy,theGroupwillnotearlyadoptPFRS9.TheGroupdoesnotexpectasignificantimpactonitsfinancialstatementsbasedontheevaluationofexistingclassificationandmeasurementoffinancialassetsand liabilities.
Philippine Interpretation IFRIC 15, Agreements for the Construction of Real EstateThis Philippine Interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. This Philippine Interpretation requires that revenue on construction of real estateberecognizedonlyuponcompletion,exceptwhensuchcontractqualifiesasconstructioncontracttobeaccountedforunderPAS11,ConstructionContracts,orinvolvesrenderingofservicesinwhichcaserevenueisrecognizedbasedonstageofcompletion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the FinancialReportingStandardsCouncil(FRSC)havedeferredtheeffectivityofthisinterpretationuntilthefinalRevenuestandardisissuedbyInternationalAccountingStandardsBoard(IASB)andanevaluationoftherequirementsofthefinalRevenuestandardagainst the practices of the Philippine real estate industry is completed.
ProductClassificationInsurancecontractsarethosecontractswheretheGroup(the insurer)hasacceptedsignificant insurance risk fromanotherparty(thepolicyholders)byagreeingtocompensatethepolicyholdersifaspecifieduncertainfutureevent(theinsuredevent)adverselyaffectsthepolicyholders.Asageneralguideline,theGroupdetermineswhetherithassignificantinsurancerisk,bycomparingbenefitspaidwithbenefitspayableiftheinsuredeventdidnotoccur.Insurancecontractscanalsotransferfinancialrisk.
Onceacontracthasbeenclassifiedasaninsurancecontract,itremainsaninsurancecontractfortheremainderofitslifetime,eveniftheinsuranceriskreducessignificantlyduringthisperiod,unlessallrightsandobligationsareextinguishedorhaveexpired.
Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less from dates of placement and that are subject to an insignificantriskofchangesinvalue.L
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Short-term InvestmentsShort-term investments are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of more than three months but less than one year from dates of placement. These earn interests at the respective short-term investment rates.
Insurance ReceivablesPremiumreceivables(Duefrompolicyholders,agentsandbrokersandduefromcedingcompanies)arerecognizedonpolicyinception dates and measured on initial recognition at the fair value of the consideration receivable for the period of coverage. Subsequenttoinitialrecognition,insurancereceivablesaremeasuredatamortizedcost.Thecarryingvalueofinsurancereceivablesis reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with theimpairmentlossrecordedinprofitorloss.
Financial InstrumentsDate of recognitionFinancialinstrumentsarerecognizedintheconsolidatedstatementoffinancialpositionwhentheGroupbecomesapartytothecontractualprovisionsoftheinstrument.Purchasesorsalesoffinancialassetsthatrequiredeliveryofassetswithinthetimeframeestablishedbyregulationorconventioninthemarketplacearerecognizedonthetradedate.
InitialrecognitionoffinancialinstrumentsFinancialinstrumentsareinitiallyrecognizedatfairvalueoftheconsiderationgiven(incaseofanasset)orreceived(incaseofaliability).Exceptforfinancialinstrumentsatfairvaluethroughprofitorloss(FVPL),theinitialmeasurementoffinancialassetsincludestransactioncosts.TheGroupclassifiesitsfinancialassetsinthefollowingcategories:held-to-maturity(HTM)investments,AFSinvestments,FVPLinvestmentsandloansandreceivables.TheGroupclassifiesitsfinancialliabilitiesintofinancialliabilitiesatFVPLandotherfinancialliabilities. Theclassificationdependsonthepurposeforwhichtheinvestmentswereacquiredandwhethertheyarequotedinanactivemarket.Managementdeterminestheclassificationofitsinvestmentsatinitialrecognitionand,whereallowedandappropriate,re-evaluates such designation at every end of the reporting period.
AsofDecember31,2012and2011,theGroup’sfinancialinstrumentsareinthenatureofAFSfinancialassets,loansandreceivablesandotherfinancialliabilities.
Determination of fair valueThefairvalueforfinancial instrumentstraded inactivemarketsattheendofthereportingperiod isbasedontheirquotedmarket price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence ofthecurrentfairvalueaslongastherehasnotbeenasignificantchangeineconomiccircumstancessincethetimeofthetransaction.
Forallotherfinancial instrumentsnot listed inanactivemarket, thefairvalue isdeterminedbyusingappropriatevaluationtechniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models.
Day1profitWhere the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, theGrouprecognizesthedifferencebetweenthetransactionpriceandfairvalue(a‘Day1’profit) inprofitor lossunless itqualifiesforrecognitionassomeothertypeofasset.Incaseswhereanunobservabledataisused,thedifferencebetweenthetransactionpriceandmodelvalueisonlyrecognizedinprofitorlosswhentheinputsbecomeobservableorwhentheinstrumentisderecognized.Foreachtransaction,theGroupdeterminestheappropriatemethodofrecognizingthe‘Day1’profitamount.
Financial assets and liabilities at FVPLFinancialassetsandfinancialliabilitiesatFVPLincludefinancialassetsandliabilitiesheld-for-tradingandfinancialassetsandliabilities designated upon initial recognition as at FVPL.
Financialassetsandliabilitiesareclassifiedasheld-for-tradingiftheyareacquiredforpurposesofsellingandrepurchasinginthenearterm.Derivatives,includinganyseparatedembeddedderivatives,arealsoclassifiedasfinancialassetsorfinancialliabilitiesat FVPL, unless these are designated as hedging instruments in an effective hedge.
FinancialassetsandliabilitiesatFVPLarerecordedintheconsolidatedstatementoffinancialpositionatfairvalue.Subsequentchangesinfairvaluearerecognizedin”Investmentandotherincome”intheconsolidatedstatementofincome.Interestearnedor incurred is recorded as interest income or expense, respectively, while dividend income is recorded as other income when the right to receive the payment has been established.
Derivative instrumentsThe Group uses derivatives such as non-deliverable forward contracts as a means of reducing its foreign exchange exposure. Derivativeinstruments(includingbifurcatedembeddedderivatives)areinitiallyrecognizedatfairvalueonthedateonwhichthederivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gain or loss arising from changes in fair value of derivativesthatdonotqualifyforhedgeaccountingisrecognizedin”Investmentandother income”intheconsolidatedstatement of income.
Embedded derivativesAn embedded derivative is a component of a hybrid (combined) instrument that also includes non-derivative host contract with theeffectthatsomeofthecashflowsofthecombinedinstrumentvaryinawaysimilartostand-alonederivative.
Embedded derivatives are bifurcated from their host contracts, when the following conditions are met:
a) the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financialassetsandliabilitiesatFVPL;
b) whentheireconomicrisksandcharacteristicsarenotcloselyrelatedtothoseoftheirrespectivehostcontracts;and
c) aseparateinstrumentwiththesametermsastheembeddedderivativewouldmeetthedefinitionofaderivative.
TheGroupassesseswhetherembeddedderivativesarerequiredtobeseparatedfromthehostcontractwhenitfirstbecomespartytothecontract.Reassessmentonlyoccursifthereisachangeinthetermsofthecontractthatsignificantlymodifiesthecashflowsthatwouldotherwiseberequired.
AFSfinancialassetsAFSinvestmentsarethosewhicharedesignatedassuchordonotqualifytobeclassifiedasdesignatedatFVPL,HTMorloansandreceivables.Theyarepurchasedandheldindefinitely,andmaybesoldinresponsetoliquidityrequirementsorchangesinmarket conditions.
After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in earnings. Interest earned on holding AFS investments are reported as interest income using the effective interest rate. Dividends earned onholdingAFSinvestmentsarerecognizedinprofitorlosswhentherighttoreceivethepaymenthasbeenestablished.TheunrealizedgainsandlossesarisingfromthefairvaluationofAFSinvestmentsarereportedas‘Revaluationreserveonavailable-for-salefinancialassets’inothercomprehensiveincome.Thelossesarisingfromimpairmentofsuchinvestmentsarerecognizedinprofitorloss.Whenthesecurityisdisposedof,thecumulativegainorlosspreviouslyrecognizedinothercomprehensiveincomeisrecognizedasrealizedgainsorlossesinprofitorloss.WhentheGroupholdsmorethanoneinvestmentinthesamesecurity, the cost is determined using the weighted average method.
WhenthefairvalueofAFSinvestmentscannotbemeasuredreliablybecauseoflackofreliableestimatesoffuturecashflowsanddiscount rates necessary to calculate the fair value of unquoted equity instruments, these investments are carried at cost.
Loans and receivablesLoansandreceivablesarefinancialassetswithfixedordeterminablepaymentsandfixedmaturitiesthatarenotquotedinanactivemarket.Theyarenotenteredintowiththeintentionofimmediateorshort-termresaleandarenotclassifiedasfinancialassetsheldfortrading,designatedasAFSorFVPL.Thisaccountingpolicyrelatestotheconsolidatedstatementoffinancialposition captions: (a) “Cash and Cash Equivalents”, (b) “Short-term Investments”, (c) “Insurance Receivables”, (d) “Loans and Receivables” and (e) “Accrued Income”.
Afterinitialmeasurement,theloansandreceivablesaresubsequentlymeasuredatamortizedcostusingtheeffectiveinterestratemethod,lessallowanceforimpairment.Amortizedcostiscalculatedbytakingintoaccountanydiscountorpremiumonacquisitionandfeesthatareanintegralpartoftheeffectiveinterestrate.TheamortizationisincludedintheInvestmentandotherincomeaccountinprofitorloss.Thelossesarisingfromimpairmentofsuchloansandreceivablesarerecognizedinprofitor loss.
OtherfinancialliabilitiesIssuedfinancial instrumentsortheircomponents,whicharenotdesignatedatFVPLareclassifiedasotherfinancial liabilities,where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financialassettotheholder,ortosatisfytheobligationotherthanbytheexchangeofafixedamountofcashoranotherfinancialassetforafixednumberofownequityshares.
Afterinitialmeasurement,otherfinancialliabilitiesaresubsequentlymeasuredatamortizedcostusingtheeffectiveinterestratemethod.Amortizedcostiscalculatedbytakingintoaccountanydiscountorpremiumontheissueandfeesthatareanintegralpartoftheeffectiveinterestrate.Anyeffectsofrestatementofforeigncurrency-denominatedliabilitiesarerecognizedintheconsolidated statement of income.
This accounting policy applies primarily to the Group’s insurance payables and accounts payable, accrued expenses and other liabilitiesthatmeettheabovedefinition(otherthanliabilitiescoveredbyotheraccountingstandards,suchaspensionliabilityand income tax payable).
Impairment of Financial AssetsTheGroupassessesateachendofthereportingperiodwhetherthereisobjectiveevidencethatafinancialassetoragroupoffinancialassetsisimpaired.Afinancialassetoragroupoffinancialassetsisdeemedtobeimpairedif,andonlyif,thereisobjective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred‘lossevent’)andthatlossevent(orevents)hasanimpactontheestimatedfuturecashflowsofthefinancialassetorthegroupoffinancialassetsthatcanbereliablyestimated.
Evidenceofimpairmentmayincludeindicationsthattheborroweroragroupofborrowersisexperiencingsignificantfinancialdifficulty,defaultordelinquency in interestorprincipalpayments,theprobabilitythattheywillenterbankruptcyorotherfinancialreorganizationandwhereobservabledataindicatethatthereismeasurabledecreaseintheestimatedfuturecashflows,such as changes in arrears or economic conditions that correlate with defaults.
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AFS investments carried at fair valueIncaseofequityinvestmentsclassifiedasAFS,impairmentindicatorswouldincludeasignificantorprolongeddeclineinthefairvalue of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference betweentheacquisitioncostandthecurrentfairvalue,lessanyimpairmentlossonthatfinancialassetpreviouslyrecognizedintheconsolidatedstatementofincomeisremovedfromothercomprehensiveincomeandrecognizedinprofitorloss.Impairmentlossesonequityinvestmentsarenotreversedthroughprofitorloss.Increasesinfairvalueafterimpairmentarerecognizeddirectly in other comprehensive income. InthecaseofdebtinstrumentsclassifiedasAFSfinancialassets,impairmentisassessedbasedonthesamecriteriaasfinancialassetscarriedatamortizedcost.Futureinterestincomeisbasedonthereducedcarryingamountandisaccruedbasedontherateofinterestusedtodiscountfuturecashflowsforthepurposeofmeasuringimpairmentloss.Suchaccrualisrecordedaspartof“Interestincome”inprofitorloss.If,insubsequentyear,thefairvalueofadebtinstrumentincreasesandtheincreasecanbeobjectivelyrelatedtoaneventoccurringaftertheimpairmentlosswasrecognizedinprofitorloss,theimpairmentlossisreversedthroughprofitorloss.
AFS investments carried at costIf there is an objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carryingamountandthepresentvalueofestimatedfuturecashflowsdiscountedatthecurrentmarketrateofreturnforasimilarfinancialasset.
Loans and ReceivablesForloansandreceivablescarriedatamortizedcost,theGroupfirstassesseswhetherobjectiveevidenceofimpairmentexistsforfinancialassetsthatareindividuallysignificant,orcollectivelyforfinancialassetsthatarenotindividuallysignificant.IftheGroupdeterminesthatnoobjectiveevidenceofimpairmentexistsforindividuallyassessedfinancialasset,whethersignificantornot,itincludestheassetinagroupoffinancialassetswithsimilarcreditriskcharacteristicsandcollectivelyassessesforimpairment.Assetsthatareindividuallyassessedforimpairmentandforwhichanimpairmentlossis,orcontinuestobe,recognizedarenotincluded in a collective assessment for impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference betweentheasset’scarryingamountandthepresentvalueoftheestimatedfuturecashflows(excludingfuturecreditlossesthathavenotbeenincurred)discountedatthefinancialasset’soriginaleffectiveinterestrate.Thecarryingamountoftheassetisreducedthroughtheuseofanallowanceaccountandtheamountoflossischargedagainstprofitorloss.Receivables,together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateralhasbeenrealized.If,inasubsequentperiod,theamountoftheestimatedimpairmentlossdecreasesbecauseofaneventoccurringaftertheimpairmentwasrecognized,thepreviouslyrecognizedimpairmentlossisreversed.Anysubsequentreversalofanimpairmentlossisrecognizedinprofitorloss,totheextentthatthecarryingvalueoftheassetdoesnotexceeditsamortizedcostatthereversaldate.
Time value is generally not considered when the effect of discounting is not material. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium.Thecalculationofthepresentvalueoftheestimatedfuturecashflowsofacollateralizedfinancialassetreflectsthecashflowsthatmayresultfromforeclosurelesscostsforobtainingandsellingthecollateral,whetherornotforeclosureisprobable.
Forthepurposeofacollectiveevaluationofimpairment,financialassetsaregroupedonthebasisofcreditriskcharacteristicssuch as past-due status and term.
Futurecashflows inagroupoffinancialassetsthatarecollectivelyevaluatedfor impairmentareestimatedonthebasisofhistorical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjustedonthebasisofcurrentobservabledatatoreflecttheeffectsofcurrentconditionsthatdidnotaffecttheperiodonwhich the historical loss experience is based and to remove the effects of conditions in the historical period that do not existcurrently.ThemethodologyandassumptionsusedforestimatingfuturecashflowsarereviewedregularlybytheGroupto reduce any difference between loss estimates and actual loss experience.
Offsetting of Financial InstrumentsFinancialassetsandfinancialliabilitiesareoffsetandthenetamountisreportedintheconsolidatedstatementoffinancialpositionif,andonlyif,thereisacurrentlyenforceablelegalrighttooffsettherecognizedamountsandthereisanintentiontosettleonanetbasis,ortorealizetheassetandsettletheliabilitysimultaneously.
Derecognition of Financial Assets and LiabilitiesFinancial Asset Afinancialasset(or,whereapplicableapartofafinancialassetorpartofagroupofsimilarfinancialassets)isderecognizedwhere:• therightstoreceivecashflowsfromtheassethaveexpired;• theGroupretainstherighttoreceivecashflowsfromtheasset,buthasassumedanobligationtopaytheminfullwithout
materialdelaytoathirdpartyundera‘pass-through’arrangement;or• theGrouphastransferreditsrightstoreceivecashflowsfromtheassetandeither(a)hastransferredsubstantiallyallthe
risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
Where the Group has transferred its right to receive cash flows from an asset and has neither transferred nor retained substantiallyalltherisksandrewardsoftheassetnortransferredcontroloftheasset,theassetisrecognizedtotheextentofthe Group’s continuing involvement in the asset.
Financial LiabilityAfinancialliabilityisderecognizedwhentheobligationundertheliabilityisdischargedorcancelledorhasexpired.Whereanexistingfinancialliabilityisreplacedbyanotherfromthesamelenderonsubstantiallydifferentterms,orthetermsofanexistingliabilityaresubstantiallymodified,suchanexchangeormodificationistreatedasaderecognitionoftheoriginalliabilityandtherecognitionofanewliability,andthedifferenceintherespectivecarryingamountsisrecognizedinprofitorloss.
ReinsuranceThe Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies for its share on the unpaid losses incurred by the Group. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. Reinsurance recoverable on paid losses are included as part of Insurance receivables.
Reinsurance assets are reviewed for impairment at each end of the reporting period or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Group may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Group will receive from the reinsurer can be measured reliably. The impairment loss is recorded in the statement of income. Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders.
The Group also assumes reinsurance risk in the normal course of business for insurance contracts. Premiums and claims on assumedreinsurancearerecognized inprofitor lossas incomeandexpenses inthesamemannerastheywouldbe ifthereinsurancewereconsidereddirectbusiness,takingintoaccounttheproductclassificationofthereinsuredbusiness.Reinsuranceliabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the associated reinsurance contract.
Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance.
Reinsuranceassetsorliabilitiesarederecognizedwhenthecontractualrightsareextinguishedorexpiredorwhenthecontractis transferred to another party.
When the Group enters into a proportional treaty reinsurance agreement for ceding out its insurance business, the Group initially recognizesaliabilityattransactionprice.Subsequenttoinitialrecognition,theportionoftheamountinitiallyrecognizedasaliabilitywhichispresentedasInsurancepayablesintheliabilitiessectionoftheconsolidatedstatementoffinancialpositionwillbewithheldandrecognizedasFundsheldforreinsurersandincludedaspartoftheInsurancepayablesintheliabilitiessectionoftheconsolidatedstatementoffinancialposition.Theamountwithheldisgenerallyreleasedafterayear.Fundsheldbycedingcompanies is accounted for in the same manner.
Deferred Acquisition Costs (DAC)Commissionsandotheracquisitioncostsincurredduringthefinancialperiodthatvarywithandarerelatedtosecuringnewinsurancecontractsandorrenewingexistinginsurancecontracts,butwhichrelatestosubsequentfinancialperiods,aredeferredto the extent that they are recoverable out of future revenue margins. Acquisition costs include referral fee of FNAC which is classifiedunderOtherunderwritingexpense.Allotheracquisitioncostsarerecognizedasexpensewhenincurred.
Subsequenttoinitialrecognition,thesecostsareamortizedonastraight-linebasisusingthe24thmethodoverthelifeofthecontractexceptforthemarinecargowherecommissionsforthelasttwomonthsoftheyeararerecognizedasexpensethefollowingyear.Amortizationischargedagainsttheprofitorloss.TheunamortizedacquisitioncostsareshownasDeferredacquisitioncostsintheAssetssectionoftheconsolidatedstatementoffinancialposition.
An impairment review is performed at each end of the reporting period or more frequently when an indication of impairment arises.Thecarryingvalueiswrittendowntotherecoverableamount.Theimpairmentlossischargedtoprofitorloss.DACisalso considered in the liability adequacy test for each end of the reporting period.
Investment PropertiesProperties held for rental yields and for capital appreciation or both rather than for use in the production or supply of goods and servicesorforadministrativepurposesorsaleintheordinarycourseofbusinessisclassifiedasinvestmentproperty.
Investment properties are measured initially at cost, including transaction costs.
Investment properties consist of land, buildings and construction in progress. The land is carried at cost. The buildings are carriedatcost,lessaccumulateddepreciationandamortizationandanyaccumulatedimpairmentlosses.
Construction in-progress is carried at cost and transferred to the related property and equipment account when the construction and related activities to prepare the property for its intended use are complete, and the property is ready for occupation. Construction in-progress is not depreciated until such time that the relevant assets are completed and put into operational use.
Depreciationandamortizationiscomputedusingthestraight-linemethodovertheestimateduseful lifeof40years.Theestimatedusefullifeanddepreciationandamortizationmethodarereviewedperiodicallytoensurethattheperiodandmethodof depreciation and amortization are consistentwith the expected pattern of economic benefits from items of investmentproperty.
Investmentpropertiesarederecognizedeitherwhentheyhavebeendisposedof,orwhentheinvestmentpropertyispermanentlywithdrawnfromuseandnofuturebenefitisexpectedfromitsdisposal.Anygainsorlossesontheretirementordisposalofaninvestmentpropertyarerecognizedintheprofitorlossintheyearofretirementordisposal.L
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Transfers are made to investment property when, and only when, there is a change in use, evidenced by the end of owner-occupation and commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.
Property and EquipmentPropertyandequipment,exceptfor land,arestatedatcost,netofaccumulateddepreciationandamortizationandanyimpairment in value. Land is stated at cost less any impairment losses.
The initial cost of property and equipment comprises its purchase price, including nonrefundable taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Subsequent costs are included intheasset’scarryingamountorrecognizedasaseparateasset,asappropriate,onlywhenitisprobablethatfutureeconomicbenefitsassociatedwiththeitemwillflowtotheGroupandthecostoftheitemcanbemeasuredreliably.Allotherrepairsandmaintenancearechargedtothestatementofincomeduringthefinancialperiodinwhichtheyareincurred.
Depreciationandamortizationarecomputedusingthestraight-linemethodovertheestimatedusefullivesofthepropertiesasfollows:
YearsBuilding and improvements 40Building equipment 5Officefurniture,fixturesandequipment 5Transportation equipment 5
Leaseholdimprovementsareamortizedoverthetermoftheleaseorestimatedusefullifeof5years,whicheverisshorter.Theestimatedusefullivesanddepreciationandamortizationmethodarereviewedperiodicallytoensurethattheperiodandmethodofdepreciationandamortizationareconsistentwiththeexpectedpatternofeconomicbenefitsfromitemsofpropertyand equipment.
When property and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortizationandaccumulatedprovisionforimpairmentlosses,ifany,areremovedfromtheaccounts.Anygainorlossarisingon derecognition of the assets, which is calculated as the difference between the net disposal proceeds and the carrying amount oftheasset,isincludedintheconsolidatedstatementofincomeintheyeartheassetisderecognized.
Creditable Withholding Taxes (CWTs)Creditable withholding pertains to the 15% indirect tax paid by the Group that is withheld by its counterparty for the payment of its expenses and other purchases. These CWTs are initially recorded at cost as an asset under “Other assets” account.
At each end of the tax reporting deadline, these CWTs may either be offset against future tax income payable or be claimed as a refund from the taxation authorities at the option of the Group. If these CWTs are claimed as a refund, these will be recorded as a receivable under “Loans and receivables” account.
At each end of the reporting period, an assessment for impairment is performed as to the recoverability of these CWTs.
Computer SoftwareCostsassociatedwiththeacquisitionofcomputersoftwarearecapitalizedonly iftheassetcanbereliablymeasured,willgeneratefutureeconomicbenefits,andthereisanabilitytouseorselltheasset.
Computersoftwareiscarriedatcostlessaccumulatedamortization.Computersoftwarecostisamortizedovertheexpectedusefullifeoftheasset,butnottoexceedfive(5)years.Allcomputersoftwarecomponentsareamortizedoverfive(5)years.Amortizationcommenceswhentheassetisavailableforuseorwhenitisinthelocationandconditionnecessaryforittobecapable of operating in the manner intended by the Group.
ImpairmentofNonfinancialAssetsThe Group assesses at each end of the reporting period whether there is an indication that investment properties, property and equipment and computer software may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unlesstheassetdoesnotgeneratecashinflowsthatarelargelyindependentofthosefromotherassetsorgroupsofassets.Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to itsrecoverableamount.Inassessingvalueinuse,theestimatedfuturecashflowsarediscountedtotheirpresentvalueusingapre-taxdiscountratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyandtherisksspecifictotheasset.
Anassessmentismadeateachendofthereportingperiodastowhetherthereisanyindicationthatpreviouslyrecognizedimpairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previouslyrecognizedimpairmentlossisreversedonlyiftherehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverableamountsincethelastimpairmentlosswasrecognized.Ifthatisthecase,thecarryingamountoftheassetisincreasedto its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation,hadnoimpairmentlossbeenrecognizedfortheassetinprioryears.Suchreversalisrecognizedinprofitorlossunless the asset is carried at revalued amount, in which case, the reversal is treated as a revaluation increase. After such reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.
Value-added Tax (VAT)The input value added tax pertains to the 12% indirect tax paid by the Group in the course of the Group’s trade or business on local purchase of goods or services.
Output VAT pertains to the 12% tax due on the sale of insurance policies and other goods or services by the Group.If at the end of any taxable month, the output VAT exceeds the input VAT, the outstanding balance is included under “Accounts payable and accrued expenses” account. If the input VAT exceeds the output VAT, the excess shall be carried over to the succeeding months and included under “Other assets” account.
Real Estate Properties for SaleRealestatepropertiesforsalearemeasuredatthelowerofcostandnetrealizablevalue(NRV).NRVistheestimatedsellingprice in the ordinary course of business, based on market prices at the reporting date, less estimated costs of completion and theestimatedcoststosell.Thecostofinventoryrecognizedinprofitorlossondisposalisdeterminedwithreferencetothespecificcostsincurredontheproperty.
Insurance Contract LiabilitiesProvision for Unearned PremiumsThe proportion of written premiums, gross of commissions payable to intermediaries, attributable to subsequent periods or to risks that have not yet expired is deferred as provision for unearned premiums. Premiums from short-duration insurance contractsarerecognizedasrevenueovertheperiodofthecontractsusingthe24thmethodexceptforthemarinecargowherepremiums for the last two months are considered earned the following year. The portion of the premiums written that relate to the unexpired periods of the policies at end of the reporting period are accounted for as Provision for unearned premiums as part ofInsurancecontractliabilitiesandpresentedintheliabilitiessectionoftheconsolidatedstatementoffinancialposition.Thechangeintheprovisionforunearnedpremiumsistakentoprofitorlossinorderthatrevenueisrecognizedovertheperiodofrisk. Further provisions are made to cover claims under unexpired insurance contracts which may exceed the unearned premiums and the premiums due in respect of these contracts.
Claims Provision and Incurred But Not Reported (IBNR) LossesThese liabilities are based on the estimated ultimate cost of all claims incurred but not settled at the end of the reporting period together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Delays can be experiencedinthenotificationandsettlementofcertaintypesofclaims,thereforetheultimatecostofwhichcannotbeknownwith certainty at the end of the reporting period. The liability is not discounted for the time value of money and includes provisionforIBNRlosses.Theliabilityisderecognizedwhenthecontractisdischarged,cancelledorhasexpired.
Liability Adequacy TestAt each end of the reporting period, liability adequacy tests are performed, to ensure the adequacy of insurance contract liabilities,netofrelatedDACassets.Inperformingthetest,currentbestestimatesoffuturecashflows,claimshandlingandpolicy administration expenses are used. Changes in expected claims that have occurred, but which have not been settled, are reflectedbyadjustingtheliabilityforclaimsandfuturebenefits.Anyinadequacyisimmediatelychargedtotheconsolidatedstatement of income by establishing an unexpired risk provision for losses arising from the liability adequacy tests. The provision for unearned premiums is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed future premiums plus the current provision for unearned premiums.
Insurance PayablesInsurancepayablesarerecognizedwhendueandmeasuredoninitialrecognitionatthefairvalueoftheconsiderationreceivedlessattributabletransactioncost.Subsequenttoinitialrecognition,theyaremeasuredatamortizedcostusingtheeffectiveinterest rate method.
Insurancepayablesarederecognizedwhentheobligationundertheliabilityissettled,cancelledorexpired.
Pension CostPensioncost isactuariallydeterminedusingtheprojectedunitcreditmethod. Thismethod reflectsservices renderedbyemployees up to the date of valuation and incorporates assumptions concerning employees’ projected salaries. Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes to underlying assumptions occur. Pension cost includes current service cost, interest cost, actuarial gains and losses and the effect of any curtailment or settlement.
ThepensionassetrecognizedbytheGroupinrespectofthedefinedbenefitpensionplanisthe(a)fairvalueoftheplanassetslesspresentvalueofthedefinedbenefitobligationatthereportingdate,togetherwithadjustmentsforunrecognizedactuarialgainsorlossesthatshallberecognizedinlaterperiods;or(b)thetotalofanycumulativeunrecognizednetactuariallossesandpastservicecostandthepresentvalueofanyeconomicbenefitsavailableintheformofrefundsfromtheplanorreductionsinfuture contributions to the plan.
ThenetpensionliabilityrecognizedbytheGroupinrespectofthedefinedbenefitpensionplanisthefairvalueoftheplanassetslessthepresentvalueofthedefinedbenefitobligationattheendofreportingdate,togetherwithadjustmentsforunrecognizedactuarialgainsorlossesthatshallberecognizedinlaterperiods.
Thedefinedbenefitobligationiscalculatedannuallybyanindependentactuaryusingtheprojectedunitcreditmethod.Thepresentvalueofthedefinedbenefitobligationisdeterminedbyusingrisk-freeinterestratesoflong-termgovernmentbondsthat have terms to maturity approximating the terms of the related pension liability.
Actuarialgainsandlossesisrecognizedinprofitorlossifthecumulativeunrecognizedactuarialgainsandlossesattheendofthepreviousreportingperiodexceededthegreaterof10%ofthepresentvalueofdefinedbenefitobligationor10%ofthefairvalueofplanassets.Thesegainsandlossesarerecognizedovertheexpectedaverageremainingworkinglivesoftheemployeesparticipating in the plan.L
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EquityCapitalstockisrecognizedasissuedwhenthestockispaidfororsubscribedunderabindingsubscriptionagreementandismeasured at par value.
Capital in excess of par value includes any premiums received in excess of par value on the issuance of capital stock.
Contributed surplus represents the original contribution of the stockholders of the Parent Company, in addition to the paid-in capital stock, in order to comply with the pre-licensing requirements as provided under the Insurance Code (the Code). ContingencysurpluspertainstocapitalinfusionofshareholdersinordertocomplywithMarginofSolvency(MOS)deficiencyasa result of the examination made by the Insurance Commission (IC).
Other revaluation reserve pertains to the appraisal increment on building relating to the Parent Company’s previously held interest in Tokio Marine Malayan Insurance Co., Inc. (TMMIC) at the time of the business combination. The balance of the other revaluationreservewillbetransferredtoretainedearningswhenthebuildingisdisposedorderecognized.
Retained earnings include all the accumulated earnings of the Group, net of dividends declared.
Revenue RecognitionRevenueisrecognizedtotheextentthatitisprobablethattheeconomicbenefitswillflowtotheGroupandtherevenuecanbereliablymeasured.Thefollowingspecificrecognitioncriteriamustalsobemetbeforerevenueisrecognized:
Premiums RevenueGross insurance written premiums comprise the total premiums receivable for the whole period of cover provided by contracts enteredintoduringtheaccountingperiodandarerecognizedonthedateonwhichthepolicyincepts.Premiumsincludeanyadjustments arising in the accounting period for premiums receivable in respect of business written in prior periods.
Premiumsfromshort-durationinsurancecontractsarerecognizedasrevenueovertheperiodofthecontractsusingthe24thmethod except for the marine cargo where premiums for the last two months are considered earned the following year. The portion of the premiums written that relate to the unexpired periods of the policies at end of the reporting period are accounted for as Provision for unearned premiums as part of Insurance contract liabilities and presented in the liabilities section of the consolidatedstatementsoffinancialposition.Therelatedreinsurancepremiumscededthatpertainstotheunexpiredperiodsat end of the reporting period are accounted for as Deferred reinsurance premiums and shown as part of reinsurance assets in theconsolidatedstatementsoffinancialposition.Thenetchangesintheseaccountsbetweeneachendofreportingperiodsarerecognizedinprofitorloss.
Reinsurance CommissionsCommissionsearnedfromshort-durationinsurancecontractsarerecognizedasrevenueovertheperiodofthecontractsusingthe 24th method except for the marine cargo where the deferred reinsurance commissions for the last two months of the year are considered earned the following year. The portion of the commissions that relate to the unexpired periods of the policies at end of the reporting period are accounted for as deferred reinsurance commissions and presented in the Liabilities section of the consolidatedstatementoffinancialposition.
Dividend incomeDividendincomeisrecognizedwhentheshareholders’righttoreceivethepaymentisestablished.
Interest incomeForallfinancialinstrumentsmeasuredatamortizedcostandinterest-bearingfinancialinstruments,interestincomeisrecordedat the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life ofthefinancialinstrumentorashorterperiod,whereappropriate,tothenetcarryingamountofthefinancialasset.Thecalculationtakesintoaccountallcontractualtermsofthefinancialinstrument(forexample,prepaymentoptions),includesanyfees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The adjusted carrying amount is calculated based on the original effective interest rate. The change in carrying amount is recorded as interest income.
Oncetherecordedvalueofafinancialassetoragroupofsimilarfinancialassetshasbeenreducedduetoanimpairmentloss,interestincomecontinuestoberecognizedusingtheoriginaleffectiveinterestrateappliedtothenewcarryingamount.
Rental incomeRentalincomefrominvestmentpropertiesarerecognizedonastraight-linebasisoverthetermofthelease.
Management feesManagementfeesarerecognizedasincomewhenservicesarerendered.
Other incomeIncomefromothersourcesisrecognizedwhenearned.
Expense RecognitionExpensesaredecreasesineconomicbenefitsduringtheaccountingperiodintheformofoutflowsordepletionsofassetsorincurrence of liabilities that result in decrease in equity, other than those relating to distribution to equity participants.
BenefitsandClaimsBenefitsandclaimsconsistsofbenefitsandclaimspaidtopolicyholders,whichincludeschangesinthevaluationofInsurancecontract liabilities, except for changes in the provision for unearned premiums which are recorded in insurance revenue. It further includes internal and external claims handling costs that are directly related to the processing and settlement of claims. Amounts
receivable in respect of salvage and subrogation are also considered. General insurance claims are recorded on the basis of notificationsreceived.
Commission ExpenseCommissionsarerecognizedasexpenseovertheperiodofthecontractsusingthe24thmethod.Theportionofthecommissionsthat relates to the unexpired periods of the policies at the end of the reporting period is accounted for as “Deferred acquisition cost”intheassetssectionoftheconsolidatedstatementoffinancialposition.
Other underwriting expenseOther underwriting expense pertains to the costs incurred by the Group prior to the issuance of policies to its policyholders. These costs include expenses for technical inspections, actuarial reviews and other work that is deemed necessary to determine whetherornottoaccepttheriskstobewritten.Thesecostsarerecognizedasexpenseastheyareincurred.
ExpensesGeneralandadministrativeexpenseandotherinvestmentexpense,exceptforleaseagreements,arerecognizedasexpenseasthey are incurred.
Interest expenseInterest expense is charged against operations as they are incurred. LeasesThe determination of whether an arrangement is, or contains a lease, is based on the substance of the arrangement and requires anassessmentofwhetherthefulfillmentofthearrangementisdependentontheuseofaspecificassetorassetsandthearrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:a. Thereisachangeincontractualterms,otherthanarenewalorextensionofthearrangement;b. A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the
leaseterm;c. Thereisachangeinthedeterminationofwhetherfulfillmentisdependentonaspecifiedassetor;d. There is a substantial change to the asset.
Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios a, c or d above, and at the date of renewal or extension period for scenario (b).
Group as a lessorLeaseswheretheGroupdoesnottransfersubstantiallyalltherisksandbenefitsofownershipoftheassetsareclassifiedasoperatingleases.Leasepaymentsreceivedarerecognizedasanincomeintheconsolidatedstatementofincomeonastraight-linebasis over the lease term. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leasedassetandrecognizedovertheleasetermonthesamebasisastherentalincome.
Group as a lesseeLeaseswherethelessorretainssubstantiallyalltherisksandbenefitsofownershipoftheassetareclassifiedasoperatingleases.Fixedleasepaymentsarerecognizedasanexpenseintheconsolidatedstatementofincomeonastraight-linebasis.
Foreign Exchange TransactionsThe functional and presentation currency of the Group is the Philippine Peso (P). Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the end of the reporting period. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction and are not subsequently restated. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rate at the date when the fair value was determined. All foreign exchange differencesaretakentoprofitorloss,exceptwhereitrelatestoequitysecuritieswheregainsorlossesarerecognizeddirectlyin other comprehensive income.
Provisions and ContingenciesProvisionsarerecognizedwhentheGrouphasapresentobligation(legalorconstructive)asaresultofapasteventanditisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligationandareliableesti-mate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example,underaninsurancecontract,thereimbursementisrecognizedasaseparateassetbutonlywhenthereimbursementisvirtuallycertain.Theexpenserelatingtoanyprovisionispresentedinprofitorloss,netofanyreimbursement.Iftheeffectofthetimevalueofmoneyismaterial,provisionsaredeterminedbydiscountingtheexpectedfuturecashflowsatapre-taxratethatreflectscurrentmarketassessmentsofthetimevalueofmoneyand,whereappropriate,therisksspecifictotheliability.Wherediscountingisused,theincreaseintheprovisionduetothepassageoftimeisrecognizedasaninterestexpense.
ContingentliabilitiesarenotrecognizedintheGroup’sfinancialstatementsbutaredisclosedunlessthepossibilityofanoutflowofresourcesembodyingeconomicbenefitsisremote.Contingentassetsarenotrecognizedbutaredisclosedintheconsolidatedfinancialstatementswhenaninflowofeconomicbenefitsisprobable.
Income TaxCurrent taxCurrent tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the end of the reporting period.L
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Deferred taxDeferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the taxbasesofassetsandliabilitiesandtheircarryingamountsforfinancialreportingpurposes.
Deferredtaxliabilitiesarerecognizedforalltaxabletemporarydifferences,includingassetrevaluations.Deferredtaxassetsarerecognizedforalldeductibletemporarydifferences,carryforwardofunusedtaxcreditsfromtheexcessofminimumcorporateincome tax (MCIT) over the regular income tax, and unused net operating loss carryover (NOLCO), to the extent that it is probablethatsufficienttaxableprofitwillbeavailableagainstwhichthedeductibletemporarydifferencesandcarryforwardofunusedtaxcreditsfromMCITandunusedNOLCOcanbeutilized.Deferredtax,however,isnotrecognizedontemporarydifferences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss.
The carrying amount of deferred tax assets is reviewed at each end of the reporting period and reduced to the extent that it isnolongerprobablethatsufficienttaxableprofitwillbeavailabletoallowallorpartofthedeferredtaxassettobeutilized.Unrecognizeddeferredtaxassetsarereassessedateachendofthereportingperiodandarerecognizedtotheextentthatithasbecomeprobablethatfuturetaxableprofitwillallowthedeferredtaxassettoberecovered.
Deferredtaxassetsandliabilitiesaremeasuredatthetaxratesthatareapplicabletotheperiodwhentheassetisrealizedortheliability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the end of the reporting period. Movements in the deferred tax assets and liabilities arising from changes in tax rates are charged against or credited to income for the period.
Currenttaxanddeferredtaxrelatingtoitemsrecognizedasothercomprehensiveincomeisalsorecognizedintheconsolidatedstatement of other comprehensive income.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority.
Events after End of the Reporting PeriodAny post year-end events that provide additional information about the Group’s position at the end of the reporting period (adjustingevent)arereflectedintheconsolidatedfinancialstatements.Postyear-endeventsthatarenotadjustingevents,ifany,aredisclosedintheconsolidatedfinancialstatementswhenmaterial.
3. SignificantAccountingJudgmentsandEstimates
ThepreparationoftheaccompanyingconsolidatedfinancialstatementsinaccordancewithPFRSrequirestheGrouptomakejudgmentsandestimatesthataffecttheamountsreportedintheconsolidatedfinancialstatementsandaccompanyingnotes.Theestimatesandassumptionsused in theaccompanyingconsolidatedfinancial statementsarebaseduponmanagement’sevaluationofrelevantfactsandcircumstancesasofthedateoftheconsolidatedfinancialstatements.Actualresultscoulddiffer from such estimates.
JudgmentsIn the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations,which have themost significant effect on the amounts recognized in the consolidated financialstatements:
ProductclassificationThesignificanceofinsuranceriskisdependentonboththeprobabilityofaninsuredeventandthemagnitudeofitspotentialeffect.Asageneralguideline,theGroupdefinessignificantinsuranceriskasthepossibilityofhavingtopaybenefitsontheoccurrenceofaninsuredeventthatareatleast5%morethanthebenefitspayableiftheinsuredeventdidnotoccur.
TheGrouphasdeterminedthattheinsurancepoliciesitissueshavesignificantinsurancerisksandthereforemeetthedefinitionof insurance contracts and should be accounted for as such.
Functional CurrencyBased on the economic substance of the underlying circumstances relevant to the Group, the functional currency of the Group has been determined to be the Philippine Peso. The Philippine Peso is the currency of the primary economic environment in which theGroupoperates.ItisthecurrencythatmainlyinfluencestherevenueandcostsoftheGroupoperations.
Operating lease commitments - Group Company as lessorThe Group entered into commercial property leases on its investment properties. The Group determined that it retains all the significantrisksandrewardsofownershipoftheproperty,thusaccountsforthemasoperatinglease.
Operating lease commitments - Group as lesseeThe Group entered into various property leases with various lessors. The Group determined that the lessors retain all the significantrisksandrewardsofownershipoftheleasedpropertiesthusaccountsforthemasoperatingleases.
Distinction between investment properties and owner-occupied propertiesTheGroupdetermineswhether a property qualifies as investment property. Inmaking this judgment, theGroup considerswhether thepropertygeneratescashflows largely independentof theotherassetsheldbyanentity. Owner-occupiedpropertiesgeneratecashflowsthatareattributablenotonlytopropertybutalsototheotherassetsusedintheproductionorsupply process.
When properties comprise a portion that is held to earn rentals or for capital appreciation and another portion is held for use in the production or supply of goods or services or for administrative purpose, and these portions cannot be sold separately, the propertyisaccountedforasinvestmentpropertyonlyifaninsignificantportionisheldforuseintheproductionorsupplyofgoods or services or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making this judgment.
Management’s Use of EstimatesThe key assumptions concerning the future and other key sources of estimation uncertainty at each reporting date, that have asignificantriskofcausingamaterialadjustmenttothecarryingamountsofassetsandliabilitieswithinthenextfinancialyearare discussed below.
FairvaluesoffinancialassetsTheGroupcarriescertainfinancialassetsatfairvalue,whichrequiresextensiveuseofaccountingestimatesandjudgments.Fairvaluedeterminationsforfinancialassetsarebasedgenerallyonlistedorquotedmarketprices. Ifpricesarenotreadilydeterminable or if liquidating positions is reasonably expected to affect market prices, fair value is based on either internal valuationmodelsormanagement’sestimateofamountsthatcouldberealizedundercurrentmarketconditions,assuminganorderlyliquidationoverareasonableperiodoftime.Whilesignificantcomponentsoffairvalueweredeterminedusingverifiableobjective evidence (i.e., foreign exchange rates, interest rates, volatility rates), the amount of changes in fair value of these financialassetsandliabilitieswouldaffectthestatementofothercomprehensiveincome.
ThecarryingvalueofAFSfinancialassetsisP9.63 billion and P8.06 billion as of December 31, 2012 and 2011, respectively (see Note 7).
Valuation of insurance contract liabilitiesEstimates have to be made both for the expected ultimate cost of claims reported and for the expected ultimate cost of claims IBNRattheendofreportingperiod.Itcantakeasignificantperiodoftimebeforetheultimateclaimscostcanbeestablishedwith certainty.
TheprimarytechniqueadoptedbymanagementinestimatingthecostofnotifiedandclaimsIBNR,isthatofusingpastclaimssettlement trends to predict future claims settlement trends. At each reporting date, prior year claims estimates are assessed for adequacy and changes made are charged to provision. Insurance contract liabilities are not discounted for the time value of money.
As of December 31, 2012 and 2011, the carrying values of provision for claims reported and IBNR amounted to P5.50 billion and P4.18 billion, respectively (see Note 14).
Estimation of allowance for impairment lossesThe Group maintains allowance for impairment losses at a level considered adequate to provide for potential uncollectible receivables. The level of this allowance is evaluated by management on the basis of factors that affect the collectability of the accounts.Thesefactorsinclude,butarenotlimitedto,ageofbalances,financialstatusofcounterparties,andlegalopiniononrecoverabilityincaseoflegaldisputes.TheGroupreviewstheageandstatusofreceivables,andidentifiesaccountsthataretobe provided with allowance on a regular basis.
TheamountandtimingofrecordedexpensesforanyperiodwoulddifferiftheGroupmadedifferentjudgmentsorutilizeddifferent estimates. An increase in allowance for impairment losses would increase recorded expenses and decrease the related asset accounts.
The carrying value of insurance receivables, net of impairment losses amounted to P3.33 billion and P2.79 billion as of December 31, 2012 and 2011, respectively. The related allowance for impairment losses amounted to P125.27 million and P67.86 million as of December 31, 2012 and 2011 respectively (see Note 6). As of December 31, 2012 and 2011, the carrying value of loans and receivables amounted to P1.33 billion and P0.43 billion, respectively. As of December 31, 2012 and 2011, the related allowance for impairment losses amounted to P3.70 million (see Note 7).
ImpairmentofAFSequityfinancialassetsTheGroupdeterminesthatAFSequityfinancialassetsareimpairedwhentherehasbeenasignificantorprolongeddeclineinthefairvaluebelowitscost.Thedeterminationofwhatissignificantorprolongedrequiresjudgment.TheGrouptreats‘significant’generally as 20% or more and ‘prolonged’ as continuous decline for a period of six (6) months or more. In making this judgment, the Group evaluates among other factors, the normal volatility in share price for quoted securities. In addition, impairment may beappropriatewhenthereisevidenceofdeteriorationinthefinancialhealthoftheinvestee,industryandsectorperformance,changesintechnology,andoperationalandfinancingcashflows.
AsofDecember31,2012and2011,thecarryingvalueoftheGroup’sAFSequityfinancialassetsamountedtoP6.59 billion and P4.82 billion, respectively (see Note 7).
Impairment lossrecognizedonGroup’sAFSequityfinancialassetsamountedtoP2.2 million and P15.53 million in 2012 and 2011, respectively (see Note 7).
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Estimation of useful lives of computer software, investment properties and property and equipmentThe Group reviews annually the estimated useful lives of computer software, investment properties and property and equipment, based on the period over which the assets are expected to be available for use. It is possible that future results of operations could be materially affected by changes in these estimates. A reduction in the estimated useful lives of computer software, investmentpropertiesandpropertyandequipmentwouldincreaserecordeddepreciationandamortizationexpenseanddecreasethe related asset accounts.
As of December 31, 2012 and 2011, the carrying value of the investment properties amounted to P108.90 million and P88.47 million, respectively (see Note 11).
As of December 31, 2012 and 2011, the carrying value of the property and equipment amounted to P230.32 million and P244.20 million, respectively (see Note 12).
As of December 31, 2012 and 2011, the carrying value of the computer software amounted to P64.91 million and P64.50 million, respectively (see Note 13).
EvaluationofnetrealizablevalueofrealestatepropertiesforsaleReal estate properties for sale are valued at the lower of cost and NRV. This requires the Group to make an estimate of the real estate properties’ estimated selling price in the ordinary course of business, cost of completion and costs necessary to make a saletodeterminetheNRV.TheGroupadjuststhecostofitsrealestatepropertiestonetrealizablevaluebasedonits assessment of the recoverability of its real estate properties for sale. In determining the recoverability of its real estate properties for sale, management considers whether its real estate properties for sale are damaged or if their selling prices have declined.
Likewise, management also considers whether the estimated costs of completion or the estimated costs to be incurred to make thesalehaveincreased.IntheeventthatNRVislowerthanthecost,thedeclineisrecognizedasanexpense.Theamountandtimingofrecordedexpensesforanyperiodwoulddifferifdifferentjudgmentsweremadeordifferentestimateswereutilized.See Note 13 for the related balances. ImpairmentofnonfinancialassetsTheGroupassessestheimpairmentofitsnonfinancialassets(i.e.,investmentproperties,propertyandequipmentandcomputersoftware) whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following:
• significantunderperformancerelativetoexpectedhistoricalorprojectedfutureoperatingresults;• significantchangesinthemannerofuseoftheassets;and• significantnegativeindustryoreconomictrends.
TheGrouprecognizesanimpairmentlosswheneverthecarryingamountofanassetexceedsitsrecoverableamount.Recoverableamounts are estimated for individual asset or, if it is not possible, for the cash-generating unit to which the asset belongs.
AsofDecember31,2012and2011,theGrouphasnotrecognizedanyimpairmentlossesonitsnonfinancialassets.SeeNotes11, 12 and 13 for related balances.
Recognition of deferred tax assetsDeferredtaxassetsarerecognizedforalldeductibletemporarydifferencestotheextentthatitisprobablethattaxableincomewillbeavailableagainstwhichthesecanbeutilized.Significantmanagementjudgmentisrequiredtodeterminetheamountofdeferredtaxassetsthatcanberecognized.Theseassetsareperiodicallyreviewedforrealization.Periodicreviewscoverthenature and amount of deferred income and expense items, expected timing when assets will be used or liabilities will be required tobereported,reliabilityofhistoricalprofitabilityofbusinessesexpectedtoprovidefutureearningsandtaxplanningstrategieswhichcanbeutilizedtoincreasethelikelihoodthattaxassetswillberealized.SeeNote24fortherelatedbalances.
EstimatingpensionobligationandotherretirementbenefitsThe determination of pension obligation and cost of pension is dependent on the selection of certain assumptions used in calculating such amounts. Those assumptions include, among others, discount rates, expected return on plan asset and salary increase rates.
Duetothelong-termnatureofthisplan,suchestimatesaresubjecttosignificantuncertainty.
The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent withtheexpectedemployeebenefitpayoutasofthereportingdate.InaccordancewithPAS19,actualresultsthatdifferfromtheGroup’sassumptionsareaccumulatedandamortizedover futureperiodsandtherefore,generallyaffect the recognizedexpense and recorded asset or obligation in such future periods. While the Group believes that the assumptions are reasonable andappropriate,significantdifferencesintheactualexperienceorsignificantchangesintheassumptionsmaymateriallyaffectthe pension obligations.
As of December 31, 2012 and 2011, the carrying value of pension obligation amounted to P38.77 million and P40.50 million, respectively (see Note 17).
As of December 31, 2012 and 2011, the carrying value of pension assets amounted to P0.60 million and P0.83 million, respectively (see Note 17). ContingenciesThe Group is currently involved in various legal proceedings. The estimate of probable costs for the resolution of these claims has been developed in consultation with the legal counsels and based upon analysis of potential results. The Group does not believethattheseproceedingswillhaveamaterialadverseeffectontheGroup’sfinancialposition.
4. Cash and Cash Equivalents
This account consists of:
2012 2011 Cash on hand: Petty cash fund P1,141,297 P1,141,297 Special funds 28,000 28,000 Cash in banks: Commercial banks and trust company (Note 28) 173,455,624 226,386,348 Thrift banks, rural banks and cooperatives 15,054,459 845,876 Short-term deposits (Note 28) 972,632,972 1,384,903,032 P1,162,312,352 P1,613,304,553
Cash in banks earns interest at the respective bank rates.
Short-term deposits are placed for varying periods of up to three (3) months depending on the immediate cash requirements of the Group.
The range of interest rates of the short-term deposits follows:
2012 2011 Philippine Peso 0.25% to 4.50% 0.50% to 4.50% US Dollar 0.25% to 1.35% 0.25% to 2.00%
5. Short-term Investments
This account consists of time deposits with maturity of more than three months but less than one year from dates of placement and earns interest with annual rates ranging from 1.00% to 4.25% and 1.00% to 6.00% in 2012 and 2011, respectively.
Interest earned on short-term investments amounted to P0.57 million and P0.56 million in 2012 and 2011, respectively (see Note 20).
6. Insurance Receivables - net
This account consists of:
2012 2011 Due from policyholders, agents and brokers P2,210,915,388 P1,616,704,536 Due from ceding companies: Facultative 55,117,474 184,440,379 Treaty 907,015,523 764,272,537 Funds held by ceding companies - treaty 152,512,045 168,759,940 Reinsurance recoverable on paid losses: Facultative 89,373,356 103,645,323 Treaty 42,041,015 21,392,188 3,456,974,801 2,859,214,903 Less allowance for impairment losses 125,268,247 67,861,172 P3,331,706,554 P2,791,353,731
The reinsurance recoverable on paid losses is the amount recoverable from the reinsurers in respect of claims already paid by the Group.
The following table shows aging information of insurance receivables:
December 31, 2012
< 30 days 30 > 60 days 60 > 90 days 90 > 120 days > 120 days TotalDue from policyholders, agents and brokers P458,146,733 P224,649,143 P345,703,683 P303,328,692 P879,087,137 P2,210,915,388Due from ceding companies: Facultative 29,940,507 45,997 668,698 6,732,968 17,729,304 55,117,474 Treaty 288,629,126 210,562,323 30,690,420 17,591,748 359,541,906 907,015,523Funds held by ceding companies - treaty 2,054,507 51,339 24,958,953 60,271,408 65,175,838 152,512,045Reinsurance recoverable on paid losses Facultative 458,256 3,064,683 2,573,975 4,819,693 78,456,749 89,373,356 Treaty 299,625 498,265 1,145,859 - 40,097,266 42,041,015 P779,528,754 P438,871,750 P405,741,588 P392,744,509 P1,440,088,200 P3,456,974,801
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December 31, 2011
< 30 days 30 > 60 days 60 > 90 days 90 > 120 days > 120 days TotalDue from policyholders, agents and brokers P285,610,067 P180,143,822 P305,513,663 P91,145,676 P754,291,308 P1,616,704,536Due from ceding companies: Facultative 41,753,561 6,161,219 97,890,339 1,789,783 36,845,477 184,440,379Treaty 616,695,042 1,066,974 10,422,241 2,418,042 133,670,238 764,272,537Funds held by ceding companies - treaty 10,401,669 27,349,849 16,995,237 1,490,851 112,522,334 168,759,940Reinsurance recoverable on paid losses Facultative - 609,423 3,476,764 5,935,382 93,623,754 103,645,323Treaty - 923 1,230 - 21,390,035 21,392,188 P954,460,339 P215,332,210 P434,299,474 P102,779,734 P1,152,343,146 P2,859,214,903
The allowance for impairment loss on insurance receivables has been determined as follows:
2012 Reinsurance Due from Due from Due from Recoverable Policyholders, Ceding Ceding Funds Held on Paid Agents and Companies - Companies - by Ceding Losses - Brokers -Facultative Treaty Companies Facultative TotalBalance at beginning of year P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172Impairment loss (Note 22) 66,032,188 - - - - 66,032,188Written-off (8,625,113) - - - - (8,625,113)Balance at end of year P101,505,280 P17,547,961 P496,316 P1,380,777 P4,337,913 P125,268,247Individually impaired P7,885,979 P17,547,961 P496,316 P1,380,777 P4,337,913 P31,648,946Collectively impaired 93,619,301 - - - - 93,619,301Total P101,505,280 P17,547,961 P496,316 P1,380,777 P4,337,913 P125,268,247
2011 Reinsurance Due from Due from Due from Recoverable Policyholders, Ceding Ceding Funds Held on Paid Agents and Companies - Companies - by Ceding Losses - Brokers -Facultative Treaty Companies Facultative TotalBalance at beginning of year P47,058,842 P6,076,008 P500,868 P1,380,777 P– P55,016,495Impairment loss (Note 22) – 11,824,823 155,314 – 4,337,913 16,318,050Reversal of impairment loss (Note 22) (211,535) (352,870) (159,866) – – (724,271)Written-off (2,749,102) – – – – (2,749,102)Balance at end of year P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172Individually impaired P16,944,841 P17,547,961 P496,316 P1,380,777 P4,337,913 P40,707,808Collectively impaired 27,153,364 – – – – 27,153,364Total P44,098,205 P17,547,961 P496,316 P1,380,777 P4,337,913 P67,861,172
7. Financial Assets
TheGroup’sfinancialassets,categorizedbasedonsubsequentmeasurement,follow:
2012 2011 AFSfinancialassets P9,626,111,111 P8,057,111,728 Loans and receivables - net 1,325,894,362 432,868,288 P10,952,005,473 P8,489,980,016
The assets included in each of the categories above are detailed below.
a) AFSfinancialassets
2012 2011 Quoted securities - at fair value Listed equity securities (Note 28): Common shares P6,320,666,240 P4,679,137,830 Preferred shares 60,981,155 26,021,840 Government debt securities: Local currency 874,413,212 561,760,112 Foreign currency 32,968,440 434,862,299 Private debt securities (Note 28) 2,129,269,696 2,244,814,531 9,418,298,743 7,946,596,612 Non-quoted securities - at cost Unlisted equity securities: Common shares 110,670,742 80,495,744 Preferred shares 17,540 – 110,688,282 80,495,744 Funds 97,124,086 30,019,372 P9,626,111,111 P8,057,111,728
In accordance with the provisions of the Code, government securities amounting to P213.38 million and P163.32 million aredepositedwiththeInsuranceCommission(IC)assecurityforthebenefitofpolicyholdersandcreditorsoftheGroupasof December 31, 2012 and 2011, respectively.
As of December 31, 2012 and 2011, the Group has certain investments in debt securities with embedded call option featurewhichallowstheissuerstoredeem,onspecifieddates,thesecuritiesatfaceamount.BasedontheGroup’sassessment,theembeddedcalloptionsidentifiedareclearlyandcloselyrelatedtothehostcontractsandthereforedonot require bifurcation.
AsofDecember31,2012and2011,allowanceforimpairmentlossrecognizedonAFSinvestmentsamountedtoP2.18 million and P25.97 million in 2012 and 2011, respectively.
ThecarryingvaluesofAFSfinancialassetshavebeendeterminedasfollows:
2012 2011 Balance at beginning of year P8,057,111,728 P7,765,898,833 Acquisitions 1,355,272,382 1,046,340,624 Unrealizedforeigncurrencyexchangeloss (120,934,191) (30,264,822) Fair value changes 1,973,019,550 111,895,326 Disposals and maturities (1,630,089,921) (802,356,405) Amortizationofpremium (8,268,437) (34,401,828) Balance at end of year P9,626,111,111 P8,057,111,728
AsofDecember31,2012and2011,therevaluationreserveonAFSfinancialassetsamountedtoP4.71 billion and P2.97 billion, respectively.
TherollforwardanalysisoftherevaluationreserveonAFSfinancialassetsfollow:
2012 2011 Balance at beginning of year P2,968,830,862 P2,897,499,717 Fair value gain credited to equity 1,973,019,550 111,895,326 Impairment loss (Note 20) 2,181,316 15,529,779 Realizedgaintransferredtoprofitorloss(Note20) (205,181,810) (58,173,271) Tax effect of net fair value gain (Note 24) (27,811,909) 2,079,311 P4,711,038,009 P2,968,830,862 Attributable to: Equity holders of the Parent Company P4,512,298,509 P2,841,321,940 Non-controlling interests 198,739,500 127,508,922 P4,711,038,009 P2,968,830,862
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b) Loans and receivables - net
This account consists of:
2012 2011 Long-term commercial papers (Note 28) P746,635,665 P344,835,665 Notes receivable 502,808,217 9,801,384 Creditable withholding tax 62,677,478 62,677,478 Claims recoverable 11,770,886 – Accounts receivable 4,502,814 4,427,838 Cash advances 859,934 1,198,492 Security fun 342,294 342,294 Long-term investments (Note 28) – 10,026,206 Due from related parties (Note 28) – 3,261,857 1,329,597,288 436,571,214 Less allowance for impairment losses 3,702,926 3,702,926 P1,325,894,362 P432,868,288
Long-term commercial papers pertain to the Group’s investments in unquoted private debt securities and corporate notes with terms of 4 to 15 years and interest rates ranging from 5.25% to 9.33% in 2012 and 2011.
TheGroupprovidesforthe50%ofthecostofthecarandmotorplansextendedtoitsmanagersandofficersaspartoftheirbenefits.Theemployee’sshareisrecordedasNotesreceivablewhichiscollectedthroughsalarydeductionsforaperiodoffive(5)yearswithannualinterestratesof8.00%forcarloansand8.50%formotorloans.
The Group also granted advances to its related parties, MEI, House of Investments (HI) and First Malayan Leasing Corporation (FMLC), by way of receipt of promissory notes from these related parties (see Note 28).
Creditablewithholdingtaxforyears2009and2010werefiledforrefundbytheGrouptotheBIR.
Long-terminvestmentspertaintofixeddepositswithoriginalmaturityofmorethan1yearwithinterestratesrangingfrom2.00% in 2011.
The allowance for impairment losses on loans and receivable had been determined as follows:
2012 Accounts Notes Due from Receivable Receivable Related Parties Total Balance at beginning / end of year P2,005,675 P1,697,251 P– P3,702,926 Individually impaired P2,005,675 P1,697,251 P– P3,702,926
2011 Accounts Notes Due from Receivable Receivable Related Parties Total Balance at beginning of year P2,005,675 P1,697,251 P7,415,927 P11,118,853 Reversal of impairment loss (Note 22) – – (7,415,927) (7,415,927) Balance at end of year P2,005,675 P1,697,251 P– P3,702,926 Individually impaired P2,005,675 P1,697,251 P– P3,702,926
As of December 31, 2012 and 2011, accounts and notes receivable with carrying value of P3.70millionwasspecificallydetermined as impaired and was fully provided with allowance. There was no movement in the allowance for impairment losses in 2012.
8. Accrued Income
This account consists of:
2012 2011 Accrued interest income on (Note 28): AFSfinancialassets P33,956,819 P36,426,308 Long-term commercial papers 6,052,261 2,549,440 Notes receivables 942,778 – Cash and cash equivalents 770,758 335,054 Funds held by ceding companies - treaty 178,549 169,429 Security fund 123,936 108,425 Short-term investments 11,429 80,127 Long-term investments – 361,180 Accrued rent income 4,298,968 3,291,580 Accrued dividend income 2,919,131 – P49,254,629 P43,321,543
9. Deferred Acquisition Costs - net
The details of deferred acquisition costs net of deferred reinsurance commissions follow:
2012 2011 Deferred acquisition costs Balance at beginning of year P272,708,433 P302,047,984 Cost deferred during the year (Note 28) 933,332,899 821,002,992 Amortizedduringtheyear (868,200,435) (850,342,543) Balance at end of year 337,840,897 272,708,433 Deferred reinsurance commissions Balance at beginning of year 113,367,069 112,741,720 Income deferred during the year (Note 28) 252,520,327 266,116,774 Amortizedduringtheyear (252,596,677) (265,491,425) Balance at end of year 113,290,719 113,367,069 P224,550,178 P159,341,364
10. Reinsurance Assets
This account consists of:
2012 2011 Deferred reinsurance premiums (Note 14) P1,596,767,471 P1,411,396,673 Reinsurance recoverable on unpaid losses (Note 14) 3,716,385,247 2,391,297,070 P5,313,152,718 P3,802,693,743
11. Investment Properties - net
The rollforward analysis of this account follows:
2012 Construction Land Buildings in-Progress Total Cost At beginning of year P29,023,039 P12,691,827 P57,653,314 P99,368,180 Additions – – 20,541,294 20,541,294 At end of year 29,023,039 12,691,827 78,194,608 119,909,474 Accumulated depreciation and amortization At beginning of year – 10,900,793 – 10,900,793 Depreciationandamortization(Note22) – 107,591 – 107,591 At end of year – 11,008,384 – 11,008,384 Net book value P29,023,039 P1,683,443 P78,194,608 P108,901,090
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2011 Construction Land Buildings in-Progress Total Cost At beginning of year P30,036,226 P46,147,860 P37,112,019 P113,296,105 Additions 160,000 147,335 20,541,295 20,848,630 Transfers (Note 12) (1,013,187) (33,603,368) – (34,616,555) Disposals (160,000) – – (160,000) At end of year 29,023,039 12,691,827 57,653,314 99,368,180 Accumulated depreciation and amortization At beginning of year – 13,875,329 – 13,875,329 Depreciationandamortization(Note22) – 133,906 – 133,906 Transfers (Note 12) – (3,108,442) – (3,108,442) At end of year – 10,900,793 – 10,900,793 Net book value P29,023,039 P1,791,034 P57,653,314 P88,467,387
During2011,transferspertaintothereclassificationfrominvestmentpropertiestopropertyandequipmentduetochangein the intentionof theGroupon theuseof its building, frombeingheld for rent tobeingoccupied asbuildingofficespaces.
RentalincomefrominvestmentpropertiesrecognizedintheconsolidatedstatementofincomeamountedtoP24.32 million and P22.50 million in 2012 and 2011, respectively (see Note 20). Direct operating expenses arising from the investment properties amounted to P13.81 million and P10.42 million in 2012 and 2011, respectively.
OnOctober1,2009,theParentCompany,RCBCSavingsBank,Inc.(RSB),RizalCommercialBankingCorporation(RCBC),Bankard Inc.,GreatPacificLifeAssuranceCorporation (Grepalife) andHexagonlandCorporation signeda JointVentureAgreementfortheconstructionanddevelopmentofatwentyseven(27)-storey,high-risemixedusedcommercial/officebuilding to be known as the “RCBC Savings Bank Building Project”.
The total construction period is estimated at thirty-nine (39) months and the total cost is estimated at P2.20 billion, of which the Parent Company shall contribute 4.47% in cash contributions.
On October 2, 2012, the Parent Company, RSB, RCBC, Bankard, Inc. and Grepalife executed a Memorandum of Understanding (MOU) agreeing in principle to cancel or revoke the JVA, subject to the approval of the Bangko Sentral ng Pilipinas (BSP). In the said MOU, RCBC was allowed to continue the construction and completion of the Building Project by purchasing the land from RSB and returning the cash contributions of RSB, Bankard, Inc. and the Parent Company.
As of December 31, 2012 and 2011, the Parent Company’s total cash contributions to the RCBC Savings Bank Building Project amounted to P78.19 million and P57.65 million, respectively.
OnMarch13,2013,throughMonetaryBoard(MB)ResolutionNo.405datedMarch7,2013,theBSPconfirmedtheacquisition of RCBC of the land contributed by RSB, as well as the rights and interests of the Parent Company, RSB, Bankard, Inc. and Grepalife to the Building Project.
Buildings with book value of P1.61 million and P1.68 million have fair value amounting to P3.34 million and P13.43 million as of December 31, 2012 and 2011, respectively. Parcels of land with book value of P26.6 million and P0.44 million have fair value amounting to P52.89 million and P40.40 million as of December 31, 2012 and 2011, respectively. The fair values of theinvestmentpropertiesweredeterminedbyindependentprofessionallyqualifiedappraisers.Thefairvaluerepresentsthe amount at which the assets could be exchanged between a knowledgeable, willing buyer and knowledgeable, willing seller in an arm’s length transaction at the date of valuation.
The fair value of the land and buildings were arrived at using the Market Data Approach. In this approach, the value of the land and buildings are based on sales and listings of comparable property registered within the vicinity. The technique of this approach requires the establishment of comparable property by reducing reasonable comparative sales and listings to a common denominator. This is done by adjusting the differences between the subject property and those actual sales and listings regarded as comparable. The properties used as basis of comparison are situated within the immediate vicinity of the subject property.
DepreciationandamortizationexpensepertainingtoinvestmentpropertiesamountedtoP0.11 million and P0.13 million in 2012 and 2011, respectively (see Note 22).
12. Property and Equipment - net
The rollforward analysis of this account as of December 31, 2012 and 2011 follows:
2012 Building, Office Building Furniture, Equipment and Fixtures and Transportation Leasehold Land Improvements Equipment Equipment Improvements Total Cost At beginning of year P1,013,187 P202,484,560 P334,962,225 P57,930,876 P55,314,276 P651,705,124 Additions – 5,291,394 16,807,843 8,637,080 4,423,161 35,159,478 Disposals – – (66,382) (3,454,377) – (3,520,759) At end of year 1,013,187 207,775,954 351,703,686 63,113,579 59,737,437 683,343,843 Accumulated depreciation and amortization At beginning of year – 57,404,747 276,535,701 40,398,354 33,166,569 407,505,371 Depreciationandamortization(Note22) – 9,070,460 26,985,992 6,516,410 6,312,237 48,885,099 Disposals – – (63,200) (3,303,828) – (3,367,028) At end of year – 66,475,207 303,458,493 43,610,936 39,478,806 453,023,442 Net book value P1,013,187 P141,300,747 P48,245,193 P19,502,643 P20,258,631 P230,320,401
2011 Building, Office Building Furniture, Equipment and Fixtures and Transportation Leasehold Land Improvements Equipment Equipment Improvements Total Cost At beginning of year P– P164,583,207 P308,256,777 P56,610,541 P43,534,308 P572,984,833 Additions – 4,297,985 27,639,777 5,878,296 11,779,968 49,596,026 Transfers (see Note 11) 1,013,187 33,603,368 – – – 34,616,555 Disposals – – (934,329) (4,557,961) – (5,492,290) At end of year 1,013,187 202,484,560 334,962,225 57,930,876 55,314,276 651,705,124 Accumulated depreciation and amortization At beginning of year – 45,032,000 254,398,500 37,250,950 28,250,997 364,932,447 Transfers (see Note 11) – 3,108,442 – – – 3,108,442 Depreciationandamortization(Note22) – 9,264,305 22,181,749 6,875,924 4,915,572 43,237,550 Disposals – – (44,548) (3,728,520) – (3,773,068) At end of year – 57,404,747 276,535,701 40,398,354 33,166,569 407,505,371 Net book value P1,013,187 P145,079,813 P58,426,524 P17,532,522 P22,147,707 P244,199,753
DepreciationandamortizationexpensechargedagainstoperationsamountedtoP48.89 million and P43.24 million 2012 and 2011, respectively (see Note 22).
13. Other Assets
This account consists of:
2011 2012 (As restated) Creditable withholding taxes P181,371,240 P140,771,661 Real estate properties for sale - at cost 93,019,300 92,212,603 Computer software - net 64,910,065 64,496,741 Refundable deposits 27,866,924 12,296,845 Prepayments 5,216,931 6,205,062 Forms and supplies inventory 4,953,315 13,460,711 Others 30,208,403 12,858,124 P407,546,178 P342,301,747
Creditable withholding tax pertains to the Group’s tax withheld at source by its customers and is creditable against the income tax liability of the Group.
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RealestatepropertiesforsaleconsistsofinvestmentsinMalayanPlazacondominiumunitsandmemoriallots.AsofDecember31, 2012 and 2011, amounts of the real estate properties for sale are as follows:
2012 2011 MalayanPlazacondominiumunits P83,294,300 P80,362,603 Memorial lots 9,725,000 11,850,000 P93,019,300 P92,212,603
Cost of real estate properties disposed in 2012 and 2011 amounted to P2.13 million and P3.23 million, respectively. The rollforward analysis of the computer software account follows:
2012 2011 Cost At the beginning of the year P78,716,962 P66,885,652 Additions 5,535,791 11,831,310 At the end of the year 84,252,753 78,716,962 Accumulated amortization At the beginning of the year 14,220,221 9,172,502 Depreciation (Note 22) 5,122,467 5,047,719 At the end of the year 19,342,688 14,220,221 Net book value P64,910,065 P64,496,741
14. Insurance Contract Liabilities and Reinsurance Assets
Short-terminsurancecontractliabilitiesandreinsurers’shareofliabilitiesmaybeanalyzedasfollows:
2012 2011 Reinsurers’ Reinsurers’ Insurance Share Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) Net Provision for claims reported and loss adjustment P5,412,934,833 P3,716,385,247 P1,696,549,586 P4,092,690,075 P2,391,297,070 P1,701,393,005 Provision for IBNR losses 83,520,020 – 83,520,020 82,878,858 – 82,878,858 Total claims reported and IBNR 5,496,454,853 3,716,385,247 1,780,069,606 4,175,568,933 2,391,297,070 1,784,271,863 Provision for unearned premiums 3,041,799,037 1,596,767,471 1,445,031,566 2,677,505,854 1,411,396,673 1,266,109,181 Total insurance contract liabilities P8,538,253,890 P5,313,152,718 P3,225,101,172 P6,853,074,787 P3,802,693,743 P3,050,381,044
ProvisionsforclaimsreportedbypolicyholdersandclaimsIBNRmaybeanalyzedasfollows:
2012 2011 Reinsurers’ Reinsurers’ Insurance Share Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) Net Balance at beginning of year P4,175,568,933 P2,391,297,070 P1,784,271,863 P4,624,673,991 P3,074,046,819 P1,550,627,172 Claims incurred during the year 3,675,418,493 2,039,184,289 1,636,234,204 2,070,971,592 490,118,124 1,580,853,468 Increase in IBNR 641,162 – 641,162 15,867,270 – 15,867,270 Total claims reported and claims IBNR 7,851,628,588 4,430,481,359 3,421,147,229 6,711,512,853 3,564,164,943 3,147,347,910 Claims paid during the year (Note 21) (2,355,173,735) (714,096,112) (1,641,077,623) (2,535,943,920) (1,172,867,873) (1,363,076,047) Balance at end of year P5,496,454,853 P3,716,385,247 P1,780,069,606 P4,175,568,933 P2,391,297,070 P1,784,271,863
Provisionforunearnedpremiumsmaybeanalyzedasfollows:
2012 2011 Reinsurers’ Reinsurers’ Insurance Share Insurance Share of Contract Liabilities Contract Liabilities Liabilities (see Note 10) Net Liabilities (see Note 10) Net Balance at beginning of year P2,677,505,854 P1,411,396,673 P1,266,109,181 P2,727,380,755 P1,489,711,593 P1,237,669,162 New policies written during the year (Note 19) 6,920,742,659 4,114,570,931 2,806,171,728 6,051,649,882 3,359,544,322 2,692,105,560 Premiums earned during the year (Note 19) (6,556,449,476) (3,929,200,133) (2,627,249,343) (6,101,524,783) (3,437,859,242) (2,663,665,541) Balance at end of year P3,041,799,037 P1,596,767,471 P1,445,031,566 P2,677,505,854 P1,411,396,673 P1,266,109,181
15. Insurance Payables
This account consists of:
2012 2011 Due to reinsurers (Note 28) P1,771,491,431 P1,095,809,972 Funds held for reinsurers (Note 28) 572,759,901 523,707,674 P2,344,251,332 P1,619,517,646
The rollforward analysis of insurance payables follows:
Due to Funds held reinsurers for reinsurers Total At January 1, 2011 P1,285,121,255 P406,808,080 P1,691,929,335 Arising during the year 2,320,785,374 210,619,457 2,531,404,831 Paid during the year (2,510,096,657) (93,719,863) (2,603,816,520) At December 31, 2011 1,095,809,972 523,707,674 1,619,517,646 Arising during the year 3,553,514,598 184,942,564 3,738,457,162 Paid during the year (2,877,833,139) (135,890,337) (3,013,723,476) At December 31, 2012 P1,771,491,431 P572,759,901 P2,344,251,332
16. Accounts Payable, Accrued Expenses and Other Liabilities
This account consists of:
2011 2012 (As restated) Accounts payable P357,450,316 P341,342,089 Commissions payable 242,197,471 263,790,116 Deferred output value-added tax (VAT) 144,510,035 108,593,807 Accrued expenses 104,831,920 67,322,045 Documentary stamp taxes payable 99,875,124 52,807,654 Accrued taxes 71,605,032 73,329,514 Surety deposits 34,290,301 31,841,060 Output VAT 15,539,222 40,725,119 Deposits payable 13,510,198 11,306,889 Due to related parties (Note 28) 7,202,734 – Others 7,740,924 7,778,817 P1,098,753,277 P998,837,110
AccruedexpensespertaintoaccrualofmonthlyexpendituresoftheGroup.Thisincludesexpensesforutilities,fringebenefittax, allocated common expenses for the use of Y Tower 1 and 2 and other expenses that are necessary to carry out the operations of the Group.
17. Pension
TheGrouphasadefinedbenefitplan,coveringsubstantiallyallof itsemployees,whichrequirescontributiontobemadetoadministered funds. The plan is administered by a local bank as trustee. The Group’s trustee bank is RCBC. The transactions of the fund are being approved by the President of the Group.
Thefollowingtablessummarizethecomponentsofnetpensionbenefitexpenserecognizedintheconsolidatedstatementsofincomeandthefundedstatusandamountsrecognizedintheconsolidatedstatementsoffinancialpositionfortheretirementplan. Thenetpensionbenefitexpenserecognizedintheconsolidatedstatementsofincome,underemployeebenefits(seeNote22),follows:
2012 2011 Current service cost P28,604,225 P22,027,098 Interest cost 19,388,157 21,761,572 Settlement of obligation – (2,613,004) Actuariallossrecognized 4,242,472 2,569,612 Expected return on plan assets (9,430,845) (9,122,182) P42,804,009 P34,623,096
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The net pension obligation of the Parent Company follows:
2012 2011 Presentvalueofpensionbenefitobligation P363,579,491 P337,430,587 Fair value of plan assets (220,383,508) (183,378,153) 143,195,983 154,052,434 Unrecognizednetactuariallosses (104,423,435) (113,550,501) P38,772,548 P40,501,933
The net plan assets of FNAC and BAC follows:
2012 2011 Fair value of plan assets P7,271,778 (P5,238,744) Presentvalueofpensionbenefitobligation (8,163,155) 5,951,858 (891,377) (713,114) Unrecognizednetactuariallosses 1,492,537 (1,547,074) P601,160 P833,960
Thereconciliationofthepresentvalueofthepensionbenefitobligationfollows:
2012 2011 Balance at beginning of year P343,382,445 P303,924,481 Current service cost 28,604,225 22,027,098 Interest cost 19,388,157 21,761,572 Actuarial loss 7,868,836 32,535,269 Present value of obligation of resigned employee – (2,613,004) Present value of obligation of transferred employees to MEI (7,513,467) – Present value of obligation of transferred employee from MEI 58,300 – Benefitspaid (20,045,850) (34,252,971) P371,742,646 P343,382,445
The reconciliation of the fair value of the plan assets follows:
2012 2011 Balance at beginning of year P188,616,897 P182,443,650 Expected return on plan assets 9,430,845 9,122,182 Contributions by employer 36,845,427 37,294,094 Actuarial loss 12,807,967 (5,990,058) Benefitspaid (20,045,850) (34,252,971) Balance at end of year P227,655,286 P188,616,897 Actual return on plan assets P22,238,812 P3,132,124
Movementsintheunrecognizednetactuariallossfollow:
2012 2011 Balance at beginning of year P115,097,575 P79,141,860 Actuarial loss on obligation 7,868,836 32,535,269 Actuarial loss on plan assets (12,807,967) 5,990,058 Actuariallossrecognized (4,242,472) (2,569,612) Balance at end of year P105,915,972 P115,097,575
The distribution of the plan assets as of December 31, 2012 and 2011 follows:
2012 2011 Cash P35,089,650 P32,877,043 Receivables 7,965,588 2,869,103 Investments: Equity securities 91,858,626 76,303,991 Government securities 57,707,236 49,449,656 Other securities and debt instruments 36,840,720 28,429,715 Others 11,632 31,185 229,473,452 189,960,693 Less accrued trust fees and other payables 1,818,166 1,343,796 P227,655,286 P188,616,897
The following presents the transactions of the Group ’s retirement fund with related parties:
2012 2011 Category Balance Balance Terms Conditions Other related parties RCBC Interest rate at Savings deposits P8,298 P42,488 0.25%to4.50% Unsecured;no p.a impairment 31 to 91 days, interest rate at Unsecured;no Time deposits 4,361,387 1,648,200 0.0625% to 4.75% impairment Interest rate at 0.00% to 7.75%: termsof Unsecured;no Corporate bonds 12,504,488 10,710,460 2.5 to 7.5 years impairment
– Unsecured;no Common stocks 15,799,320 7,925,992 impairment HI – Unsecured;no Common stocks 2,472,285 1,210,594 impairment FMLC – Unsecured;no Common stocks 2,547,990 4,111,025 impairment
The principal actuarial assumptions used in determining plan assets and obligations are as follows:
2012 2011 Salary increase rate 5.00% to 7.00% 5.00% Discount rate 5.16% to 5.31% 5.69% to 5.88% Expected return on plan assets 5.00% to 7.00% 5.00%
The overall expected return on plan assets is determined based on the market expectations prevailing as of December 31, 2012 and 2011 applicable to the period over which the obligation is to be settled.
The amounts for the current and the previous periods follows:
2012 2011 2010 2009 2008 Presentvalueofpensionbenefitobligation P371,742,646 P343,382,445 P303,924,481 P262,467,386 P245,795,547 Fair value of plan assets (227,655,286) (188,616,897) (182,443,650) (170,861,518) (125,739,602) Deficit P144,087,360 P154,765,548 P121,480,831 P91,605,868 P120,055,945
Experience adjustment follows:
2012 2011 2010 2009 2008 Experience adjustments on plan liabilities - loss (gain) (1,612,134) P16,842,946 P3,637,578 (P4,713,098) P29,428,354 Experience adjustments on plan assets - gain (loss) 12,807,967 (P5,990,058) (P2,316,776) P12,779,682 (P11,395,487)
The Group expects to contribute P40,144,471 to the retirement fund in 2013.
18. Cash Dividends and Other Revaluation Reserve
Cash DividendsOn August 8, 2011, the Parent Company’s BOD approved the declaration of cash dividends amounting to P100 million or P11.83 per share out of the unappropriated retained earnings of the Parent Company as of December 31, 2010 in favor of the stockholders of record as of August 8, 2011. Dividends were paid on October 27, 2011 and November 14, 2011.
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On August 9, 2012, the Parent Company’s BOD approved the declaration of cash dividends amounting to P100 million or P11.83 per share out of the unappropriated retained earnings of the Parent Company as of December 31, 2011 in favor of the stockholders of record as of August 9, 2012. Dividends were paid on November 29, 2012. Other Revaluation ReserveOn April 10, 2008, the Parent Company’s BOD and stockholders approved the articles of merger and plan of merger between TMMIC and the Parent Company. TMMIC is a 50-50 joint venture company owned by the Parent Company and Tokio Marine Asia Pte., Ltd. (Tokio Marine). On July 2, 2008, the SEC approved the articles and plan of merger. The effects of the merger were reckoned from January 1, 2008. The merger was accounted for as a business combination in accordance with PFRS 3. TMMIC and the Parent Company became a single corporation, with the Parent Company as the surviving corporation. TMMIC ceased to existanditslegalpersonalitywasterminated.Asatthedateofacquisition,theidentifiableassetsandliabilitiesofTMMIChavebeen measured at fair value resulting in a difference of P46,933,294 against its carrying values. The difference between the carrying value and fair value pertains mainly to the increase in the appraised value of the building. The Parent Company recorded the appraisal increase amounting to P23,466,647 pertaining to its previously held interest as “Other revaluation reserve” in the equitysectionoftheconsolidatedstatementoffinancialposition.
19. Net Premiums Earned
Gross premiums earned and reinsurers’ share of gross premiums earned consist of the following:
2012 2011 Gross premiums written Direct P4,987,310,524 P4,555,375,878 Assumed (Note 28) 1,933,432,135 1,496,274,004 Total gross premiums on insurance contracts (see Note 14) 6,920,742,659 6,051,649,882 Gross change in provision for unearned premiums (364,293,183) 49,874,901 gross premiums earned (see Note 14) 6,556,449,476 6,101,524,783 Reinsurers’ share of gross premiums written Direct insurance 3,175,745,857 2,410,469,360 Assumed reinsurance (Note 28) 938,825,074 949,074,962 Total reinsurers’ share of gross premiums on insurance contracts (see Note 14) 4,114,570,931 3,359,544,322 Reinsurers’ share of gross change in provision for unearned premiums (185,370,798) 78,314,920 Reinsurers’ share of gross premiums earned on insurance contacts (see Note 14) 3,929,200,133 3,437,859,242 Net premiums earned P2,627,249,343 P2,663,665,541
20. Investment and Other Income and Investment and Other Expense
Investment and other income
This account consists of:
2011 2012 (As restated) Dividend income (Note 28) P245,167,123 P286,305,928 Interest income (Note 28): AFSfinancialassets 178,204,706 186,992,467 Long-term commercial papers 36,233,698 22,892,393 Cash and cash equivalents 32,137,234 28,554,231 Notes receivables 25,802,254 6,447,083 Funds held by ceding companies 1,664,508 1,202,061 Short-term investments (Note 5) 573,374 557,795 Long-term investments – 270,651 Others 525,538 8,353,520 Gain on sale of: AFSfinancialassets(Note7) 203,308,800 56,716,327 Real estate for sale 4,647,144 3,011,250 Property and equipment (Note 12) 220,593 1,151,198 Long-term commercial paper – 100,000 Rental income (Note 11) 24,319,430 22,500,776 Foreign currency exchange gains - net – 49,144,719 Others 18,986,280 4,213,045 P771,790,682 P678,413,444
Investment and other expense
This account consists of the following:
2011 2012 (As restated) Foreign exchange losses - net P106,845,032 P240,709 Investment expense 17,655,667 7,797,550 Impairmentlossonfinancialassets(Note7) 2,181,316 15,529,779 P126,682,015 P23,568,038
As of December 31, 2012 and 2011, the foreign exchange gain from non-deliverable foreign exchange forward contracts entered into by the Parent Company to hedge its exposure on foreign currency risk amounted to P71.0 million and P50.04 million, respectively. In 2012 and 2011, the weighted average rate of exchange rate of these forward currency contracts are P43.69 and P43.65, respectively.
Theunrealizedforeignexchange lossasofDecember31,2012and2011amountedtoP141,216,391 and P3,701,383, respectively.
21. InsuranceContractBenefitsandClaimsPaid
Grossinsurancecontractbenefitsandclaimspaidconsistof:
2012 2011 Grossinsurancecontractbenefitsandclaimspaid: Direct insurance P1,473,112,488 P1,897,732,136 Assumed reinsurance 882,061,247 638,211,784 Totalgrossinsurancecontractbenefits and claims paid (see Note 14) P2,355,173,735 P2,535,943,920
Reinsurers’shareofgrossinsurancecontractbenefitsandclaimspaidconsistof:
2012 2011 Reinsurers’shareofinsurancecontractbenefitsandclaimspaid: Direct insurance P609,943,714 P990,644,369 Assumed reinsurance 104,152,398 (182,223,504) Total reinsurers’ share of gross insurance contractbenefitsandclaimspaid (see Note 14) P714,096,112 P1,172,867,873
Gross change in insurance contract liabilities consist of:
2012 2011 Change in provision for claims reported: Direct insurance P1,056,058,090 (P450,461,872) Assumed reinsurance 264,186,668 (14,510,456) Change in provision for IBNR 641,162 15,867,270 Total gross change in insurance contract liabilities (see Note 14) P1,320,885,920 (P449,105,058)
Reinsurers’ shares of gross change in insurance contract liabilities consist of:
2012 2011 Reinsurers’ share of gross insurance contract liabilities: Direct insurance P1,316,467,599 (P683,124,253) Assumed reinsurance 8,620,578 374,504 Total reinsurers’ share of gross change in insurance contract liabilities (see Note 14) P1,325,088,177 (P682,749,749)
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22. general and Administrative Expenses
This account consists of:
2012 2011 Salaries, wages and allowances (Note 28) P322,063,976 P306,892,963 Employeebenefits(Note17) 85,835,459 72,447,694 Provisions for impairment loss - net of reversals (Notes 6 and 7) 66,032,188 10,000,000 Rent, light and water (Notes 23 and 28) 54,128,317 59,363,592 Depreciationandamortization(Notes11,12and13) 54,115,157 48,419,175 Transportation and travel 47,333,600 42,867,990 Professional fees 42,108,459 45,307,823 Advertising and promotions 33,162,652 36,294,722 Postage, telephone and cable 30,223,250 30,307,430 Printingandofficesupplies 25,782,855 22,170,343 Entertainment, amusement and recreation 22,678,842 20,325,418 Repairs and maintenance 14,958,236 14,755,488 Taxes, licenses and fees 10,020,445 8,067,873 Management fees (Note 28) 7,500,000 7,508,397 Business development 7,318,315 7,561,675 Membership and association dues 7,110,992 7,199,597 Bank charges 3,360,676 3,847,831 Donations and contributions 1,211,653 10,265,209 Insurance 572,119 1,076,514 Others 17,112,620 15,002,712 P852,629,811 P769,682,446
23. Leases
Operating leases - Group as lessorTheGroupentered intovarious leaseagreementsfor itsofficespaces. These leasesgenerallyhavetermsofoneyear,renewable every year.
Operating leases - Group as lesseeTheGroupenteredintovariouspropertyleaseswithvariouslessorsforofficespaceofitsheadofficeandlocalandprovincialbranches. These leases generally have terms of one year, renewable every year.
24. Income Tax
Thebenefitfromincometaxconsistsof:
2012 2011 Final P26,117,303 P18,345,483 Current 6,892,805 8,457,482 Deferred (5,514,359) 7,308,699 P27,495,749 P34,111,664 The Group’s net deferred tax assets (liabilities) consist of:
2012 2011 Deferred tax assets: Excess of provision for unearned premiums per books over tax basis P576,852,481 P477,841,581 Allowance for impairment losses 37,742,722 20,453,914 Deferred reinsurance commissions 33,987,216 31,840,859 Unamortizedpastservicecosts 17,356,369 22,631,118 Pension obligation 13,896,674 12,150,580 Unrealizedforeignexchangelosses 6,215,762 1,663,611 NOLCO 1,902,943 – Provision for IBNR losses – 24,863,657 Accrualforshort-termbenefits – 9,894,512 P687,954,167 P601,339,832 Deferred tax liabilities: Deferred reinsurance premiums (P477,979,289) (419,178,867) Deferred acquisition costs (101,352,269) (79,643,269) Excess of provision for unearned premiums per books over tax basis (1,054,129) – Pension assets (208,707) (250,188) Unrealizedforeignexchangegains (131,102) (553,195) (580,725,496) (499,625,519) Deferred tax liability through equity: NetunrealizedgainonAFSfinancialassets (59,778,265) (31,966,356) P47,450,406 P69,747,957
Thenetdeferredtaxassetsarepresentedintheconsolidatedstatementsoffinancialpositionasfollows:
2012 2011 Deferred tax assets P47,798,630 P70,024,768 Deferred tax liability (348,224) (276,811) P47,450,406 P69,747,957
AsofDecember31,2012and2011,theGroupdidnotrecognizethedeferredincometaxassetsonthefollowingdeductibletemporary differences, carryforward of unused tax credits from excess of MCIT over RCIT, and unused NOLCO:
2012 2011 NOLCO P493,990,994 P364,857,127 Accrued expenses 98,416,219 59,832,872 Provision for IBNR 83,492,905 – MCIT 26,847,123 26,657,568 Unamortizedpastservicecost 12,434,793 – Allowance for doubtful accounts 3,162,098 3,384,386 Impairment loss – 15,430,478
Therelatedtaxbenefitswillberecognizedonlyasreassessmentdemonstratesthattheyarerealizable.Realizationisentirelydependent upon future taxable income.
As of December 31, 2012, details of the NOLCO and MCIT, which is available for offset against future taxable income and future income tax liability, respectively, follows:
Tax Effect Inception Year NOLCO of NOLCO MCIT Expiration Year 2012 P240,817,847 P72,245,354 P6,892,805 2015 2011 241,217,138 72,365,142 8,457,482 2014 2010 18,299,152 5,489,746 11,496,836 2013 P500,334,137 P150,100,242 P26,847,123
The following are the movements in NOLCO:
2012 2011 Balance at beginning of year P364,857,127 P856,501,006 Addition 240,817,847 241,217,138 Expiration (21,549,579) (732,861,017) Applied (83,791,258) – Balance at end of year P500,334,137 P364,857,127
The following are the movements in MCIT:
2012 2011 Balance at beginning of year P26,657,568 P20,798,178 Addition 6,892,805 8,457,482 Expiration (6,703,250) (2,598,092) Balance at end of year P26,847,123 P26,657,568
Thereconciliationofprovisionforincometaxcomputedatthestatutorycorporateincometaxratetobenefitfromincometaxshown in the consolidated statements of income follows:
2012 2011 At statutory income tax rate P21,234,775 P85,831,914 Adjustments for: Changeinunrecognizeddeferred tax assets 118,736,412 89,755,608 Nondeductible expenses 53,182,100 2,523,432 Dividend income (73,071,567) (84,592,676) Interest income exempt or already subjectedtofinaltax (40,375,948) (46,331,820) GainonsaleofAFSfinancialassets (52,202,173) (13,074,794) Nontaxable income (7,850) - P27,495,749 P34,111,664
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25. Reconciliation of Net Income under PFRS to Statutory Net Income
The reconciliation of net income under PFRS to statutory net income of the Group follows:
2012 2011 Net income under PFRS P43,286,835 P251,994,718 Adjustments: Difference in change in provision for unearned premiums - net 130,521,167 (9,260,124) Netpensionbenefitexpense(income) 5,855,101 (2,670,998) Deferred reinsurance commission (6,803,399) (2,607,633) Deferred acquisition costs - net (58,405,414) 32,570,980 Net adjustments to interest income (2,771,605) (2,546,822) Others 17,272,691 1,481,175 Eliminated dividend income 88,675,000 110,940,000 Tax effect of adjustments (20,899,108) 3,995,179 P196,731,268 P383,896,475
26. Insurance and Financial Risk Management
Insurance RiskTheprincipalrisktheGroupfacesunderinsurancecontractsisthattheactualclaimsandbenefitpaymentsorthetimingthereof,differfromexpectations.Thisisinfluencedbythefrequencyofclaims,severityofclaims,actualbenefitspaidandsubsequentdevelopmentofclaims.Therefore,theobjectiveoftheGroupistoensurethatsufficientreservesareavailabletocovertheseliabilities.
Theaboveriskexposureismitigatedbydiversificationacrossalargeportfolioofinsurancecontractsandgeographicalareas.The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements.
The Group purchases reinsurance as part of its risks mitigation program. Reinsurance ceded is placed on both a proportional and non-proportional basis with retention limits varying by product line and territory. The majority of proportional reinsurance is quota-share reinsurance which is taken out to reduce the overall exposure of the Group to certain classes of business.
Non-proportional reinsurance is primarily excess-of-loss reinsurance designed to mitigate the Group’s net exposure to catastrophe losses. Retention limits for the excess-of-loss reinsurance vary by product line and territory.
Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Group has reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements.
TheGroup’splacementofreinsuranceisdiversifiedsuchthatitisneitherdependentonasinglereinsurernoraretheoperationsof the Group substantially dependent upon any single reinsurance contract.
The Group principally issues the following types of general insurance contracts: fire, motorcar, personal accident, marine, engineering,bondsandmiscellaneouscasualty.Themostsignificantrisksarisefromclimatechangesandnaturaldisasters.TheserisksdonotvarysignificantlyinrelationtothelocationoftheriskinsuredbytheGroup,typeofriskinsuredandbyindustry.
To further reduce the risk exposure, the Group requires strict claim review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims.
The Group further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Group.
The Group also has limited its exposure level by imposing maximum claim amounts on certain contracts as well as the use of reinsurance arrangements in order to limit exposure to catastrophic events. The purpose of these underwriting and reinsurance strategies is to limit exposure to catastrophes to a predetermined maximum amount based on the Group’s risk appetite as decided by management.
The tables below set out the concentration of the claims liabilities by type of contract (see Note 14).
2012 gross Reinsurers’ Share Net Fire P3,242,383,100 P2,371,584,942 P870,798,158 Marine cargo 669,507,137 527,638,458 141,868,679 Miscellaneous casualty 598,315,703 432,763,554 165,552,149 Motor 362,106,573 14,737,785 347,368,788 Engineering 360,629,034 276,080,927 84,548,107 Bonds 203,718,828 93,571,794 110,147,034 Others 59,794,478 – 59,794,478 P5,496,454,853 P3,716,377,460 P1,780,077,393
2011 Gross Reinsurers’ Share Net Fire P2,618,601,729 P1,725,239,060 P893,362,669 Motor 411,028,052 14,007,531 397,020,521 Engineering 361,176,063 301,750,849 59,425,214 Miscellaneous casualty 249,998,346 108,326,727 141,671,619 Marine cargo 226,496,861 112,806,428 113,690,433 Bonds 114,095,499 90,265,302 23,830,197 Surety 128,861,927 38,901,173 89,960,754 Personal accident 63,775,747 – 63,775,747 Others 1,534,709 – 1,534,709 P4,175,568,933 P2,391,297,070 P1,784,271,863
The tables below set out the geographical concentration of the Group’s claims liabilities based on the countries where the insurance business is written.
2012 gross Reinsurers’ Share Net Philippines P5,381,333,471 P3,716,385,247 1,664,948,224 Greece 115,121,382 – 115,121,382 P5,496,454,853 P3,716,385,247 1,780,069,606
2011 Gross Reinsurers’ Share Net Philippines P3,986,983,615 P2,382,809,158 P1,604,174,457 Greece 183,263,872 8,487,912 174,775,960 Netherlands 5,321,446 – 5,321,446 P4,175,568,933 P2,391,297,070 P1,784,271,863
Key AssumptionsThe principal assumption underlying the liability estimates is the Group’s future claims development will follow a similar pattern to past claims development experience. This includes assumptions in respect of average claim costs, claims handling costs, claims inflationfactorsandclaimnumbersforeachaccidentyear.Additionalqualitativejudgmentsareusedtoassesstheextenttowhich past trends may not apply in the future, for example once-off occurrence, changes
in market factors such as public attitude to claiming, economic conditions, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures. Judgment is further used to assess the extent to which external factors such as judicial decisions and government legislation affect the estimates.
Other key assumptions include variations in interest, delays in settlement and changes in foreign currency rates.
SensitivitiesThe insurance claims provision is sensitive to the above key assumptions. Because of delays that arise between occurrence of aclaimanditssubsequentnotificationandeventualsettlement,theoutstandingclaimprovisionsarenotknownwithcertaintyat the reporting dates.
The table below shows the impact of changes in certain important assumptions in general insurance business while other assumptionsremainunchanged.Thecorrelationofassumptionswillhaveasignificanteffectindeterminingtheclaimsbuttodemonstrate the impact due to changes in assumptions, assumptions had to be changed on individual basis.
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2012 Impact on Impact on gross Insurance Net Insurance Impact on Contract Contract Income Before Liabilities Liabilities Income Tax Change in Increase Increase Increase Assumptions % (Decrease) (Decrease) (Decrease) Average claim costs +5% P141,435,584 P45,403,049 (P45,403,049) Average number of claims +5% 142,020,012 45,396,696 (45,396,696)
2011 Impact on Impact on Gross Insurance Net Insurance Impact on Contract Contract Income Before Liabilities Liabilities Income Tax Change in Increase Increase Increase Assumptions % (Decrease) (Decrease) (Decrease) Average claim costs +5% P68,020,655 P48,334,494 (P48,334,494) Average number of claims +5% 61,316,690 42,652,585 (42,652,585)
Claims Development TableThefollowingtablesreflectthecumulativeincurredclaims,includingbothclaimsnotifiedandIBNRforeachsuccessiveaccidentyear at each reporting dates, together with cumulative payments to date.
The Group aims to maintain strong reserves in respect of its insurance business in order to protect against adverse future claims experience and developments. As claims develop and the ultimate cost of claims becomes more certain, adverse claims experiences are eliminated which results in the release of reserves from earlier accident years. In order to maintain strong reserves, the Group transfers much of this release to current accident year reserves when the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims.
TherisksvarysignificantlyinrelationtothelocationoftheriskinsuredbytheGroup,typeofrisksinsuredandinrespectofcommercial and business interruption insurance by industry. The uncertainty of the BAC’s ultimate cost of claims is typically resolved within one year. The bonds claims payable amounting to P13.40 million as of December 31, 2012 and 2011 is determined to be the BAC’s ultimate cost of claims.
gros
s ins
uran
ce c
ontra
ct lia
bilit
ies in
201
2
2005
and
Accid
ent y
ear
prior
yea
r 20
06
2007
20
08
2009
20
10
2011
20
12
Tota
lAc
ciden
t yea
r P7
,033
,157
,544
P4
,850
,917
,503
P2
,332
,520
P3
,454
,804
,095
P4
,559
,381
,129
P2
,481
,332
,474
P2
,087
,604
,406
P3
,569
,353
,705
P3
,569
,353
,705
One
year
late
r 7,
211,
293,
104
6,80
5,33
6,00
3 2,
702,
868,
685
3,08
1,95
4,26
4 4,
064,
463,
972
2,38
5,64
6,85
5 2,
386,
441,
297
– 2,
386,
441,
297
Two
year
s lat
er
7,27
0,83
7,80
4 6,
141,
362,
933
3,30
9,28
8,41
7 3,
045,
807,
229
4,12
3,59
4,78
3 2,
340,
065,
008
– –
2,34
0,06
5,00
8Th
ree
year
s lat
er
7,28
0,26
3,33
3 6,
211,
822,
149
3,23
8,22
0,38
8 3,
054,
340,
566
4,00
3,06
8,00
8 –
– –
4,00
3,06
8,00
8Fo
ur y
ears
late
r 7,
321,
310,
337
6,10
9,29
6,49
8 3,
218,
225,
235
3,05
0,27
8,50
0 –
– –
– 3,
050,
278,
500
Five
year
s lat
er
7,20
4,20
4,82
6 6,
119,
695,
906
3,23
6,69
6,94
0 –
– –
– –
3,23
6,69
6,94
0Six
yea
rs la
ter
7,19
4,46
2,94
5 6,
115,
761,
614
– –
– –
– –
6,11
5,76
1,61
4Se
ven
year
s lat
er
7,16
5,37
3,18
2 –
– –
– –
– –
7,16
5,37
3,18
2Cu
rrent
est
imat
e of
cum
ulativ
e cla
ims
7,16
5,37
3,18
2 6,
115,
761,
614
3,23
6,69
6,94
0 3,
050,
278,
500
4,00
3,06
8,00
8 2,
340,
065,
008
2,38
6,44
1,29
7 3,
569,
353,
705
31,8
67,0
38,2
54Cu
mula
tive
pa
ymen
ts to
dat
e 6,
759,
688,
115
5,93
8,21
5,79
1 3,
206,
921,
323
2,48
5,93
0,63
6 3,
299,
371,
157
2,23
4,36
2,00
3 1,
472,
339,
813
973,
754,
563
26,3
70,5
83,4
01Lia
bilit
y re
cogn
ized
P4
05,6
85,0
67
P177
,545
,823
P2
9,77
5,61
7 P5
64,3
47,8
64
P703
,696
,851
P1
05,7
03,0
05
P914
,101
,484
P2
,595
,599
,142
P5
,496
,454
,853
Net i
nsur
ance
con
tract
liabi
lities
in 2
012
20
05 a
nd
Accid
ent y
ear
prior
yea
r 20
06
2007
20
08
2009
20
10
2011
20
12
Tota
lAc
ciden
t yea
r P3
,085
,614
,472
P1
,242
,378
,749
P1
,431
,258
,014
P1
,952
,183
,387
P1
,125
,272
,584
P1
,497
,315
,141
P1
,497
,678
,245
P1
,373
,522
,852
P1
,373
,522
,852
One
year
late
r 3,
226,
427,
209
1,56
7,04
5,89
3 1,
424,
541,
612
1,92
0,76
9,31
9 1,
152,
619,
674
1,56
5,18
5,25
6 1,
808,
794,
492
– 1,
808,
794,
492
Two
year
s lat
er
3,25
4,19
2,23
7 1,
616,
864,
780
1,94
1,14
7,71
2 1,
976,
729,
680
1,21
6,04
1,80
7 1,
549,
070,
340
– –
1,54
9,07
0,34
0Th
ree
year
s lat
er
3,27
8,76
2,81
2 1,
626,
293,
386
1,90
2,39
6,64
7 1,
944,
578,
887
1,20
3,23
5,25
7 –
– –
1,20
3,23
5,25
7Fo
ur y
ears
late
r 3,
271,
630,
637
1,62
2,78
8,90
8 1,
882,
845,
857
1,94
6,39
9,06
3 –
– –
– 1,
946,
399,
063
Five
year
s lat
er
3,04
2,76
4,56
8 1,
636,
820,
607
1,87
8,43
3,99
4 –
– –
– –
1,87
8,43
3,99
4Six
yea
rs la
ter
2,75
4,57
6,46
8 1,
635,
768,
393
– –
– –
– –
1,63
5,76
8,39
3Se
ven
year
s lat
er
2,74
2,39
9,40
4 –
– –
– –
–
2,74
2,39
9,40
4Cu
rrent
est
imat
e of
cum
ulativ
e cla
ims
2,74
2,39
9,40
4 1,
635,
768,
393
1,87
8,43
3,99
4 1,
946,
399,
063
1,20
3,23
5,25
7 1,
549,
070,
340
1,80
8,79
4,49
2 1,
373,
522,
852
14,1
37,6
23,7
95Cu
mula
tive
pa
ymen
ts to
dat
e 2,
605,
150,
767
1,62
3,10
4,60
4 1,
861,
274,
799
1,84
8,68
7,04
7 1,
150,
912,
689
1,45
1,70
0,09
2 1,
139,
786,
901
676,
937,
290
12,3
57,5
54,1
89Ne
t liab
ility
reco
gnize
d
P137
,248
,637
P1
2,66
3,78
9 P1
7,15
9,19
5 P9
7,71
2,01
6 P5
2,32
2,56
8 P9
7,37
0,24
8 P6
69,0
07,5
91
P696
,585
,562
P1
,780
,069
,606
Leg
acy
122
20
12
AN
UA
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Financial RiskThe Group is exposedtofinancialriskthroughitsfinancialassetsandfinancialliabilities.Inparticular,thekeyfinancialriskisthattheproceedsfromitsfinancialassetsarenotsufficienttofundtheobligationsarisingfromitsinsurancecontracts.Themostimportantcomponentsofthisfinancialriskarecreditrisk,liquidityriskandmarketrisk.
Credit RiskCredit risk is a risk due to uncertainty in a counterparty’s (also called an obligor) ability to meet its obligation.
Prior to extending credit, the Group manages its credit risk by assessing credit quality of its counterparty.
The Group has a credit policy group that reviews all information about the counterparty which may include its statement offinancialposition,statementsofincomeandothermarketinformation.Thenatureoftheobligationislikewiseconsidered.Based on this analysis, the credit analyst assigns the counterparty a credit rating to determine whether or not credit may be provided.
Creditrisklimitisalsousedtomanagecreditexposurewhichspecifiesexposurecreditlimitforeachintermediarydependingonthesizeofitsportfolioanditsabilitytomeetitsobligationbasedonpastexperience.
Thetablebelowshowsthemaximumexposuretocreditriskforthecomponentsoftheconsolidated statement of financialposition, net of impairment loss.
2012 2011 AFSfinancialassets: Quotedsecurities: Listed equity securities Common shares P6,320,666,240 P4,679,137,830 Preferred shares 60,981,155 26,021,840 Government debt securities: Local currency 874,413,212 561,760,112 Foreign currency 32,968,440 434,862,299 Private debt securities 2,129,269,696 2,244,814,531 Funds 97,124,086 30,019,372 Non-quoted securities: Unlisted equity securities 110,688,282 80,495,744 Loans and receivables: Cash and cash equivalents 1,161,143,055 1,612,135,256 Short-term investments 11,245,787 11,099,040 Insurance receivables: Due from policyholders, agents and brokers 2,109,410,107 1,572,606,331 Due from ceding companies: Treaty 906,519,207 763,776,221 Facultative 37,569,513 166,892,418 Funds held by ceding companies 151,131,268 167,379,163 Reinsurance recoverable on paid losses: Facultative 85,035,443 99,307,410 Treaty 42,041,015 21,392,188 Loans and receivables: Long-term commercial papers 746,635,665 344,835,665 Notes receivable 501,110,966 8,104,133 Creditable withholding tax 62,677,478 62,677,478 Claims recoverable 11,770,886 – Accounts receivable 2,497,139 2,422,163 Cash advances 859,934 1,198,492 Security fund 342,294 342,294 Long-term investments – 10,026,206 Due from related parties – 3,261,857 Accrued income: Accrued interest income: AFSfinancialassets 33,956,819 36,426,308 Long-term commercial papers 6,052,261 2,549,440 Notes receivable 942,778 – Cash and cash equivalents 770,758 335,054 Funds held by ceding companies 178,549 169,429 Security fund 123,936 108,425 Short-term investments 11,429 80,127 Long-term investments – 361,180 Accrued rent income 4,298,968 3,291,580 Accrued dividend income 2,919,131 – P15,505,355,497 P12,947,889,586
ThefollowingtablesprovideinformationregardingthecreditriskexposureoftheGroupbyclassifyingthefinancialassetsaccording to the Group’s credit ratings of the counter parties.
2012 Neither past due nor impaired Past due but Individually High grade Medium grade not impaired Impaired Total AFSfinancialassets: Quotedsecurities: Listed equity securities Common shares P6,302,730,495 P– P– P31,472,107 P6,334,202,602 Preferred shares 60,981,155 – – – 60,981,155 Government debt securities: Local currency 874,413,212 – – – 874,413,212 Foreign currency 32,968,440 – – – 32,968,440 Private debt securities 289,888,735 1,839,380,961 – – 2,129,269,696 Funds 97,124,086 – – – 97,124,086 Non-quoted securities: Unlisted equity securities – 110,688,282 – – 110,688,282 Loans and receivables: Cash and cash equivalents 1,146,088,596 15,054,459 – – 1,161,143,055 Short-term investments 11,245,787 – – – 11,245,787 Insurance receivables: Due from policyholders, agents, and brokers 1,364,503,085 515,009,870 323,516,454 7,885,979 2,210,915,388 Due from ceding companies: Facultative 27,129,947 10,258,223 181,343 17,547,961 55,117,474 Treaty 785,685,913 63,649,461 57,183,833 496,316 907,015,523 Funds held by ceding companies 97,467,475 1,634,984 52,028,809 1,380,777 152,512,045 Reinsurance recoverable on paid losses: Facultative 30,420,140 15,186,976 39,428,327 4,337,913 89,373,356 Treaty 797,890 – 41,243,125 – 42,041,015 Accrued income: Accrued interest: AFSfinancialassets 17,600,727 16,356,092 – – 33,956,819 Long-term commercial papers 6,052,261 – – – 6,052,261 Notes receivable 942,778 – – – 942,778 Cash and cash equivalents 770,758 – – – 770,758 Funds held by ceding companies 29,420 23,547 125,582 – 178,549 Security fund 123,936 – – – 123,936 Short-term investments 11,429 – – – 11,429 Accrued rent income 4,298,968 – – – 4,298,968 Accrued dividend income 2,919,131 – – – 2,919,131 Loans and receivables: – Long-term commercial papers 746,635,665 – – – 746,635,665 Creditable withholding tax 62,677,478 – – – 62,677,478 Notes receivable 500,607,320 503,646 – 1,697,251 502,808,217 Claims recoverable 11,770,886 – – – 11,770,886 Accounts receivable 2,425,992 71,147 – 2,005,675 4,502,814 Due from related parties – – – – – Cash advances 859,934 – – – 859,934 Security fund 342,294 – – – 342,294 P12,479,513,933 P2,587,817,648 P513,707,473 P66,823,979 P15,647,863,032
2011 Neither past due nor impaired Past due but Individually High Grade Medium Grade not impaired Impaired Total AFSfinancialassets: Quotedsecurities: Listed equity securities Common shares P4,666,574,526 P– P– P34,385,935 P4,700,960,461 Preferred shares 26,021,840 – – – 26,021,840 Government debt securities: Local currency 561,760,112 – – – 561,760,112 Foreign currency 434,862,299 – – – 434,862,299 Private debt securities 1,296,561,266 948,253,265 – – 2,244,814,531 Funds 30,019,372 – – – 30,019,372 Non-quoted securities: Unlisted equity securities – 80,495,744 – – 80,495,744 Loans and receivables: Cash and cash equivalents 1,611,289,380 845,876 – – 1,612,135,256 Short-term investments 11,099,040 – – – 11,099,040 Insurance receivables: Due from policyholders, agents, and brokers 731,743,924 462,080,812 405,934,959 16,944,841 1,616,704,536 Due from ceding companies: Facultative 19,734,830 121,191,205 25,966,383 17,547,961 184,440,379 Treaty 611,150,998 17,177,946 135,447,277 496,316 764,272,537 Funds held by ceding companies 165,222,389 788,629 1,368,145 1,380,777 168,759,940 Reinsurance recoverable on paid losses: Facultative 4,086,187 – 95,221,223 4,337,913 103,645,323 Treaty 923 – 21,391,265 – 21,392,188 (Forward) L
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2011 Neither past due nor impaired Past due but Individually High Grade Medium Grade not impaired Impaired Total Accrued income: Accrued interest: AFSfinancialassets P21,637,013 P14,789,295 P– P– P36,426,308 Long-term commercial papers 2,363,075 186,365 – – 2,549,440 Cash and cash equivalents 335,054 – – – 335,054 Long-term investments 361,180 – – – 361,180 Funds held by ceding companies 169,429 – – – 169,429 Security fund 108,414 11 – – 108,425 Short-term investments 80,127 – – – 80,127 Accrued rent income 3,291,580 – – – 3,291,580 Loans and receivables: Long-term commercial papers 344,835,665 – – – 344,835,665 Creditable withholding tax 62,677,478 – – – 62,677,478 Long-term investments 10,026,206 – – – 10,026,206 Notes receivable 8,104,133 – – 1,697,251 9,801,384 Accounts receivable 2,363,616 58,547 – 2,005,675 4,427,838 Due from related parties 3,261,857 – – – 3,261,857 Cash advances 1,198,492 – – – 1,198,492 Security fund 342,294 – – – 342,294 P10,631,282,699 P1,645,867,695 P685,329,252 P78,796,669 P13,041,276,315
The credit rating is based on the following:
a) Cash and cash equivalents, short-term investments and related accrued income High grade pertains to those deposited, placed or invested in foreign and local banks belonging to the top banks in the
Philippinesintermsofresourcesandprofitability,whilemediumgradepertainstothosedeposited,placedorinvestedinthrift banks and rural banks in the Philippines.
b) Insurance receivables, loans and receivables, accrued rent income and dividend income For insurance receivables and loans and receivables except Due from ceding companies, Funds held by ceding companies,
and Long-term commercial papers, the Group uses a credit rating concept based on the borrowers and counterparties’ overall creditworthiness. High grade is given to borrowers and counterparties who possess strong to very strong capacity to meet its obligations. Medium grade is given to borrowers and counterparties who possess above average capacity to meet its obligations. These counterparties are somewhat susceptible to adverse changes in business and economic conditions.
For Due from ceding companies and Funds held by ceding companies from local sources, the Group uses a credit rating concept based on the debt-to-equity ratios of the borrowers and counterparties. High grade is given to borrowers and counterparties with debt-to-equity ratio of less than or equal to 2:1, while medium grade is given to borrowers and counterparties with debt-to-equity ratio of more than 2:1.
For Due from ceding companies and Funds held by ceding companies from foreign sources, the Group uses Standard & Poor’s (S&P) and A.M. Best’s credit rating of insurance companies. High grade pertains to insurance companies rated by S&PandA.M.BestashigherthanBB+,whichmeansthatthe insurancecompanyhasgoodtostrongfinancialsecuritycharacteristics, but may be affected by adverse business conditions. Medium grade pertains to insurance companies that are ungraded and rated by S&P and A.M. Best as lower than BB+, which means that the insurance company has marginal financialsecuritycharacteristics.Positiveattributesexist,butadversebusinessconditionscouldleadtoinsufficientabilitytomeetfinancialcommitments.
c) Equity securities Listedequitysecuritiesareclassifiedashighgrade.Unlistedequitysecuritiesareclassifiedasmediumgrade.
d) Debt securities, long-term commercial papers, and related accrued income These are based on the credit ratings by the international rating agency, Standard & Poors (S&P), and by Philippine Ratings
Services Corporation (Philratings), the only domestic credit rating services in the Philippines accredited by Bangko Sentral ng Pilipinas (BSP) and SEC, in cases where an S&P rating is not available. High grade pertains to investments rated by S&P as BBB- and higher, which means that the counterparties have extremely strong to adequate capacity of paying interest and repaying principal, as well as Investments in Securities issued by the Philippine Government. Medium grade pertains to investments rated as Baa and higher by Philratings, as well as investments rated by S&P as BB+ to B- (except Philippine Government Securities). The Group’s holdings under this category are rated either BB- by S&P (due to sovereign credit ratingceiling)orAaabyPhilratingswhichisdefinedbyPhilratingstomeanthattheobligor’scapacitytomeetitsfinancialcommitment on the obligation is extremely strong.
e) Notes receivables Receivables from related entities are considered as high grade.
Thefollowingshowstheaginganalysisoffinancialassets:
2012 Total past due but not <30 days > 30 days impaired Loans and receivables: Due from policyholders, agents and brokers P3,827,274 P319,689,180 P323,516,454 Due from ceding companies: Facultative 175,024 6,319 181,343 Treaty 26,825,050 30,358,783 57,183,833 Funds held by ceding companies - treaty 50,000 51,978,809 52,028,809 Reinsurance recoverable on paid losses: Facultative 9,612,558 29,815,769 39,428,327 Treaty 380,906 40,097,265 40,478,171 Accrued income: Funds held by ceding companies - treaty – 125,582 125,582 P40,870,812 P472,071,707 P512,942,519
2011 Total past due but not <30 days > 30 days impaired Loans and receivables: Due from policyholders, agents and brokers P310,664 P405,624,295 P405,934,959 Due from ceding companies: Facultative 1,789,783 24,176,600 25,966,383 Treaty 2,418,042 133,029,235 135,447,277 Funds held by ceding companies - treaty 410,154 957,991 1,368,145 Reinsurance recoverable on paid losses: Facultative 5,935,382 89,285,841 95,221,223 Treaty 1,230 21,390,035 21,391,265 P10,865,255 P674,463,997 P685,329,252
Liquidity RiskLiquidityorfundingriskistheriskthatanentitywillencounterdifficultyinraisingfundstomeetcommitmentsassociatedwithfinancialinstruments.Liquidityriskmayresultfromeithertheinabilitytosellfinancialassetsquicklyattheirfairvalues;orcounterpartyfailingonrepaymentofacontractualobligation;orinsuranceliabilityfallingdueforpaymentearlierthanexpected;orinabilitytogeneratecashinflowsasanticipated.
An institution may suffer from a liquidity problem when its credit rating falls. The Group is also exposed to liquidity risk if markets on which it depends on are subject to loss of liquidity. The major liquidity risk faced by the Group is the potential daily calls on its available cash resources in respect of claims from insurance contracts.
The Group manages liquidity through a management team which determines liquidity risk for the Group by identifying events that would trigger liquidity problems, providing contingency plans, identifying potential sources of funds and monitoring compliance of liquidity risk policy.
ThetablesbelowanalyzefinancialassetsandfinancialliabilitiesoftheGroupintotheirrelevantmaturitygroupsbasedontheremaining period at the reporting date to their contractual maturities or expected repayment dates.
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2012 More than Up to a year* 1-3 years 3 years No term Total Cash and cash equivalents P1,162,312,352 P– P– P– P1,162,312,352 Short-term investments 11,245,787 – – – 11,245,787 Insurance receivables 3,456,974,801 – – – 3,456,974,801 AFSfinancialassets 54,354,167 348,039,361 2,634,257,820 6,589,459,763 9,626,111,111 Loans and receivables 591,681,307 183,413,164 554,502,817 – 1,329,597,288 Accrued income 49,254,629 – – – 49,254,629 Reinsurance recoverable on unpaid losses 3,716,385,247 – – – 3,716,385,247 Totalfinancialassets P9,042,208,290 P531,452,525 P3,188,760,637 P6,589,459,763 P19,351,881,215 Insurance contract liabilities P5,496,454,853 P– P– P– P5,496,454,853 Insurance payables 2,344,251,332 – – – 2,344,251,332 Accounts payable, accrued expenses and other liabilities 753,713,666 – – – 753,713,666 Totalfinancialliabilities P8,594,419,851 P– P– P– P8,594,419,851 *Up to a year are all commitments which are either due within one year or are payable in demand
2011 More than Up to a year* 1-3 years 3 years No term Total Cash and cash equivalents P1,613,304,553 P– P– P– P1,613,304,553 Short-term investments 11,099,040 – – – 11,099,040 Insurance receivables 2,859,214,903 – – – 2,859,214,903 AFSfinancialassets 197,756,097 162,197,741 2,881,483,104 4,815,674,786 8,057,111,728 Loans and receivables 18,992,759 147,310,140 270,268,315 – 436,571,214 Accrued income 43,321,543 – – – 43,321,543 Reinsurance recoverable on unpaid losses 2,391,297,070 – – – 2,391,297,070 Totalfinancialassets P7,134,985,965 P309,507,881 P3,151,751,419 P4,815,674,786 P15,411,920,051 Insurance contract liabilities P4,175,568,933 P– P– P– P4,175,568,933 Insurance payables 1,619,517,646 – – – 1,619,517,646 Accounts payable, accrued expenses and other liabilities 712,074,127 – – – 712,074,127 Totalfinancialliabilities P6,507,160,706 P– P– P– P6,507,160,706 *Up to a year are all commitments which are either due within one year or are payable in demand
In 2012 and 2011, certain insurance receivables, AFS securities and loans and receivables have been provided with allowance for impairment.
ThetablebelowanalyzesnonfinancialassetsandliabilitiesoftheGroupintoamountsexpectedtoberecoveredorsettledwithin12 months (current) and beyond 12 months (noncurrent).
2012 2011 Current Noncurrent Current Noncurrent Deferred acquisition costs P337,840,897 P– P272,708,433 P– Deferred reinsurance premiums 1,596,767,471 – 1,411,396,673 – Investment properties – 108,901,090 – 88,467,387 Property and equipment – 230,320,401 – 244,199,753 Pension assets – 601,160 – 833,960 Deferred tax assets – 47,798,630 – 70,024,768 Other assets 68,245,573 339,300,605 44,820,742 297,481,005 Totalnonfinancialassets P2,002,853,941 P726,921,886 P1,728,925,848 P701,006,873 Provision for unearned premiums P3,041,799,037 P– P2,677,505,854 P– Deferred reinsurance commissions 113,290,719 – 113,367,069 – Deferred tax liability – 348,224 – 276,811 Pension liability – 38,772,548 – 40,501,933 Income tax payable 133,579 – – – Other liabilities 345,039,611 – 286,762,983 – Totalnonfinancialliabilities P3,500,262,946 P39,120,772 P3,077,635,906 P40,778,744
It is unusual for the Group primarily transacting insurance business to predict the requirements of funding with absolute certainty as theory of probability is applied on insurance contracts to ascertain the likely provision and the time period when such liabilities will require settlement. The amounts and maturities in respect of insurance liabilities are thus based on management’s best estimate based on past experience.
Market RiskMarketriskistheriskofchangeinfairvalueoffinancialinstrumentsfromfluctuationsinforeignexchangerates(currencyrisk),marketinterestrates(interestraterisk)andmarketprices(pricerisk),whethersuchchangeinpriceiscausedbyfactorsspecificto the individual instrument or its issuer or factors affecting all instruments traded in the market.
Marketriskistherisktoaninstitution’sfinancialconditionfromvolatilityinthepricemovementsoftheassetscontainedina portfolio. Market risk represents what the Group would lose from price volatilities. Market risk can be measured as the potentialgainorlossinapositionorportfoliothatisassociatedwithapricemovementofagivenprobabilityoveraspecifiedtimehorizon.
The Group manages market risk by evenly distributing capital among investment instruments, sectors and geographical areas.
TheGroupstructureslevelsofmarketriskitacceptsthroughasoundmarketriskpolicybasedonspecificguidelinessetbyanInvestment Committee. This policy constitutes certain limits on exposure of investments mostly with top-rated banks, which are selectedonthebasisofthebank’screditratings,capitalizationandqualityservicingbeingrenderedtotheGroup.Also,thesaidpolicyincludesdiversificationbenchmarksofinvestmentportfoliotodifferentinvestmenttypesdulyapprovedbytheIC,assetallocation and portfolio limit structure.
Moreover, control of relevant market risks can be addressed through compliance reporting of market risk exposures, regular monitoring and review of the Group’s investment performance and upcoming investment opportunities for pertinence and changing environment.
a) Currency Risk
The Group’s principal transactions are carried out in Philippine Peso and its exposure to foreign exchange risk arises primarily with respect to U.S. Dollar and Euro. In addition, the Parent Company enters into non-deliverable forward contracts to hedge its exposure on foreign currency exchange risks.
ThetablesbelowsummarizetheGroup’sexposuretoforeigncurrencyexchangeraterisksbycategorizingassetsandliabilities by major currencies.
2012 Philippine Peso U.S. Dollar Euro Others Total AFSfinancialassets: Equity securities: Listed equity securities P6,234,242,149 P95,581,295 P14,337,028 P37,486,923 P6,381,647,395 Unlisted equity securities 110,688,282 – – – 110,688,282 Private debt securities 97,996,543 1,916,984,665 107,244,315 7,044,173 2,129,269,696 Government debt securities 874,413,212 32,968,440 – – 907,381,652 Funds 97,124,086 – – – 97,124,086 Loans and receivables: Cash and cash equivalents 835,237,892 279,929,403 40,253,340 6,891,717 1,162,312,352 Short-term investments 11,245,787 – – – 11,245,787 Insurance receivables – net 2,782,360,548 494,797,705 9,663,665 44,884,636 3,331,706,554 Loans and receivables 1,325,867,395 26,967 – – 1,325,894,362 Accrued income 28,894,096 18,541,972 1,701,517 117,044 49,254,629 Total assets P12,398,069,990 P2,838,830,447 P173,199,865 P96,424,493 P15,506,524,795 Otherfinancialliabilities Accounts payable, accrued expenses and other liabilities P753,713,666 P P– P– P753,713,666 Insurance payables 1,734,189,266 556,546,403 38,000,000 15,515,663 2,344,251,332 Total liabilities P2,487,902,932 P556,546,403 P38,000,000 P15,515,663 P3,097,964,998
2011 Philippine Pes U.S. Dollar Euro Others Total AFSfinancial assets: Equity securities: Listed equity securities P4,492,792,730 P92,714,714 P78,635,812 P41,016,414 P4,705,159,670 Unlisted equity securities 80,495,744 – – – 80,495,744 Private debt securities – 2,162,231,674 71,240,939 11,341,918 2,244,814,531 Government debt securities 561,760,112 342,870,492 91,991,807 – 996,622,411 Funds – 30,019,372 – – 30,019,372 Loans and receivables: Cash and cash equivalents 1,471,793,331 66,611,075 46,704,904 28,195,243 1,613,304,553 Short-term investments 11,099,040 – – – 11,099,040 Insurance receivables – net 2,124,670,024 594,281,345 2,700,007 69,702,355 2,791,353,731 Loans and receivables 423,410,504 10,026,206 – – 432,868,288 Accrued income 16,315,367 23,284,823 3,516,430 204,923 43,321,543 Total assets P9,182,336,852 P3,322,039,701 P294,789,899 P150,460,853 P12,949,058,883 Otherfinancial liabilities Accounts payable, accrued expenses and other liabilities P712,074,127 P– P– P– P712,074,127 Insurance payables 1,213,778,049 402,536,332 – 3,203,265 1,619,517,646 Total liabilities P1,925,852,176 P402,536,332 P– P3,203,265 P2,331,591,773
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The following table demonstrates the sensitivity to a reasonably possible change in the US Dollar, euro and other currency exchangerates,withallothervariablesheldconstant,oftheGroup’sprofitbeforetax(duetochangesintheforeignexchange rate).
Impact on income before tax Increase (Decrease) Currency Change in rate 2012 2011 US Dollar + 5% P119,065,826 P147,342,269 – 5% (119,065,826) (147,342,269) Euro + 5% 6,759,993 16,652,314 – 5% (6,759,993) (16,652,314) Others + 5% 4,045,442 3,184,567 – 5% (4,045,442) (3,184,567)
b) Interest Rate Risk
Interestrateriskistheriskthatthevalue/futurecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.TheGroup’sfixedrateinvestmentsinparticularareexposedtosuchrisk.
TheGroup’smarketriskpolicyrequiresittomanageinterestrateriskbymaintainingappropriatemixoffixedandvariablerateinstruments.Thepolicyalsorequiresittomanagethematuritiesofinterestbearingfinancialassets. ThefollowingtablesetsouttheGroup’sfinancialassetsexposedtointerestrateriskbymaturity:
2012 More than Interest Rate Within one year 1-3 years 3 years Total Cash and cash equivalents 0.25% - 4.50% P1,161,143,055 P– P– P1,161,143,055 Short-term investments 1.00% - 4.25% 11,245,787 – – 11,245,787 Notes receivable 1.00% - 8.50% 491,527,901 2,815,017 8,465,299 502,808,217 Long-term commercial papers 5.25% - 9.33% 20,000,000 180,598,147 546,037,518 746,635,665 Security fund 4.76% 342,294 – – 342,294 AFSdebtfinancialassets 1.25% - 13.50% 54,354,167 348,039,361 2,634,257,820 3,036,651,348 Totalinterest-bearingfinancialassets P1,738,613,204 P531,452,525 P3,188,760,637 P5,458,826,366
2011 More than Interest Rate Within one year 1-3 years 3 years Total Cash and cash equivalents 0.25% - 4.50% P1,612,135,256 P– P– P1,612,135,256 Short-term investments 1.00% - 6.00% 11,099,040 – – 11,099,040 Notes receivable 1.00% to 8.50% 729,164 3,641,405 5,430,815 9,801,384 Long-term commercial papers 5.25% - 9.33% – 79,998,165 264,837,500 344,835,665 Long-term investments 2.00% 10,026,206 – – 10,026,206 Security fund 4.76% 342,294 – – 342,294 AFSdebtfinancialassets 2.50%-12.38% 197,756,097 162,197,741 2,881,483,104 3,241,436,942 Totalinterest-bearingfinancialassets P1,832,088,057 P135,321,195 P3,262,267,535 P5,229,676,787
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on the AFS debt securities, with all other variables held constant, of the Group’s equity:
Impact on equity Increase (decrease) Change in basis Currency points 2012 2011 Philippine Peso + 100 (P55,752,252) (P19,501,830) U.S. Dollar + 100 (112,808,185) (135,307,088) Euro + 100 (1,828,116) (2,776,029) Philippine Peso – 100 P61,565,620 P28,250,970 U.S. Dollar – 100 121,682,981 141,661,019 Euro – 100 1,961,121 2,909,236
c) Equity Price Risk
TheGroup’spriceriskexposureatyear-endrelatestofinancialassetsandliabilitieswhosevalueswillfluctuateasaresultofchangesinmarketprices,principally,AFSequityfinancialassets.
Suchfinancialassetsaresubjecttopriceriskduetochangesinmarketvaluesofinstrumentsarisingeitherfromfactorsspecifictoindividualinstrumentsortheirissuersorfactorsaffectingallinstrumentstradedinthemarket.
The Group’s market risk policy requires it to manage such risks by setting and monitoring objectives and constraints on investments;diversificationplan;limitsoninvestmentineachcountry,sectorandmarket;andcarefulandplanneduseofderivative instruments. The price risk on investments securities is also actively managed through the use of derivative financialinstrumentstomitigatetheriskofadversemarketmovements.
The following table shows the equity impact of reasonably possible change of Philippine Stock Exchange index (PSEi), Morgan Stanley Capital International (MSCI) Euro and Dow Jones Euro Stoxx 50 (SX5E Index):
Impact on equity Increase (decrease) Change in equity prices PSEi MSCI Euro SX5E Index 2012 +15% P754,235,752 P– P13,817,379 –15% (754,235,752) – (13,817,379) 2011 +28% P955,460,547 P30,964,907 P– –28% (955,460,547) (30,964,907) –
27. Financial Assets and Liabilities
ThetablebelowpresentsacomparisonbycategoryofcarryingamountsandestimatedfairvaluesofalltheGroup’sfinancialinstruments.
2012 2011 Carrying Value Fair Value Carrying Value Fair Value AFSfinancialassets: Quotedsecurities: Listed equity securities Common shares P6,320,666,240 P6,320,666,240 P4,679,137,830 P4,679,137,830 Preferred shares 60,981,155 60,981,155 26,021,840 26,021,840 Government debt securities: Local currency 874,413,212 874,413,212 561,760,112 561,760,112 Foreign currency 32,968,440 32,968,440 434,862,299 434,862,299 Private debt securities 2,129,269,696 2,129,269,696 2,244,814,531 2,244,814,531 Funds 97,124,086 97,124,086 30,019,372 30,019,372 Non-quoted securities: Unlisted equity securities 110,688,282 110,688,282 80,495,744 80,495,744 Loans and receivables: Cash and cash equivalents 1,162,312,352 1,162,312,352 1,613,304,553 1,613,304,553 Short-term investments 11,245,787 11,245,787 11,099,040 11,099,040 Insurance receivables: Due from policyholders, agents and brokers 2,109,410,108 2,109,410,108 1,572,606,331 1,572,606,331 Due from ceding companies: Facultative 37,569,513 37,569,513 171,771,502 171,771,502 Treaty 906,519,207 906,519,207 763,776,221 763,776,221 Funds held by ceding companies 151,131,268 151,131,268 167,379,163 167,379,163 Reinsurance recoverable on paid losses: Facultative 85,035,443 85,035,443 99,307,410 99,307,410 Treaty 42,041,015 42,041,015 21,392,188 21,392,188 Loans and receivables: Long-term commercial papers 746,635,665 901,025,312 344,835,665 401,017,218 Creditable withholding tax 62,677,478 62,677,478 62,677,478 62,677,478 Long term investments – – 10,026,206 10,026,206 Accounts receivable 2,497,139 2,497,139 2,422,163 2,422,163 Notes receivable 501,110,966 501,110,966 8,104,133 8,104,133 Claims recoverable 11,770,886 11,770,886 – – Due from related parties – – 3,261,857 3,261,857 Cash advances 859,934 859,934 1,198,492 1,198,492 Security fund 342,294 342,294 342,294 342,294 Accrued income: Accrued interest income: AFSfinancialassets 33,956,819 33,956,819 36,426,308 36,426,308 Long term commercial papers 6,052,261 6,052,261 2,549,440 2,549,440 Long-term investments – – 361,180 361,180 Cash and cash equivalents 770,758 770,758 335,054 335,054 Funds held by ceding companies 178,549 178,549 169,429 169,429 Security fund 123,936 123,936 108,425 108,425 Short-term investments 11,429 11,429 80,127 80,127 Accrued rent income 4,298,968 4,298,968 3,291,580 3,291,580 Accrued dividend income 2,919,131 2,919,131 – – Totalfinancialassets P15,505,582,017 P15,659,971,664 P12,953,937,967 P13,010,119,520
(Forward)
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2012 2011 Carrying Value Fair Value Carrying Value Fair Value Otherfinancialliabilities Insurance payables Due to reinsurers and ceding companies P1,771,491,432 P1,771,491,432 P1,095,809,972 P1,095,809,972 Funds held for reinsurers 572,759,900 572,759,900 523,707,674 523,707,674 Accounts payable and accrued expenses and other liabilities: Accounts payable 357,450,316 357,450,316 341,342,089 341,342,089 Commissions payable 242,197,471 242,197,471 263,790,116 263,790,116 Accrued expenses 90,856,035 90,856,035 34,340,337 34,340,337 Surety deposits 34,290,301 34,290,301 31,841,060 31,841,060 Short-termemployeebenefitspayable 13,975,885 13,975,885 32,981,708 32,981,708 Due to related parties 7,202,734 7,202,734 – – Others 7,740,924 7,740,924 40,760,525 40,760,525 Totalfinancialliabilities P3,097,964,998 P3,097,964,998 P2,364,573,481 P2,364,573,481
Fairvaluesoffinancialassetsareestimatedasfollows:
Cash and cash equivalents, short-term investments - the fair value approximates the carrying amounts at initial recognition due to their short term nature.
Debt securities - the fair values are based on quoted market prices.
Quotedequitysecurities-thefairvaluesaregenerallybasedonquotedmarketprices.
Unquoted equity securities - these are carried at cost less allowance for impairment losses because fair value cannot be measuredreliablyduetolackofreliableestimatesoffuturecashflowsanddiscountratesnecessarytocalculatethefairvalue.There is no active market for the equity securities. The entity intends to dispose the securities through selling to a willing buyer in an arms length transactions.
Insurance receivables, accrued income, short-term loans and receivables (including notes receivable, long-term investments and security fund), insurance payables, accounts payable and accrued expenses - the fair values approximate the carrying amounts due to the short-term nature of the transactions.
Long-term commercial papers-fairvaluesarebasedonpresentvalueoffuturecashflowsdiscountedusingrisk-freeratesthatranged from 1.08% to 1.29% and 2.30% to 3.58% in 2012 and 2011, respectively.
Fair value hierarchyTheGroupusesthefollowinghierarchy fordetermininganddisclosingthe fairvaluesoffinancial instrumentsbyvaluationtechnique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilitiesLevel2: othertechniquesforwhichallinputswhichhaveasignificanteffectontherecordedfairvalueareobservable,either
directly or indirectlyLevel3: techniqueswhichuses inputswhichhaveasignificanteffectonthe recorded fairvaluethatarenotbasedon
observable market data
As of December 31, 2012 and 2011, the Group classifies AFS financial assets under Level 1 of the fair value hierarchy. During the reporting period ended December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.
28. Related Party Transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party, or exercise significantinfluenceovertheotherpartyinmakingfinancialandoperatingdecisions.Partiesarealsoconsideredtoberelatediftheyaresubjecttocommoncontrolorcommonsignificantinfluence.
Outstanding balances as of year-end are unsecured and to be settled in cash. There have been no guarantees provided or received for any related party receivables or payables. In 2012 and 2011, the Group has not recorded any impairment of receivablesrelatingtoamountsowedbyrelatedparties.Thisassessmentisundertakeneachfinancialyearbyexaminingthefinancialpositionoftherelatedpartyandthemarketinwhichtherelatedpartyoperates.
Significanttransactionswithrelatedpartiesinclude:
2012 2011 Outstanding Outstanding Amount/ Receivable Receivable Category Volume (Payable) Amount/Volume (Payable) Terms Conditions Parent MEI Non-interest bearing;on Management expense P7,500,000 P– P7,500,000 P– demand –(Forward)
2012 2011 Outstanding Outstanding Amount/ Receivable Receivable Category Volume (Payable) Amount/Volume (Payable) Terms Conditions Interest at 6%p.a.;due Unsecured;no Notes receivables P300,000,000 P100,000,000 P6,000,000 P– within one year impairment Dividend income 100,044,003 – 97,780,534 – – – Interestat Unsecured;no Interest income 2,645,833 633,333 0.22 million 0.73 million 6% p.a. impairment Other related parties a. MIIC Non-interest Reinsurersshareon bearing;on gross premiums 205,003,475 (444,628,863) 528,641,602 (516,922,876) demand Unsecured Non-interest bearing;on Unsecured;on Commission income 10,694,195 2,177,107 11,894,773 7,880,677 demand impairment Non-interest bearing;on Unsecured;on Shared expenses 1,075,000 – 1,075,000 519,057 demand impairment
b. Y Realty Corporation Non-interest bearing;on Unsecured;no Rent expense 12,070,388 – 11,160,000 – demand impairment c. RCBC Bankard Non-interest bearing;on Unsecured;no Shared expenses 20,193,497 2,069,314 1.29 million 1,357,334 demand impairment d. ASPAC Non-interest Reinsuranceshareon bearing;on Unsecured;no gross premiums 14,406,575 (19,330,885) 16,379,539 (5,313,874) demand impairment Non-interest bearing;on Unsecured;no Commission income 6,739,559 8,701,057 6,175,474 2,145,955 demand impairment
e. MICO-Hk Non-interest bearing;on Unsecured;no Shared expenses – – – 286,965 demand impairment f. HI Interest at 5% p.a.;duewithin Unsecured;no Notes receivable 200,000,000 200,000,000 – – one year impairment
Interestat5% Unsecured;no Interest income 7,944,444 437,500 – – p.a. impairment Investment in AFS Unsecured;no Equity securities 171,341 109,065,845 165,521 52,538,873 – impairment Unsecured;no Dividend income 771,858 – 745,639 – – impairment g. FMLC Due within oneyear; interestat4.75% Unsecured;no Notes receivable P190,000,000 P190,000,000 P– P– to 6.00% p.a. impairment Interestat Unsecured;no Interest income 386,806 1,467 – – 5% p.a. impairment h. Grepalife Non-interest bearing;on Unsecured;no Shared expenses 34,019 34,016 315,856 114,108 demand impairment i. RCBC Interest rate at 0.25%to Unsecured;no Cash in bank 14,599,749 111,742,355 11,398,001 201,265,836 4.50% p.a. impairment 2 to 35-day term, Interest at0.50%- Unsecured;no Short-term deposits 6,314,188,553 699,399,267 5,997,080,072 1,052,943,003 4.50% p.a. impairment Investment in AFS Maturing in 2016 and 2007;interest rateat5.25% Unsecured;no Debt securities 153,216,300 496,323,071 35,190,068 352,894,018 to 9.88% impairment(Forward)
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2012 2011 Outstanding Outstanding Amount/ Receivable Receivable Category Volume (Payable) Amount/Volume (Payable) Terms Conditions Unsecured;no Stocks 35,515,758 2,890,867,014 34,113,493 1,489,123,123 – impairment Maturing in 2019 and 2027;Interest rateat5.25% Unsecured;no Long-term commercial papers 120,000,000 165,000,000 25,000,000 37,000,000 to 7.00% impairment Interest and dividend income Interest at 0.25%-4.25% Unsecured;no Cash in bank 3,129,066 – 3,867,350 – p.a. impairment
2 to 35-day term, Interest at0.50%- Unsecured;no Short-term deposits 26,611,727 913,309 20,563,325 277,856 4.50% p.a. impairment Investment in AFS: Interest at 4.77%-9.88% Unsecured;no Debt securities 30,816,853 8,979,206 28,976,664 5,314,835 p.a. impairment Unsecured; Stocks 39,943,507 – 34,377,338 – – impaired
Interest at Long-term 5.25%-7.00% Unsecured;no commercial papers 4,299,947 1,230,223 870,625 71,867 p.a. impairment Interest at 0.75% to 3.50% Long-term investments – – 70,127 – p.a. Unsecured Non-interest bearing, on Referral fee 4,576,343 (681,492) 1,872,599 (340,521) demand Unsecured
j. Ipeople Investment in AFS Unsecured;no Stocks 23,400 23,613,850 17,940 12,223,640 – impairment Unsecured;no Dividend income 810,030 162,006 621,023 – – impairment k. PIAA Non-interest bearing;on Unsecured;no Rent income 1,598,914 409,478 2,230,348 129,993 demand impairment l. go! Travel Insurance Agency Non-interest bearing;on Referral fee 2,981,361 (267,556) 6,078,866 (229,136) demand Unsecured
The outstanding receivables and payables are to be settled in cash.
The Group and MIIC are subsidiaries of MICO Equities, Inc. (MEI). MEI, RCBC, HI, FLMC and iPeople are subsidiaries of PMMIC, the holdingcompanyoftheflagshipinstitutionsoftheYuchengcoGroupofCompanies.
During the year 2012, the Group transferred certain employees to MEI together with the corresponding pension obligation amounting to P7,513,467. Likewise MEI transferred an employee to the Parent Company with corresponding pension obligation amounting to P58,300. In 2013, the Parent Company will contribute the equivalent net amount of P7,455,167 into MEI’s plan assets in exchange for MEI’s assumption of the pension obligation to the transferred employees.
Key management personnel of the Group include senior management.
The summary of compensation of key management personnel is as follows:
2012 2011 Salaries and wages P52,449,957 P57,552,537 Short-termemployeebenefits 11,383,089 10,246,647 Post-employmentbenefits 79,811,690 77,379,482 P143,644,736 P145,178,666
29. Capital Management
Governance FrameworkTheprimaryobjectiveoftheGroup’sriskandfinancialmanagementframeworkistoprotecttheGroupfromeventsthathinderthe sustainable achievement of the Group’s performance objectives, including failure to exploit opportunities. The Group recognizestheimportanceofhavingefficientandeffectiveriskmanagementsystemsinplace.
Regulatory FrameworkRegulators are interested in protecting the rights of the policyholders and maintain close vigil to ensure that the Group is satisfactorilymanagingaffairsfortheirbenefit.Atthesametime,theregulatorsarealsointerestedinensuringthattheGroupmaintains appropriate solvency position to meet liabilities arising from claims and that the risk levels are at acceptable levels.
The operations of the Group are subject to the regulatory requirements of the IC. Such regulations not only prescribe approval andmonitoringofactivitiesbutalsoimposecertainrestrictiveprovisions(e.g.,marginofsolvencytominimizetheriskofdefaultandinsolvencyonthepartoftheinsurancecompaniestomeettheunforeseenliabilitiesasthesearise,fixedcapitalizationrequirements, risk-based capital requirements).
As mandated by the IC, most of the additional capital infusions are invested in government securities.
Capital Management FrameworkThe Group has established the following capital management objectives, policies and approach to managing the risks that affect its capital position.
The capital management objectives are:
a) tomaintaintherequiredlevelofstabilityoftheGrouptherebyprovidingadegreeofsecuritytopolicyholders;b) toallocatecapitalefficientlyandsupportthedevelopmentofbusinessbyensuringthatreturnsoncapitalemployedmeet
therequirementsofitscapitalprovidersandofitsshareholders;c) toretainfinancialflexibilitybymaintainingstrongliquidityandaccesstoarangeofcapitalmarkets;d) toaligntheprofileofassetsandliabilitiestakingaccountofrisksinherentinthebusiness;e) tomaintainfinancial strength to supportnewbusinessgrowthand to satisfy the requirementsof thepolicyholders,
regulatorsandstakeholders;andf) tomaintainstrongcreditratingsandhealthycapitalratiosinordertosupporttheGroup’sbusinessobjectivesandmaximize
shareholders’ value.
The operations of the Group are also subject to regulatory requirements within the jurisdictions where it operates. Such regulations not only prescribe approval and monitoring of activities, but also impose certain restrictive provisions (e.g. capital adequacy)tominimizetheriskofdefaultandinsolvencyonthepartoftheinsurancecompaniestomeetunforeseenliabilitiesas these arise.
TheGrouphasmetalloftheserequirementsthroughoutthefinancialyear.
TheGroup’scapitalmanagementpolicyforitsinsuranceandnon-insurancebusinessistoholdsufficientcapitaltocoverthestatutory requirements based on the IC directives, including any additional amounts required by the regulator.
TheGroupseekstooptimizethestructureandsourcesofcapital toensurethat itconsistentlymaximizesreturnstotheshareholders and policyholders. The Group’s approach to managing capital involves managing assets, liabilities and risks in a coordinated way, assessing shortfalls between reported and required capital levels (by each regulated entity) on a regular basisandtakingappropriateactionstoinfluencethecapitalpositionoftheGroupinthelightofchangesineconomicconditionsand risk characteristics. An important aspect of the Group’s overall capital management process is the setting of target risk adjusted rates of return which are aligned to performance objectives and ensure that the Group is focused on the creation of value for shareholders.
TheGroupmaintainsacertainlevelofcapitaltoensuresufficientsolvencymarginsandtoadequatelyprotectthepolicyholders.The level of capital maintained is usually higher than the minimum capital requirements set by the regulators and the amount computed under the Risk-based Capital (RBC) Model. The Group fully complied with the externally imposed capital requirements duringthereportedfinancialperiods.
The ICcapital requirementsare themarginofsolvency(MOS),fixedcapitalization requirements,RBC requirements,andunimpaired capital requirement.
ThefollowingtablesshowMICO,BACandFNAC’sstatutorynetworth,MOS,fixedcapitalrequirementsandRBCratioasofDecember 31, 2012 and 2011.
MICO 2012 2011 Minimum Minimum Required Actual* Required Actual* Statutory net worth P500.00 million P6.68 billion P350,000,000 P744,633,367 Paid-up capital 250.00 million 0.84 billion 175,000,000 250,000,000 MOS 265.58 million 2.83 billion 1,262,250 175,870,402 RBC hurdle rate 100% 244% 100% 456% * The statutory net worth, MOS and RBC ratio for both years are based on amounts estimated by MICO.
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BAC
2012 2011 Minimum Minimum Required Actual* Required Actual* Statutory net worth P500,000,000 P911,266,613 P350,000,000 P744,633,367 Paid-up capital 250,000,000 250,000,000 175,000,000 250,000,000 MOS 2,048,611 81,065,063 1,262,250 175,870,402 RBC rate 100% 426% 100% 456% * The statutory net worth, MOS and RBC ratio for 2012 are based on amounts estimated by BAC.
FNAC
2012 2011 Minimum Minimum Required Actual* Required Actual* Statutory net worth P500,000,000 P766,210,853 P350,000,000 P608,881,965 Paid up capital 250,000,000 250,000,000 175,000,000 175,000,000 MOS 4,210,418 73,697,209 4,833,847 150,290,819 RBC hurdle rate 250% 425% 250% 464% * The statutory net worth, MOS and RBC ratio for both years are based on amounts estimated by FNAC.
No changes were made to its capital base, objectives, policies and processes from the previous year.
Margin of Solvency (MOS)Under the Code, an insurance company doing business in the Philippines shall maintain at all times a MOS equal to P500,000 or 10% of the total amount of its net premiums written during the preceding year, whichever is higher. The MOS shall be the excessofthevalueofitsadmittedassets(asdefinedundertheCode),exclusiveofitspaid-upcapital,overtheamountofitsliabilities, unearned premiums and reinsurance reserves. Provision for unearned premiums as of December 31, 2012, determined in accordance with the Code for purposes of MOS, amounted to P1,105,876,726.Intheaccompanyingconsolidatedfinancialstatements, the net Provision for unearned premiums amounted to P1,445,031,566 computed as Provision for unearned premiums of P3,041,799,037 less deferred reinsurance premiums of P1,596,767,471 (see Note 14).
Theestimatedamountsoftheconsolidatednon-admittedassetsasofDecember31,2012and2011,asdefinedundertheCode,whichareincludedintheaccompanyingconsolidatedstatementoffinancialpositionfollow:
2012 2011Deferred reinsurance premiums P1,596,767,471 P1,411,396,673Insurance receivables 705,595,164 791,496,269Deferred acquisition costs 337,840,897 272,708,433Property and equipment - net 174,990,756 63,306,378Loans and receivables 378,681,663 7,661,141Net pension assets 601,160 833,960Other assets 232,440,601 289,617,147 P3,426,917,712 P2,837,020,001
ThefinalamountoftheMOScanonlybedeterminedaftertheaccountsoftheGrouphavebeenexaminedbytheIC,particularlywith respect to the determination of admitted and nonadmitted assets.
Fixed Capitalization RequirementsDepartmentofFinanceOrder(DO)27-06providesforthecapitalizationrequirementsforlife,nonlifeandreinsurancecompanieson a staggered basis for the years ended December 31, 2006 up to 2011. Depending on the level of the foreign ownership in the insurance company, the minimum statutory net worth and minimum paid-up capital requirements vary. The statutory net worth shall include the Group’s paid-up capital, capital in excess of par value, contingency surplus, retained earnings and revaluation increments as may be approved by the IC. The minimum paid-up capital is pegged at 50% of the minimum statutory net worth.
Based on the scheduled increases under DO 27-06, the required statutory net worth and minimum paid-up capital for the Par-ent Company amounted to P500,000,000 and P250,000,000, respectively, as of December 31, 2012 and P350,000,000 and P175,000,000, respectively as of December 31, 2011.
On October 29, 2008, the IC issued Circular Letter No. 26-2008, which recalls that in view of the compliance of insurance companies with the requirement of IMC No. 10-2006, the scheduled increases due December 31, 2007 have been deferred for a year. Hence, the IMC reiterates that by December 31, 2008, insurance companies should comply with the increase previously scheduled for December 31, 2007. Based on this Circular Letter, the required statutory net worth and minimum paid up capital for the Group amounted to P500 million and P250 million, respectively, as of December 31, 2012 and P350.00 million and P175.00 million, respectively as of December 31, 2011.
On June 1, 2012, the Department of Finance issued DO No. 15-2012 which provides for minimum paid up capital requirements of all insurance and professional reinsurance companies to supplement the requirements of DO No. 27-06 after December 31, 2012. Under the said DO, the minimum paid up capital requirements for all existing insurance and professional reinsurers regardlessofitscitizenshipisgoingtobeonastaggeredbasisfortheyearsDecember31,2012upto2020.TheDOalsoallows all existing insurance and professional reinsurance companies a one-time one-year deferral in the compliance to minimum paid up capital requirements provided it has met the RBC hurdle rate based on the schedule set out in the said DO.
The table below shows the amount of minimum paid-up capital and the schedule of compliance per DO No. 15-2012:
Paid up capital Compliance date On or before December 31, 2012 (Pursuant to P250,000,000 DO 27-06 and IMC No. 10-2006) 400,000,000 On or before December 31, 2014 600,000,000 On or before December 31, 2016 800,000,000 On or before December 31, 2018 1,000,000,000 On or before December 31, 2020
On November 22, 2012, the IC issued an advisory to all insurance and reinsurance companies doing business in the Philippines regarding the implementation of DO No. 27-06. According to the advisory, the minimum paid-up capital for December 31, 2012 must at least be equal to the amount previously scheduled for December 31, 2011 per DO 27-06.
On December 11, 2012, DO No. 15-2012 was issued with a temporary restraining order. Accordingly, the minimum paid up capital requirement would be P250,000,000 by the end of 2012 as advised by the IC.
OnFebruary5,2013,theSenateofthePhilippinesapprovedtheAmendedInsuranceCodewhichprovidesthenewcapitaliza-tion requirements of all existing insurance companies based on networth on a staggered basis starting June 30, 2013 up to December 31, 2022. The following presents the amount of required networth and the schedule of compliance per Amended Insurance Code:
Networth Compliance date P250,000,000 June 30, 2013 550,000,000 December 31, 2016 900,000,000 December 31, 2019 1,300,000,000 December 31, 2022
As of April 12, 2013, the Amended Insurance Code has not been signed by the President of the Philippines for it to become a law.
As of December 31, 2012, MICO, BAC and FNAC have complied with the minimum paid-up capital requirement while each entity’s statutory net worth based on its computation amounted to P6,679,310,153, P911,266,613 and P766,210,853, respectively.
Unimpaired capital requirementInsurance Memorandum Circular (IMC) 22-2008 provided that for purposes of determining compliance with the law, rules and regulationsrequiringthatthepaid-upcapitalshouldremainintactandunimpairedatalltimes,thestatementoffinancialpositionshould show that the net worth or equity is at least equal to the actual paid-up capital.
Risk-based Capital RequirementsIMC No. 7-2006 provides for the RBC framework for the nonlife insurance industry to establish the required amounts of capital to be maintained by the companies in relation to their investment and insurance risks. Every nonlife insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the trend test. Failure to meet the minimum RBC ratio shallsubjecttheinsurancecompanytothecorrespondingregulatoryinterventionwhichhasbeendefinedatvariouslevels.
The RBC ratio shall be calculated as Net worth divided by the RBC requirement. Net worth shall include the Group’s paid-up capital contributedandcontingencysurplusandunassignedsurplus.RevaluationandfluctuationreserveaccountsshallformpartofnetworthonlytotheextentauthorizedbytheIC.
The following table shows how the RBC ratio as of December 31, 2012 and 2011 was determined by MICO, BAC and FNAC:
MICO
2012 2011 Net worth P6,679,310,153 P5,460,287,581 RBC requirement 2,629,923,075 1,926,499,656 RBC ratio 254% 283%
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BAC
2012 2011 Net worth P911,266,613 P744,633,367 RBC requirement 213,679,741 167,406,856 RBC ratio 426% 445%
FNAC
2012 2011 Net worth P766,210,853 P608,881,966 RBC requirement 180,270,978 131,118,785 RBC ratio 425% 464%
ThefinalRBCratiocanbedeterminedonlyaftertheaccountsoftheGrouphavebeenexaminedbytheIC.
IfaninsurancecompanyfailedtomeettheminimumrequiredMOS,fixedcapitalizationrequirementsandRBCrequirements,theICisauthorizedtosuspendorrevokeallcertificatesofauthoritygrantedtosuchcompanies,itsofficersandagents,andnonewbusiness shall be done by and for such company until its authority is restored by the IC.
Consolidated Compliance FrameworkTheICissuedIMC10-2006integratingthecompliancestandardsforthefixedcapitalizationandrisk-basedcapitalframework.UnderthisIMC,allinsurersmustpossessthecapitalizationrequiredfortheyear2006.Likewise,allinsurersshallannuallycomplywith the RBC ratio requirements.
Subsequenttoyear2006,thefixedcapitalizationrequirementforagivenyearmaybesuspendedforinsurersthatcomplywiththe required RBC hurdle rate, provided that the industry complies with the required Industry RBC Ratio Compliance Rate. The IMC provides the annual schedule of progressive rates for the Industry RBC Ratio Compliance Rates and the RBC Hurdle Rate 250%. For the review year 2011 which shall be based on the 2010 synopsis, the Industry RBC Ratio Compliance Rate is 90% and the RBCHurdleRateis250%.Failuretoachieveoneoftherateswillresultintheimpositionofthefixedcapitalizationrequirementfor the year under review.
In cases where the Group will be required to comply with the higher capital requirements of the IC including the RBC ratio, the Group’sstockholdersarecommittedtoinfuseadditionalcontributiontocoverupanydeficiencyitmayhaveandmeetthecapitalrequirements as mandated by the IC.
30. Contingencies
The Group operates in the insurance industry and has various contingent liabilities arising in the ordinary conduct of business, which are either pending decision by the courts or being contested, the outcome of which are not presently determinable. In the opinion of management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will not have a material oradverseeffectontheGroup’sfinancialpositionandresultsofoperations.
31. Note to Consolidated Statements of Cash Flows
The Group’s noncash activities include:
a. Transfer of properties amounting to P31.51 million from investment properties to property and equipment in 2011.b. TransferofcreditablewithholdingtaxfiledwithBIRforrefundamountingtoP62.68 million from other assets to loans and
receivables in 2011.c. Transfer of pension obligation amounting to P7.51 million from the Parent Company to MEI and transfer of pension
obligation from MEI to the Parent Company amounting to P58,300 in 2012.
MICO EQUITIES, INC. and SUBSIDIARIES
YVOnnE S. YuCHEngCOPRESIDENTMalayan Insurance Company, Inc., PRESIDENT AND DIRECTORFirst Nationwide Assurance Corporation, CHAIRMANRCBC Capital Corporation, CHAIRMAN AND DIRECTORAY Foundation, Inc., MEMBER, BOARD OF TRUSTEESMalayan Securities Corporation, CHAIRMAN AND PRESIDENT
HElEn Y. DEEDIRECTORMalayan Insurance Company, Inc., CHAIRPERSONHouse of Investments, Inc., CHAIRPERSON, PRESIDENT AND CHIEF EXECUTIVE OFFICERRizal Commercial Banking Corporation, CHAIRPERSONRCBC Savings Bank,CHAIRPERSONManila Memorial Park Cemetery, Inc., CHAIRPERSONMalayan Colleges Inc., TRUSTEEPhilippine Long Distance Telephone Company, DIRECTORMalayan Securities Corporation, DIRECTOR
TEODORO D. REgalaDIRECTORRizal Commercial Banking Corporation, DIRECTORAngara, Abello, Concepcion, Regala & Cruz Law Offices, FOUNDING PARTNERAGC Flat Glass Philippines, Inc., CORPORATE SECRETARYSafeway Philtech, Inc., DIRECTORMalayan Insurance Company, Inc., DIRECTOROEP Philippines, Inc., DIRECTOR AND CORPORATE SECRETARY
alfOnSO S. YuCHEngCO, JR.DIRECTOR AY FOUNDATION, TRUSTEE Water Dragon, Inc., CHAIRMAN & PRESIDENT Y Realty Corporation, PRESIDENT, DIRECTOR Shayamala Corporation, PRESIDENT, DIRECTOR ET Yuchengco, Inc., DIRECTOR Pan Malayan Realty Corporation, DIRECTOR, VICE PRESIDENT Pan Malayan Management & Investment Corporation, VICE CHAIRMAN, DIRECTOR IMI, Inc., CHAIRMAN, PRESIDENT Yuchengco Museum, VICE CHAIRMAN, PRESIDENT
alfOnSO T. YuCHEngCOCHAIRMAN
(Refer to page 5 for his business affiliations)
BOARDofDIRECTORS
1992 Malayan The Leader print ad
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JOViTO R. SalOngaINDEPENDENT DIRECTOR Kilosbayan, CHAIRMAN EMERITUS Bantayog ng mga Bayani Foundation (Pillars of Heroes Foundation), CHAIRMAN EMERITUS FORMER PRESIDENT OF THE SENATE, Republic of the PhilippinesFORMER CHAIRMAN, Presidential Commission on Good Government, Republic of the Philippines
helen Y. deeCHAIRPERSON
House of Investments, Inc., CHAIRPERSONRizal Commercial Banking Corporation, CHAIRPERSON
RCBC Savings Bank, CHAIRPERSONManila Memorial Park Cemetery, Inc., CHAIRPERSON
Malayan Colleges Inc., TRUSTEEPhilippine Long Distance Telephone Company, DIRECTOR
Sunlife Grepa Financial, Inc., DIRECTOR
Teodoro d. regAlADIRECTORRizal Commercial Banking Corporation, DIRECTORAngara, Abello, Concepcion, Regala & Cruz Law Offices, FOUNDING PARTNERAGC Flat Glass Philippines, Inc., CORPORATE SECRETARYSafeway Philtech, Inc., DIRECTOROEP Philippines, Inc., DIRECTOR AND CORPORATE SECRETARYMICO Equities, Inc., DIRECTOR
Yvonne s. YuchengcoPRESIDENTFirst Nationwide Assurance Corporation, CHAIRMANRCBC Capital Corporation, CHAIRMAN AND DIRECTORMalayan Colleges Inc., DIRECTORAY Foundation, Inc., MEMBER, BOARD OF TRUSTEESMalayan Securities Corporation, CHAIRMAN AND PRESIDENT
MICHELE DEE-SANTOSDIRECTORAY Foundation, EXECUTIVE VICE PRESIDENT Sandee Unlimited, Inc., PRESIDENT MICO Equities, Inc., TREASURERLuis Miguel Foods, Inc., CHAIRMAN AND PRESIDENT First Nationwide Assurance Corporation, DIRECTORRizal Commercial Banking Corporation, FIRST VICE PRESIDENTPhilippine Integrated Advertising Agency, TREASURER
renATo c. vAlenciAINDEPENDENT DIRECTOR i-People, Inc., CHAIRMAN AND DIRECTORHypercash Payment Systems, Inc., CHAIRMANBastion Payment Systems, Inc., CHAIRMANAsia Pacific Network Holdings, Inc., VICE CHAIRMANAnglo Philippine Holdings Corporation, DIRECTORPhilippine Veterans Bank, BOARD ADVISER
cesAr e.A. virATADIRECTORRizal Commercial Banking Corp., CORPORATE VICE CHAIRMAN AND DIRECTOR RCBC Savings Bank, Inc., DIRECTORRCBC Realty Corporation, DIRECTORRCBC Forex Brokers Corporation, CHAIRMAN AND DIRECTORRCBC Land, Inc., DIRECTOR AND PRESIDENTRCBC International Finance, Ltd. (Hong Kong), DIRECTORPacific Fund, Inc., DIRECTOR AND CHAIRMANBankard, Inc., VICE CHAIRMAN AND DIRECTORMalayan Colleges, Inc., TRUSTEE YGC Corporate Services, Inc., DIRECTORAY Foundation, Inc., TRUSTEEYuchengco Center, Inc., TRUSTEEYuchengco Museum, TRUSTEEGreat Life Financial Assurance Corporation, DIRECTORLuisita Industrial Park Corporation, DIRECTOR Niyog Property Holdings, Inc., DIRECTOR
ArmAndo m. medinAINDEPENDENT DIRECTORRizal Commercial Banking Corporation, INDEPENDENT DIRECTORRCBC Savings Bank, INDEPENDENT DIRECTOR RCBC Capital Corporation, INDEPENDENT DIRECTOR Malayan Insurance Company, Inc., INDEPENDENT DIRECTOR Malayan Colleges, Inc., INDEPENDENT TRUSTEE
Executive Committee: Helen Y. Dee • Yvonne S. Yuchengco • Renato C. Valencia* • Cesar E.A. VirataAudit Committee: Renato C. Valencia* • Jovito R.Salonga* • Armando M. MedinaRemuneration & Nomination Committee: Renato C. Valencia* • Teodoro D. Regala • Michele Dee-Santos(*independent directors)
TAkAshi YoshikAwADIRECTORTokio Marine Asia Pte. Ltd., CHIEF EXECUTIVE OFFICER
ArThur leeDIRECTORTokio Marine Asia Pte. Ltd., CHIEF EXECUTIVE OFFICER(June 22, 2011)
MALAYAN INSURANCE CO., INC.
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BANKERS ASSURANCE CORPORATION
FIRST NATIONWIDE ASSURANCE CORPORATION
Yvonne s. YuchengcoChairMaN
AnTonio m. rubinPrESiDENT
michele dee-sAnTosDirECTOr
AnTonio g. PuYATiNDEPENDENT DirECTOr
AnnAbelle s. YuchengcoDirECTOr
edmundo l. bunYiiNDEPENDENT DirECTOr
Audit Committee: Edmundo L. Bunyi* • Antonio G. Puyat*Remuneration & Nomination Committee: Edmundo L. Bunyi • Michele Dee-Santos(*independent directors)
Joel T. AlmAgroPrESiDENT
AnTonio m. rubinChairMaN
edmundo l. bunYiiNDEPENDENT DirECTOr
herminiA s. JAcinToiNDEPENDENT DirECTOr
AlmA P. PeñAlosADirECTOr
mA. TheresA b. TiuDirECTOr
Audit Committee: Edmundo L. Bunyi* • Herminia S. Jacinto*Remuneration & Nomination Committee: Edmundo L. Bunyi • Antonio M. Rubin • Alma P. Peñalosa(*independent directors)
Jose mArTin A. morenTeDirECTOr(October 28, 2011)
1990 - Malayan Insurance 60 Years print ad
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MICO eQUITIeS, InC.
ALFONSO T. YUCHENGCOChairman
YVONNE S. YUCHENGCO President
MICHELE DEE-SANTOSTreasurer
SAMUEL V. TORRESCorporate Secretary
JOSE MARTIN A. MORENTEAssistant Corporate Secretary
MAlAYAn InSURAnCe COMPAnY, InC.
HELEN Y. DEEChairperson
YVONNE S. YUCHENGCO President
ANTONIO M.RUBINExecutive Vice President
JOEL T. ALMAGROExecutive Vice President
MA. THERESA B. TIUExecutive Vice President
DAISUKE FUJIISecond Vice President
JOSELITO C. BANTAYANSecond Vice President
MA. VICENTA LUCIA M. ALCIDFirst Vice President
JOSEPHINE S. GATCHALIANFirst Vice President
ATSUSHI SEGAWAFirst Vice President
BEATRIZ H. SORIANOVice President II
PAOLO Y. ABAYAVice President
JOSE MARTIN A. MORENTEVice President / Asst. Corporate Secretary
AKIRA YOSHIDAVice President
RAUL B. TANVice President
ALEGRIA R. CASTROVice President
JOANNE S.P. DELA CRUZVice President
RODELIO M. NOBVice President
MARTIN DEE YUCHIOCOVice President
SAMUEL V. TORRESCorporate Secretary
BAnKeRS ASSURAnCe CORPORATIOn
ANTONIO M. RUBINChairman
JOEL T. ALMAGROPresident
SAMUEL V. TORRESCorporate Secretary
JOSE MARTIN A. MORENTEAssistant Corporate Secretary
FIRST nATIOnwIDe ASSURAnCe CORPORATIOn
YVONNE S. YUCHENGCO Chairman
ANTONIO M. RUBINPresident
SAMUEL V. TORRESCorporate Secretary
JOSE MARTIN A. MORENTEAssistant Corporate Secretary
PRINCIPALOFFICERS
2000 - Malayan Insurance Celebrating 70 yearsof Strength, Stability and Service Excellence print ad.
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DIRECTORYofSUBSIDIARIES,OFFICESandBRANCHES
MALAYAN INSURANCE COMPANY, INC.Yuchengco Tower, 500 Quintin Paredes Street1006 Binondo, ManilaP. O. Box 3389 - ManilaTel. No.: (632) 242-8888Fax No.: (632) 242-2222Website: www.malayan.com www.malayanonline.com www.facebook.com/MalayanInsurancePHE-mail: [email protected]
BANKERS ASSURANCE CORPORATION6th Floor, Rm 604, Doña Felisa Syjuco BuildingRemedios St., cor. Taft Avenue, Malate, ManilaTel. Nos.: (632) 567-4678 / 567-4676Telefax No.: (632) 567-4675 Website: http://www.bankersassurance.com.ph E-mail: [email protected]
The FIRST NATIONWIDE ASSURANCE CORPORATION4th Floor, Y - Tower IIL.P. Leviste Street cor. Gallardo StreetSalcedo Village, 1227 Makati CityTel. Nos.: (632) 843-8080 local 213, 246Fax No.: (632) 843-6168 / 843-0611Website: http://www.fnac.com.phE-mail: [email protected]
FOREIGN SUBSIDIARIES
MALAYAN INTERNATIONAL INSURANCE CORP. LTD. (HK BRANCH) Unit A, 18th Floor, Li Dong Building 9 Li Yuen Street East, Central, Hong Kong Tel. Nos.: (852) 2525-2137 / (852) 2525 8820 Fax No.: (852) 2167-7422 E-mail: [email protected]
MALAYAN INSURANCE COMPANY (HONG KONG) LTD. Unit A, 18th Floor, Li Dong Building 9 Li Yuen Street East, Central, Hong Kong Tel. Nos.: (852) 2525-2137 / (852) 2525 8820 Fax No.: (852) 2167-7422 E-mail: [email protected] MALAYAN INSURANCE COMPANY (UK) LTD. c/o Chiltington International Limited The Isis Building, 193 Marsh WallLondon E14 9SG Tel. No.: +44 (020) 7068-8000 Fax No.: +44 (020) 7068-8001 Email: [email protected]
FOREIGN AGENCY
GREECE Insurance Group Genka S.A. 320 Sygrou Avenue 17673 Kallithea, Athens, Greece Tel. Nos.: (30) 210-925-0110 / 20 / 30 Fax Nos.: (30) 210-924-4434 / 210-923-7768 Email: [email protected]
REPRESENTATIVE OFFICE
CHINAc/o Mr. Cai Zhichao, Xiamen RepresentativeUnit 806, SOHO Building619 Hubin Nan Road, Xiamen, China 361004Tel. No.: (86592) 504-6168Fax No.: (86592) 504-6178E-mail: [email protected]
METRO MANILA SALES OFFICES
ALABANG2nd Floor, RCBC Building, Tierra Nueva Subd.,Zapote Road, Alabang MuntinlupaTel. Nos.: (632) 850-7659/ 842-0234Telefax No.: (632) 842-0228
CUBAO8th Floor, Aurora TowerAurora Boulevard, Cubao, Quezon CityTel. Nos.: (632) 912-9367/ 911-3827/ 421-4526Telefax No.: (632) 911-3825
MAKATI5th Floor, Yuchengco Tower IIL.P. Leviste Street cor. Gallardo StreetSalcedo Village, 1227 Makati CityTel. Nos.: (632) 843-8080/ 844-4694/ 818-4880Fax No.: (632) 813-4543
MARIKINAUnit A-12 of Marikina East Centre Building83 Gil Fernando Avenue, San Roque, Marikina CityTel. No.: (632) 646-9788Telefax No.: (632) 369-7112
REGIONAL OFFICES
UPPER NORTH LUZON3rd Floor, RCBC BuildingA. B. Fernandez Ave., 2400 Dagupan CityTel. No.: (075) 515-5811Telefax No.: (075) 522-0928
LOWER NORTH LUZON3rd Floor, RCBC Savings Bank BuildingMaharlika Highway cor. Paco Roman Street3100 Cabanatuan City, Nueva Ecija Tel. No.: (044) 463-9683Telefax No.: (044) 463-0910
Photos taken during the Malayan Insurance San Fernando Pampanga Branch Office blessing last October 4, 2012. It was attended by Malayan officers and employees headed by President Yvonne S. Yuchengco.
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LEGAZPI CITY2nd Floor, Sia Ko Pio BuildingRizal Street, 4500 Legazpi CityTel. No.: (052) 480-7523Telefax No.: (052) 820-4119
LIPA CITYGround Floor, Unit 17, K-POINTECommercial Center, Ayala Highway, Lipa CityTel. No.: (043) 756-6951Telefax No.: (043) 756-6952
NAGA CITYGround Floor, RL BuildingPanganiban Drive, Naga CityTelefax No.: (054) 473-5050
OLONGAPO (Subic)Ground Floor, Building 789Subic International Hotel, Sta Rita RoadSubic Bay Freeport Zone, OlongapoTel. No.: (047) 252-3255Telefax No.: (047) 252-3256
PAMPANGA2/F HIZ-SAN Bldg. McArthur HighwayDolores City, San Fernando, PampangaTel. No.: (045) 961-0042Telefax No.: (045) 963-1027
SAN PABLO (Laguna)Maharlika Highway, Brgy. San RafaelSan Pablo City 4000 LagunaTel. Nos.: (049) 562-5788/ 562-3655Fax No.: (049) 562-0181
TARLAC2nd Floor, Rm 205 Jaral BuildingCorners Juan Luna Street & McArthur HighwayTarlac City, TarlacTelefax No.: (045) 982-2748
TUGUEGARAO CITY2nd Floor, RCBC BuildingGomez Street cor. Bonifacio StreetTuguegarao CityTelefax No.: (078) 844-1393
VISAYAS AREA
BACOLOD CITY2nd Floor, Malayan House BuildingLacson cor. 3rd Street, 6100 Bacolod CityTel. No.: (034) 434-6566Telefax No.: (034) 434-6567
CEBU CITY2nd Floor, Grepalife BuildingFuente Osmeña Rotonda, 6000 Cebu CityTel. Nos.: (032) 253-9384 / 253-4801Fax No.: (032) 255-3009
DUMAGUETE CITY2/F RCBC Saving Bldg.Real St. Corner San Juan St.,Dumaguete City, Negros OrrientalTel/Fax No.: (035) 420-5075
ILOILO CITY2nd Floor, RCBC Building, J. M. Basa Street cor. Arsenal Street, 5000 Iloilo CityTel. No.: (033) 335-0763/ 335-0302Fax No.: (033) 335-0406
PALAWAN2nd Floor, RCBC BuildingRizal Avenue corner Junction IPuerto Princesa City, 5300 PalawanTelefax No.: (048) 434-4360
TACLOBAN CITY2/F Isuzu Bldg., Brgy.77 Fatima VillageMarasbaras, Tacloban CityTel. No. (053) 523-0609
TAGBILARANDoor # 4, 2nd Floor, RCBC BuildingCPG Avenue, Tagbilaran City, BoholTelefax No.: (038) 235-4551
MINDANAO AREA
CAGAYAN DE OROGround Floor, Malayan House, Velez cornerNacalaban Streets, 9000 Cagayan De OroTel. No.: (088) 856-1685Telefax No.: (08822) 856-1686 DAVAO CITYGround Floor, Malayan House, Km. 6, J.P. LaurelLanang 8000 Davao CityTel. Nos.: (082) 234-1790/ 235-2476/ 234-1765Fax No.: (082) 234-1766 DAVAO CITY (Satellite Office)Ground Floor, RCBC Building, Palma Gil cor.C. M. Recto Street, Davao CityTel. No.: (082) 224-6887Telefax No.: (082) 224-6889
GENERAL SANTOS2nd Floor, RCBC Savings BuildingPioneer Avenue, 9500 General Santos CityTel. No.: (083) 552-2225Telefax No.: (083) 552-3580
TAGUM (Davao Del Norte)Ground Floor RCBC BuildingPioneer Avenue cor. Quirante StreetTagum, Davao Del NorteTel. No.: (084) 655-6326Telefax No.: (084) 400-2181
ZAMBOANGA CITYGround Floor, YPC BuildingVeterans Avenue, 7000 Zamboanga CityTel. No.: (062) 991-2779Telefax No.: (062) 991-2296
SOUTH LUZONRoom 1-B Ground Floor, Melta BuildingVilla Nicasia III VillageEmilio Aguinaldo Highway, Imus, CaviteTel. No.: (046) 471-6613Telefax No.: (046) 471-8687
VISAYAS & MINDANAO2nd Floor, Great Pacific Life Building Fuente Osmeña, Rotonda, 6000 Cebu CityTel. Nos.: (032) 253-9382 / 253-4801Fax No.: (032) 255-3009
PROVINCIAL OFFICES
LUZON
BAGUIO CITY3rd Floor, RCBC BuildingSession Road, 2600 Baguio CityTel. Nos.: (074) 442-6300/ 446-0026Fax No.: (074) 442-7247
BALIWAG (Bulacan)321 2nd Floor, J & U BuildingBenigno S. Aquino Avenue, Baliwag, BulacanTelefax No.: (044) 766-6387
CABANATUAN CITY3rd Floor, RCBC Savings Bank BuildingMaharlika Highway cor. Paco Roman Street3100 Cabanatuan CityTel. No.: (044) 463-9683Telefax No.: (044) 463-0910
CALAMBA (Laguna)Ground Floor, RCBC BuildingNational Highway cor. Dolor StreetBarangay 1 Crossing, Calamba, LagunaTel. No.: (049) 545-1162 Telefax No.: (049) 545-0955
CAVITE (Imus)Room 1-B Ground Floor, Melta BuildingVilla Nicasia III VillageEmilio Aguinaldo Highway, Imus, CaviteTel. No.: (046) 471-6613Telefax No.: (046) 471-8687
DAGUPAN CITY2nd Floor, RCBC BuildingA.B. Fernandez Avenue, 2400 Dagupan CityTel. No.: (075) 515-5811Telefax No.: (075) 522-0928
ISABELATalavera Twin BuildingDon Canciller Avenue, Cauayan, IsabelaTel. No.: (078) 652-0092/ 634-5122Telefax No.: (078) 634-5331
LAOAG CITY2nd Floor, Cristina BuildingGen. A. Luna Street, 2900 Laoag CityTel. No.: (077) 772-0015Telefax No.: (077) 771-4806
LA UNIONCJArch Building (PBCom Bank)Quezon Avenue, San Fernando City, La UnionTel. No.: (072) 607-0066Telefax No.: (072) 607-8419
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PRODUCTSandSERVICES
• AVIATION
• ENGINEERING
- Advance Loss and Profits
- Boiler Pressure Vessel
- Contractor’s All Risk
- Deterioration of Stock following
Machinery Breakdown
- Electronic Equipment
- Erection All Risk
- Civil Engineering Completed Risk
- Machinery Breakdown
- Special Risk / Equipment Floater
• FIRE
- Business Interruption
- Commercial All Risk
- Fire and Lightning, including
Allied Perils
- Industrial All Risk
• MARINE
- Marine Cargo
- Marine Hull
- Fine Arts, Jewellery & Specie (FAJS)
- Jeweller’s Block
• MISCELLANEOUS CASUALTY
- Bankers Blanket Bond /
Computer Crime
- Burglary & Housebreaking
- Comprehensive General Liability
- Comprehensive Dishonesty
Disappearance and Destruction
- Employers Liability
- Excess Auto Liability
- Errors & Omissions
- Fidelity Guarantee
- Foresight Directors & Officers
Insurance
- Med Protect
- Money in Transit
- Money, Securities & Payroll
- Professional Liability
- Other Lines
Loss of Credit Card Insurance
Plate Glass Insurance
Hole in One (Tournament only)
• MOTORCAR
- Dealership Insurance Programs
Honda Insurance
Isuzu Car Insurance Program
- Motomax
- Motorcycle 1
- My Car
- Standard Motorcar Insurance
Private Vehicle
Commercial Vehicle
• RETAIL LINES -
PERSONAL ACCIDENT
- All-occasion Cards
- Crisis Cover
- Credit Protect/Unemployment
- Daily Hospitalization Income Benefit
- Diplomax
- Executive Plan
- Family Plan
- Family Protect
- Income Protect
- Inflation Free Plus Plan (IFC)
- Med Rescue
- MyFamily
- PA Christmas Cards
- PA Emergency Cards (AZ card)
- PA Valentines Cards
- Pampamilya Insurance Plan
- Rajah Personal Accident Insurance
- Seaman Secure
- Seafarer’s Bantay Pamilya
- Student Personal Accident Insurance
- TIP Domestic
- TIP Global
- Todo Asenso
- Tuition Fee Protect
- Travelmaster
- Travel Sure
- Vessel Personal Accident
• RETAIL FIRE - Business Protect - EZ Fire - Fire and Lightning, including Allied Perils - Home Protect Plus - MyBiz - MyHome - YGC-EPI
• RETAIL MISCELLANEOUS CASUALTY - Comprehensive Homeowners Insurance - Comprehensive Personal Liability - Golfers’ Comprehensive Insurance - Photo Rx
• BONDS - Administrator’s Bond - Attachment Bond - Attachment Bond (to Lift) - Bidder’s Bond - BOI Omnibus Bond - Broker’s Bond - Contract Growers Bond - Dealership Bond - Execution Pending Appeal Bond - Fidelity Bond - Firearm Bond - Forestry Bond (Internal Revenue) - Forestry Bond (Bureau of Forestry) - Guaranty Bond (Maintenance Warranty) - Guardians Bond - Haulers Bond - Heirs Bond - Immigration Bond - Indemnity Bond (3rd Party Sheriffs) - Injunction Bond (Plaintiff) - Injunction Bond (to Lift) - Manufacturer’s Official Bond - Miller’s Bond - Payment Bond - Performance Bond for Constructions - Replevin Bond - Supersedeas Bond - Surety Bond General - Warehouse Bond for Rice Bonded
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acy
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our vision MALAYAN equals Non-life Insurance.
our missionMALAYAN guarantees to provide its policyholders
the best non-life insurance protection and fair and prompt settlement of valid claims at all times.
our core values PASSIOn FOR eXCellenCe
Striving to be great and not just be good; continuously improving results.
SenSe OF URGenCYDoing things fast; taking the initiative to
respond to the needs of various stakeholders.
PROFeSSIOnAl DISCIPlIneWith strong working ethics; deserving of others’ trust and respect;
using company resources prudently; acting with fairness and objectivity; being accountable for one’s actions.
TeAMwORKActively tapping areas of Synergy;
communicating and collaborating towards shared goals.
lOYAlTYA good corporate citizen; pursuing corporate interests as one’s own; speaking well of the company and taking pride in its achievements.
Malayan Insurance President Alfonso T. Yuchengco (front row, far right) attended the 1964 East Asian
Insurance Conference. Also in photo are GSIS General Manager Ramon A. Diaz (3rd from right) and
Carmelino Avendia of Orient Reinsurance (3rd from left).
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Legacy
2012 ANNUAL REPORT