table of contents - republic...

About the Cover 3

Our Company 4

Culture, Mission, Vision, Values 6

President’s Message 9

Financial highlights 12

Key Risk 15

Corporate Governance 26

Board of Directors 32

Committees 37

Management 38

Ownership Structure 41

Corporate Social Responsibility 42

Financial Statements 46

Statements of Financial Position 47

Statements of Comprehensive Income 48

Statements of Changes in Equity 49

Statements of Cash flows 50

Notes to Financial Statements 52

TABLE OF CONTENTS

I N S T I T U T I O N A L I Z I N G R I S K M A N A G E M E N T

RSIC transcends traditional insurance practices in the

country by having Risk Management as its core

capability. The Company aims to be at the pinnacle of

providing innovative, efficient and effective insurance

products complemented by dynamic risk analysis and

management. Designed to manage their clients‘ risk

exposures and allow them to achieve their continuously

expanding business goals, these strategic and

progressive solutions are aligned with global best

practices resulting from the integration of risk

management in all aspects of the Company‘s services.

Through its Total Risk Solution Services, RSIC aspires to

become an institution who can understand risk better

than any other company in the Philippines.

ABOUT THE COVER

3

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Acquired in March

2007, under the leadership of

its President Dr. Pedro P.

Benedicto, Jr., RSIC has been

tasked to underwrite

Meralco‘s risk exposures and

address all its insurance needs

including its subsidiaries. RSIC

has quickly began to assist

Meralco in rationalizing its

insurance programs with the

aid of engineering surveys

and risk management

approaches, thus saving

Meralco not only substantial

premiums but also cost

effective cover designs and

pro-active claims

management.

Envisioning itself as the

country‘s Total Risk Solution

Provider, RSIC is quickly

becoming a major player in

the local insurance industry

that makes a strong mark for

its fierce advocacy towards

Good Corporate

Governance and Corporate

Social Responsibility. It holds

among its core values the

virtue of ―malasakit‖ in

dealing with others.

Today, RSIC is fully licensed to

write non-life insurance

packages to include Property

(Fire & Allied Perils, Industrial

All Risks & Commercial All

Risks and

Engineering), Liabilities &

Casualty, Marine, Motor,

Surety, Homeowner‘s and

other Special Packages. It

continues to innovate new

insurance

packages and group

programs. RSIC has

established and continues to

develop a dynamic, pro-

active risk management and

underwriting team. And with

its fast growing underwriting

capacity and risk

management

capability, RSIC is poised to

propel itself with even greater

growth as it serves the

expanding requirements of

Meralco, Metro Pacific, San

Miguel and Lopez groups‘

fast-growing

corporate, employees and

customer requirements.

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Republic Surety & Insurance Co., Inc. (RSIC),

is a wholly owned non-life insurance subsidiary of Meralco.

OUR COMPANY

5

Our Corporate

Culture

We are creating a culture

founded on the belief that

there is divinity in

humanity. In RSIC, our

challenge is ―to find God

in each other and in

others―. From this belief

emanates our vision and

core values

Our Company Vision

is to be a TOTAL RISK

SOLUTION PROVIDER.

Putting its core values of

malasakit and customer

focus to bear, we at RSIC

are committed to going

beyond traditional

insurance underwriting by

taking a risk-managed

approach in providing

insurance and other risk

solutions to our clients.

Prior to offering insurance

solutions, we assist in

identifying and assessing

the full gamut of risks

(―TOTAL‖) our clients may

be exposed to and offer

alternative non-insurance

solutions that will

complement a cost-

efficient insurance

program (―RISK

SOLUTION‖). Along this

line, RSIC commits itself in

providing (―PROVIDER‖)

innovative insurance

products and risk services

that would empower its

clients in pursuing its

business goals with

minimum disruption and

improved value creation

for its stakeholders.

Our Company Mission

is to be a PROFESSIONAL

RISK TAKER OF CHOICE

with emphasis in RISK

MANAGEMENT &

INSURANCE.

In achieving its vision as a

―total risk solution

provider‖, RSIC aims to

deliver quality and world-

class protection at the

most cost-effective

means. Thus, RSIC will

continuously develop its

core capabilities along

the lines of insurance and

risk management. It will

establish itself as a robust

business partner to its

owners, customers,

reinsurers as well as

members of its staff.

Despite its being a

―new-comer‖ under

Meralco ownership, RSIC‘s

initial stages of operation

has shown strong positive

results in terms of

capitalization, operational

efficiency and profitability

as well as technical

expertise. This augurs well

to an operational

performance at par with

the market leadership and

resiliency of the Meralco

Group of Companies. And

this will also be the source

of RSIC‘s competitive

advantage and market

differentiation.

Under the proven

leadership of its Chairman

(Atty. Monico V. Jacob)

and President (Dr. Pedro

P. Benedicto, Jr.), RSIC‘s

strong confidence

emanates from its distinct

strengths in its strong

financial condition as well

as the experience and

technical expertise of its

core of officers and staff.

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OUR COMPANY

6

Our Core Values

Our day-to-day affairs

and practice of doing our

business shall be

governed by the

following values:

Malasakit – We believe

that long-term business

sustainability can only be

achieved through

genuine care: For others

— our customers, our

shareholders, the business

industry we operate

in, the nation as well as

the physical

environment, and for our

company and for each

other

Makabayan –

Commitment to making a

positive impact in the lives

of the Filipino people by

doing our share in the

interest of nation-building

and undertaking high-

impact initiatives that

support and contribute to

the economic and social

development of the

Country.

Integrity /

Transparency – Service

beyond insurance covers

will be the norm in fulfilling

our duties. Every product

or service that we render

should show evidence of

―differentiation‖ and

―high value-added‖. We

will constantly aspire for

higher market

penetration and market

share but only if we can

deliver quality with

consistent efficiency.

Community Service –

We shall share our

resources including our

personal time, talents and

resources for the benefit

of the less fortunate

members of our

community and of society

in general.

Teamwork and

Collegiality – We move

as one in the pursuit of our

business objectives with a

strong work ethic and

spirit of enterprise.

Accountability /

Empowerment –

Accepting

responsibility, assuming

ownership and taking full

accountability for all our

actions, whether

decisions or behaviours in

the delivery of services

and management of

resources, in our public

and private spheres in

any level we are in the

organization.

Performance – Creating

and enhancing value for

all our stakeholders

(customers, employees,

investors and the

communities we serve).

Proactively seeking and

implementing

opportunities that drive

and sustain higher quality

and levels of

organizational

performance and

growth, cost-

effectiveness and

efficient delivery of

services. Organizational

agility and a sense of

urgency alongside

efficiency, creativity and

productivity are keys.

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OUR COMPANY

7

The Company

Objectives

RSIC aims to be among

the top 5 insurers in the

Philippines in the non-life

sector of insurance in

terms of:

Profitability – We aim to

achieve underwriting

profitability at all times

with proper pricing

strategies that support

quality service and high

technical competence.

Market Share – In the

long run, we believe this

will be a measure of the

distinctive quality service

and technical know-how

we aim to deliver and

maintain.

Corporate Governance

– Transparency,

Accountability and

Fairness will be our basic

foundation in doing

business.

Corporate Social

Responsibility – In the

process of efficiently

attaining value for our

clients and shareholders

with its strong spirit of

public service, we shall

pro-actively contribute to

the well-being of our

other stakeholders --- our

employees, to the

community in general, to

nation building and to the

environment.

Active Leadership in

the field of Risk

Management – We aim

to achieve recognition as

a leader if not a driving

force in risk management

approaches in

developing insurance

covers and other solutions

to risks.

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OUR COMPANY

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TO OUR STAKEHOLDERS,

With the integration of the ASEAN Community

fast approaching, RSIC has committed itself to

achieving the highest standards in enterprise-

wide risk management and corporate

governance to ensure greater

transparency, accountability and integrity in our

business practices. We are pleased to report

that our Company achieved significant

improvements in financial and operating

performance, as well as in the aspect of

corporate responsibility.

RSIC gained a 5.5% increase in Gross Premiums

Written in 2012 – premiums rose by PhP25.52

Million to PhP485.27 Million. The average growth

rate for six years now stands at 70.27%.

Pursuant to the provisions of Department Order

27-2006, the RSIC has also achieved the PhP250

Million capitalization requirement for 2012 set by

the Insurance Commission for all non-life

insurance companies in the Philippines.

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The year also marks the

selection of the General

Insurance Information

System (GENIISYS), a

software solution

customized for non-life

insurance companies

since 1991. The system is

designed to support

operations and greatly

improve workflow

efficiency by integrating

different functions of a

general insurance

company such as

underwriting, marketing,

reinsurance, claims and

accounting. GENIISYS is

developed by Computer

Professionals Inc. (CPI).

One of the highlights of

the year is the Corporate

Social Responsibility

(CSR) Program

composed of a Tree

Planting Initiative and

Gift-Giving Activities in

Tanay, Rizal. More than

meeting the new Triple

Bottom Line requirement

for businesses –

Economic, Social and

Environmental

Sustainability, this CSR

Program is a way for us to

embody our advocacy

―malasakit sa

kapwa, malasakit sa

bayan‖.

RSIC was recognized by

the Philippine Insurers

and Reinsurers

Association Inc.

(PIRA, Inc.) for its efforts

on social

responsibility, preserving

the environment, as well

as in innovating its

products and services.

Our company won in the

categories of ―Best

Green Company‖ and

―Best in CSR‖.

Meanwhile, PIRA also

gave distinction to RSIC

for spearheading the

―First Risk Management

Summit in the

Philippines‖, which as the

title implies, is a

completely

unprecedented event in

the country, given that

our awareness on

managing the totality of

business risks is still

considered to be in the

infancy stage compared

to progressive nations.

Our achievements this

past year represent

important steps towards

our vision of becoming a

Total Risk Solution

Provider by 2015.

We aspire to go beyond

traditional insurance

practices and ultimately

become capable of

understanding risk better

than any other institution

in the Philippines. As the

title of this 2012 Annual

Report goes,

Institutionalizing Risk

Management‖, we

believe that managing

the totality of risks is the

highest form of service

we can provide to all our

stakeholders, for while

insurance products

protect us from financial

losses, risk management

goes one step further, by

allowing us to convert

threats into opportunities.

In closing, I would like to

extend my gratitude to

our Board of Directors for

their commitment in

leading us towards our

Vision, and our

employees for the

hardwork and

dedication they have

shown in helping us

achieve our goals.

Finally, to our valued

clients, thank you for your

continued support and

unwavering faith to our

company. We will

continue to be your

strategic partner in your

endeavors and provide

you with products and

services founded on the

value of ―malasakit‖.

“More than meeting the new Triple Bottom

Line requirement for businesses, this CSR

Program is a way for us to embody our

advocacy “malasakit sa kapwa, malasakit

sa bayan”

PEDRO P. BENEDICTO, JR.

President10

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PERFORMANCE

HIGHLIGHTS

RSIC was the recipient of several awards during the

Philippine Insurers and Reinsurers Association, Inc.

(PIRA) Awards held last October 12, 2012.

For its support of the Department of Environment

and Natural Resources (DENR) ―National Greening

Program‖ through a Tree-Planting Activity held in

August 25, 2012, as well as conducting newspaper

drives and promoting the use of recycled

paper, RSIC won in the ―Best Green Company‖

Category.

Meanwhile, outreach programs conducted in San

Andres Elementary School in Tanay, Rizal wherein

the company provided school supplies, clothing

and meals earned RSIC another win, this time in the

―Best Corporate Social Responsibility‖ Category.

RSIC also was awarded as a Finalist in the

category of ―Best in Innovation‖ for hosting and

organizing the First Risk Management Summit in

the Philippines on September 12, 2012 at the

First Pacific Leadership Academy in

Antipolo, Rizal. The highly successful summit was

well attended by executives, senior

officers, managers and employees of

Meralco, PLDT, SMART, Metro Pacific

Investments Corporation, San Miguel

Corporation and subsidiaries and LOPEZ Group

of companies who are tasked to manage the

insurance requirements of their respective

companies.

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Gross PremiumsNumber of Non-Life Insurance

Companies in the Philippines

2007 55,018,187.00 87

2008 184,871,455.00 85

2009 240,655,118.00 84

2010 386,897,075.00 84

2011 459,755,884.00 84

2012 485,273,084.00 81

FINANCIAL HIGHLIGHTS

0.00

50,000,000.00

100,000,000.00

150,000,000.00

200,000,000.00

250,000,000.00

300,000,000.00

350,000,000.00

400,000,000.00

450,000,000.00

500,000,000.00

2007 2008 2009 2010 2011 2012

RSIC Gross Premiums, Industry Ranking2007-2012

Rank66

Rank34

Rank28

Rank22

*Based on Insurance Commission (IC) data

Rank21

Rank22

The Company continues to experience an increase in Gross Premiums Written. RSIC

posted a 5.5% growth in 2012, with premiums rising by PhP25.52 Million to PhP485.27

Million. Average growth for six years of operation is now at 70.27%. The company is

now ranked 22nd in terms of Gross Premiums out of the 81 insurance companies in the

Philippines in 2012.

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Both Net Income (GAAP) and Net Premiums retained experienced a slight decrease

for the year while Premiums Earned continued to rise, achieving a 18.70% growth in

2012. The decline in Net Income is attributed to incurred losses for the year due to

Habagat (August 2012).

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2007 2008 2009 2010 2011 2012

Net Premiums Retained

Premiums Earned

Net Income (GAAP)

Net Premiums Retained, Premiums Earned and Net Income

2007 - 2012


Net Premiums

RetainedPremiums Earned Net Income (GAAP)

2007 9,280,958 5,231,507 2,204,343

2008 45,343,310 17,266,346 14,243,535

2009 73,798,869 50,585,684 31,059,405

2010 91,282,336 80,241,800 26,465,978

2011 123,848,276 114,549,130 36,423,629

2012 119,063,731 135,969,720 33,026,458

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The Company‘s Total Net Worth and Total Assets increased in value in 2012. RSIC‘s

Total Net Worth experienced a remarkable 52.50% growth for the year while Total

Assets increased by 16.14%. Both values have seen continuous rise in previous

years, with Total Net Worth gaining a larger percentage of the former over time. RSIC

has also complied with the PhP250 Million Networth required by the New Insurance

Code.

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

2007 2008 2009 2010 2011 2012

Total Assets

Total Net Worth

Total Net Worth and Total Assets

2007 - 2012

Total Net Worth Total Assets

2007 107,962,394 170,117,340

2008 121,431,382 390,824,219

2009 152,638,216 920,764,733

2010 169,180,130 1,054,416,700

2011 205,608,565 1,016,079,219

2012 313,548,239 1,180,264,544


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GovernanceThe primary objective of the Company‘s insurance risk and financial

risk management framework is to protect the Company‘s

stockholders from events that hinder the sustainable achievement of

the financial performance objectives, including failing to exploit

opportunities. Key management recognizes the critical importance of

having efficient and effective risk management system.

Regulatory Framework

The concern of the regulators is to protect the rights of the policyholders and maintain

close observation to ensure that the Company is satisfactorily managing its affairs for

the benefit of policyholders. At the same time, the regulators are also interested in

ensuring that the Company maintains appropriate solvency position to meet liabilities

arising from claims and that the risks are at acceptable levels. The risks and the way

the Company manages insurance and financial risks are set out in the following:

I. Insurance Risk

The risk under any one insurance contract is the possibility that the insured event

occurs and the uncertainty of the amount of the resulting claim. The principal risk the

Company faces under such contracts is that the actual claims exceed the carrying

amount of insurance liabilities. This could occur due to any of the following:

•Occurrence Risk - the possibility that the number of insured events reported in a

particular period will differ from those expected.

•Severity Risk - the possibility that the cost of the events will differ from those

expected.

•Development Risk - the possibility that changes may occur in the amount of an

insurer‘s obligation at the end of the contract period.

The Company‘s exposure to insurance risk as at December 31, 2012 and 2011 is as

follows:

The foregoing risk exposure is mitigated by diversification across a portfolio of

insurance contracts and geographical areas. The variability of risk is also improved by

careful selection and implementation of underwriting strategy guidelines, as well as

the use of reinsurance arrangements.

KEY RISKS

15Note:Taken from Report of Independent Auditors, March 21, 2013, Manabat, Sanagustin & Co., CPAs

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The foregoing risk exposure is mitigated by diversification across a portfolio of

insurance contracts and geographical areas. The variability of risk is also improved

by careful selection and implementation of underwriting strategy guidelines, as well

as the use of reinsurance arrangements.

The Company aims to maintain strong reserves in respect of its insurance business in

order to protect against adverse future claims experience and developments.

Amounts of estimates at the accident year are based from adjusters‘ report. Other

estimates are based on reasonable approximation after an evaluation of reported

claims. Adjustment to the loss reserves is made on the year the ultimate cost of

claim becomes more certain. Reserves are either released or increased depending

on said amounts.

Key Assumptions

The principal assumptions underlying the estimates made by the Company

depends on the past claims experience and industry levels. This includes

assumptions in respects to average claims costs, inflation factor and handling cost.

Judgment is used to assess the extent to which external factors such as judicial

decision and government legislation affect the estimates.

Sensitivity Analysis

The insurance provisions are sensitive to the interest rate, risk discount rate expense

and persistency assumptions. Because of delays that arise between occurrences

of claims and their subsequent notifications and actual settlement, the provisions

are not known with certainty at reporting dates.

The Company aims to maintain strong reserves in respect of its insurance business in

order to protect against adverse future claims experience and developments.

Amounts of estimates at the accident year are based from adjusters‘ report. Other

estimates are based on reasonable approximation after an evaluation of reported

claims. Adjustment to the loss reserves is made on the year the ultimate cost of claim

becomes more certain. Reserves are either released or increased depending on

said amounts.

KEY RISKS


Note 2012 2011

Gross claims 9 P299,858,946 P270,446,577

Less reinsurance recoverable on unpaid losses 8 254,149,906 243,363,560

P 45,709,040 P 27,083,017

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In accordance with the claims development methodology, losses and claims for 2012

and 2011 were developed based on the following:

Losses and claims payable of P299.86 million and P270.45 million as at December 31,

2012 and 2011, respectively, include estimated IBNR of P2.00 million in 2012 and 2011.

Reinsurance recoverable on unpaid losses amounted to P254.15 million and P243.36

million as at December 31, 2012 and 2011, respectively. Hence, net losses and claims

payable as at December 31, 2012 and 2011 amounted to P45.71 million and

P27.09 million, respectively.

KEY RISKS


Gross Losses and Claims Payable for 2012

Accident Year 2008 2009 2010 2011 2012 Total

Estimate of ultimate claims

costs at the end

of accident year P2,993,925 P411,532,592 P62,941,339 P236,906,769 P191,392,814 P191,392,814

One year later 2,601,525 296,368,680 73,597,227 200,402,379 - 200,402,379

Two years later 2,781,142 259,807,667 74,598,241 - - 74,598,241

Three years later 2,788,193 260,021,330 - - - 260,021,330

Four years later 2,747,693 - - - - 2,747,693

Current estimate of

cumulative claims 2,747,693 260,021,330 74,598,241 200,402,379 191,392,814 729,162,457

Cumulative payments

to date 2,477,174 258,312,026 32,082,039 112,179,102 24,253,170 429,303,511

Liability recognized in the

statements of financial

position P270,519 P1,709,304 P42,516,202 P88,223,277 P167,139,644 P299,858,946

Gross Losses and Claims Payable for 2011



costs at the end

of accident year P198,406 P2,993,925 P411,532,592 P62,941,399 P236,906,769 P236,906,769

One year later 395,247 2,601,525 296,368,680 73,597,227 - 73,597,227

Two years later 477,366 2,781,142 259,807,667 - - 259,807,667

Three years later 477,366 2,788,193 - - - 2,788,193

Four years later 477,366 - - - - 477,366

Current estimate of

cumulative claims 477,366 2,788,193 259,807,667 73,597,227 236,906,769 573,577,222

Cumulative payments

to date 477,366 2,477,174 257,554,510 27,324,572 15,297,023 303,130,645



position P - P311,019 P2,253,157 P46,272,655 P221,609,746 P270,446,577

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Details of the net loss presented in the following table reflect the cumulative incurred

claims, including both claims notified and claims IBNR, for each successive accident

year at each reporting date, together with the cumulative payments to date.

The table below sets out the concentration of claims and losses payable (excluding

IBNR of P2.0 million in 2012 and 2011) by type of contract:

KEY RISKS


Net Losses and Claims Payable for 2012



costs at the end

of accident year P932,944 P6,229,659 P7,165,095 P22,254,579 P40,428,419 P40,428,419

One year later 1,026,571 4,914,231 12,641,178 22,445,246 - 22,445,246

Two years later 1,102,571 5,145,205 12,474,702 - - 12,474,702

Three years later 1,031,541 5,203,795 - - - 5,203,795

Four years later 1,010,580 - - - - 1,010,580

Current estimate of

cumulative claims 1,010,580 5,203,795 12,474,702 22,445,246 40,428,419 81,562,742

Less cumulative payments

to date 814,707 4,796,950 5,037,372 16,549,028 8,655,645 35,853,702



position P195,873 P406,845 P7,437,330 P5,896,218 P31,772,774 P45,709,040

Net Losses and Claims Payable for 2011



costs at the end

of accident year P198,406 P932,944 P6,229,659 P7,165,095 P22,254,579 P22,254,579

One year later 247,031 1,026,571 4,914,231 12,641,178 - 12,641,178

Two years later 305,526 1,102,571 5,145,205 - - 5,145,205

Three years later 305,526 1,031,541 - - - 1,031,541

Four years later 305,526 - - - - 305,526

Current estimate of

cumulative claims 305,526 1,031,541 5,145,205 12,641,178 22,254,579 41,378,029

Less cumulative payments

to date 305,526 814,708 4,779,439 4,358,540 4,036,799 14,295,012



position P - P216,833 P365,766 P8,282,638 P18,217,780 P27,083,017

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II. Financial Risk

The Company is exposed to financial risk through its financial assets, financial liabilities,

reinsurance assets and reinsurance liabilities. In particular, the key financial risk is that

the proceeds from its financial assets are not sufficient to fund the obligations arising

from its insurance contracts. The most important components of this financial risk are

credit risk, liquidity risk and market risk.

These risks arise from open positions in interest rate, currency and equity products, all

of which are exposed to general and specific market movements. The risk that the

Company primarily faces due to the nature of its investments and liabilities is interest

rate risk.

A. Credit Risk

Credit risk is due to uncertainty in a counterparty‘s (also called an obligor) ability to

meet its obligation.

Prior to extending credit, the Company manages its credit risk by assessing credit

quality of its counterparty through a process called credit scoring.

Credit risk limit is also used to manage credit exposure, which specifies credit exposure

limit for each intermediary depending on the size of its portfolio and its ability to meet

its obligation based on past experience.

KEY RISKS


Gross

Liabilities

Reinsurers’

Share of

Liabilities Net Liabilities

As at December 31, 2012

Fire P223,222,934 P193,801,752 P29,421,182

Engineering 60,515,901 50,540,561 9,975,340

Motor 2,968,561 490,533 2,478,028

Casualty 10,560,060 8,871,987 1,688,073

Marine 585,141 440,280 144,861

Personal accident 6,349 4,793 1,556

P297,858,946 P254,149,906 P43,709,040

As at December 31, 2011

Fire P212,968,487 P197,315,404 P15,653,083

Engineering 41,201,367 35,629,966 5,571,401

Casualty 12,397,934 10,224,402 2,173,532

Motor 1,207,659 145,803 1,061,856

Bonds 585,806 - 585,806

Marine 74,077 39,098 34,979

Personal accident 11,247 8,887 2,360

P268,446,577 P243,363,560 P25,083,017

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Generally, the maximum credit risk exposure of financial assets is the carrying amount

of the financial assets as shown on the face of the statement of financial position (or in

the detailed analysis provided in the notes to the financial statements), summarized as

follows:

The aging of the gross insurance receivable is as follows:

KEY RISKS


Note 2012 2011

Cash in banks and cash equivalents 7 P246,733,310 P187,737,040

Insurance receivables - net 8 565,062,235 493,097,058

Investments:

AFS 10 942,080 1,028,864

HTM 10 118,284,669 101,081,825

Accrued interest income 1,721,802 1,424,021

Receivables 13 3,211,540 2,759,340

P935,955,636 P787,128,148

Premiums Collectible from Direct 2012 2011

Current P226,609,810 P216,385,762

31 - 60 days 1,124,396 747,018

61 - 90 days 2,151,476 1,015,915

More than 90 days 5,683,711 -

P235,569,393 P218,148,695

Premiums Collectible from Reinsurers 2012 2011

Current P298,680,068 P258,202,528

31 - 60 days 4,160,669 3,727,101

61 - 90 days 2,806,177 2,015,967

More than 90 days 23,845,928 11,060,520

P329,492,842 P275,006,116

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The following tables summarize the credit quality of the Company‘s financial assets

based on their historical experience with the corresponding third parties:

The following tables summarize the credit quality of the Company‘s financial assets

based on their historical experience with corresponding third parties:

The Company classifies its unimpaired financial assets into the following credit

grades:

•Grade A pertains to those financial assets that consistently collected before the

maturity date.

•Grade B includes financial assets that are collected on their due dates without an

effort from the Company to follow them up.

•Grade C pertains to financial assets which are collected on their due dates with the

Company making a persistent effort to collect them.

•Past due but not impaired includes those that are past due but are still collectible.

KEY RISKS


2012

Neither Past Due nor Impaired

Past Due

but

Grade A Grade B Grade C

not

Impaired Total

Cash in banks and cash

equivalents P246,733,310 P - P - P - P246,733,310

Insurance receivables 535,532,596 - - 29,529,639 565,062,235

Investments:

AFS 942,080 - - - 942,080

HTM -

118,284,6

69 - - 118,284,669

Accrued interest income 1,721,802 - - - 1,721,802

Receivables 3,211,540 - - - 3,211,540

P788,141,328

P118,284,

669 P - P29,529,639 P935,955,636

2011

Neither Past Due nor Impaired

Past Due

but

Grade A Grade B Grade C

not

Impaired Total


equivalents P187,737,040 P - P - P - P187,737,040

Insurance receivables 482,036,538 - - 11,060,520 493,097,058

Investments:

AFS 1,028,864 - - - 1,028,864

HTM -

101,081,8

25 - - 101,081,825

Accrued interest income 1,424,021 - - - 1,424,021

Receivables 2,759,340 - - - 2,759,340

P674,985,803

P101,081,

825 P - P11,060,520 P787,128,148

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The table below sets out the concentration of credit risk on insurance receivables

(excluding premiums deposit of P2.64 and P2.28 million in 2012 and 2011, respectively)

by type of contract.

B. Liquidity Risk

Liquidity or funding risk is the risk that an entity will encounter difficulty in raising funds

to meet commitments associated with financial instruments. Liquidity risk may result

from either the inability to sell financial assets quickly at their fair values; or

counterparty failing on repayment of a contractual obligation; or insurance liability

falling due for payment earlier than expected; or inability to generate cash inflows as

anticipated.

An institution may suffer liquidity problem when its credit rating begins to fall. The

Company is also exposed to liquidity risk if markets on which it depends are subject to

loss of liquidity. The major liquidity risk faced by the Company is the provision for cash

calls in respect of claims from insurance contracts with sustained losses.

The Company manages liquidity through regular monitoring of its cash position to

ensure that maturing liabilities will be adequately met.

As at December 31, 2012 and 2011, the Company‘s financial assets exceeded the

financial liabilities as shown in the table below.

KEY RISKS


2012 % 2011 %

Fire P486,118,870 85.63 P323,737,569 66.21

Engineering 52,917,191 9.32 100,572,430 20.57

Casualty 19,773,615 3.48 32,490,185 6.64

Motor 4,080,514 0.72 15,405,030 3.15

Personal accident 3,304,965 0.58 8,685,937 1.78

Marine 1,111,961 0.20 4,225,429 0.86

Bonds 392,179 0.07 3,840,478 0.79

P567,699,295 100.00 P488,957,058 100.00

2012

Less than

1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years

More than

5 Years Total


equivalents P246,733,310 P - P - P - P - P - P246,733,310

Insurance receivables- net 565,062,235 - - - - - 565,062,235

Investments:

AFS 942,080 - - - - - 942,080

HTM 3,000,463 8,000,000 24,105,000 33,017,959 10,000,000 30,161,247 108,284,669

Accrued interest income 1,721,802 - - - - - 1,721,802

Receivables 3,211,540 - - - - - 3,211,540

Accounts payable and

accrued expenses (28,540,812) - - - - - (28,540,812)

Reinsurance liabilities (213,518,807) - - - - - (213,518,807)

Losses and claims payable (299,858,946) - - - - - (299,858,946)

Net liquidity P278,752,865 P8,000,000 P24,105,000 P33,017,959 P10,000,000 P30,161,247 P384,037,071

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It is unusual for the Company primarily transacting insurance business to predict the

requirements of funding with absolute certainty as theory of probability is applied to

insurance contracts to ascertain the likely provision and time period when such

liabilities will require settlement. The amount and maturities in respect of insurance

liabilities are thus based on management‘s best estimate and on statistical

techniques and past experience.

C. Market Risk

Market risk is the risk of change in fair value of financial instruments from fluctuation in

foreign exchange rates (currency risk), market interest rates (interest rate risk) and

market prices (price risk), whether such change in price is caused by factors specific

to the individual instrument or its issuer or factors affecting all instruments traded in the

market.

Market risk is the risk to an institutions‘ financial condition from volatility in the price

movements of the assets contained in a portfolio. Market risk represents what the

Company would lose from price volatilities. Market risk can be measured as the

potential gain or loss in a position or portfolio that is associated with a price

movement of a given probability over a specified time horizon.

The Company manages market risk by evenly distributing capital among investment

instruments, sectors and geographical areas. The Company structures levels of market

risk it accepts through a sound market risk policy based on specific guidelines set by

its Investment Committee. This policy constitutes certain limits on exposure of

investments mostly with high-rated banks, which are selected on the basis of the

bank‘s credit ratings, capitalization and quality servicing being rendered to the

Company. Also, the said policy includes diversification benchmarks of investment

portfolio to different investment types duly approved by the IC, asset allocation

reporting and portfolio limit structure.

KEY RISKS


2011

Less than

1 Year 1 - 2 Years 2 - 3 Years 3 - 4 Years 4 - 5 Years

More than

5 Years Total


equivalents P187,737,040 P - P - P - P - P - P187,737,040

Insurance receivables- net 493,097,058 - - - - - 493,097,058

Investments:

AFS 1,028,864 - - - - - 1,028,864

HTM 2,501,459 3,003,211 8,000,000 20,000,000 37,415,908 30,161,247 101,081,825

Accrued interest income 1,424,021 - - - - - 1,424,021

Receivables 2,759,340 - - - - - 2,759,340

Accounts payable and

accrued expenses (17,624,220) - - - - - (17,624,220)

Reinsurance liabilities (198,350,029) - - - - - (198,350,029)

Losses and claims payable (270,446,577) - - - - - (270,446,577)

Net liquidity P202,126,956 P3,003,211 P8,000,000 P20,000,000 P37,415,908

P30,161,24

7 P300,707,322

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Moreover, control of relevant market risks can be addressed through compliance

reporting of market risk exposure to the IC, regular monitoring and review of the

Company‘s investments performance and upcoming investment opportunities for

pertinence and changing environment.

D. Interest Rate Risk

The management of interest rate risk involves maintenance of appropriate blend of

financial instruments with consideration on the maturity profile of the financial

instruments.

The Company‘s exposure to such instruments is not significant as most of the

investments have fixed interest rates and maturities.

E. Foreign Currency Risk

The Company‘s exposure to foreign currency risk based on notional amounts as at

December 31, 2012 and 2011 follows:

The table below demonstrates the sensitivity to a reasonably possible change in the

US dollar exchange rate, with all other variables held constant, of the Company‘s

income before income tax and equity.

KEY RISKS


2012

In USD

Closing Exchange

Rate In Peso

Cash $484,587 P41.05 P19,892,280

HTM investments 100,000 41.05 4,105,900

Exposure $584,587 P41.05 P23,998,180

2011

In USD

Closing Exchange

Rate In Peso

Cash $404,964 P43.84 P17,753,622

HTM investments 100,000 43.84 4,384,000

Exposure $504,964 P43.84 P22,137,622

Increase/Decrease in

USD Exchange Rate

Effect on

Income before

Income Tax

Effect on

Equity

2012 +5% P1,198,981 P839,287

-5% (1,198,981) (839,287)

2011 +5% 1,106,881 774,817

-5% (1,106,881) (774,817)

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F. Price Risk

The Company‘s price risk exposure at each reporting period date relates to financial

assets and liabilities whose values will fluctuate as a result of changes in market price

of AFS financial assets. However, changes in price risk affecting AFS financial assets do

not have significant impact on the financial statements considering the insignificant

amount of AFS financial assets as at December 31, 2012 and 2011.

Capital Management

The Company‘s objectives when managing capital is to maintain a certain level of

capital structure to ensure compliance with margin of solvency (MOS) and minimum

paid-up capital requirements imposed by IC as well as to adequately protect the

claims of the Company‘s policyholders.

The Company regards the following as the capital it manages as at December 31:

There were no changes in the Company‘s approach to capital management during

the year (see Note 25).

The Company is subject to capital requirements imposed by IC (see Note 25).

KEY RISKS


2012 2011

Capital stock P175,000,000 P175,000,000

Deposit for future capital stock subscription 75,000,000 -

Contributed surplus 44,269 44,269

Revaluation reserve on AFS financial assets (197,325) (110,541)

Retained earnings 63,701,295 30,674,837

P313,548,239 P205,608,565

CORPORATE GOVERNANCE

at RSIC

A corporation, while

considered to be a

juridical entity, also

assumes qualities of a

human being, that is, it has

needs, wants and goals

that it has to meet in order

to stay ―alive‖. This is

traced to the fact that

firms are conglomerations

of people who perform

collaborative work to meet

a common set of goals. It is

this nature of organizations

– interaction between

members internal to the

organization and

interaction between the

organization and external

entities, that give rise to

stakeholders, which affect

and at the same time, are

affected by the operations

of the organization.

For this reason, corporate

success is now measured in

terms of the Triple Bottom

Line, that is, meeting the

economic, social and

environmental

sustainability requirements

of all stakeholders of the

company. Corporate

Governance, the structures

and processes that provide

control and direction of

organizations, is concerned

with improving relationships

among management, the

Board of Directors,

shareholders and other

stakeholders.

Thus, adhering to global

practice in corporate

governance contributes to

sustainable development.

At RSIC, our Board of

Directors, officers,

managers and employees

commit to the

fundamental principles of

sound corporate

governance and

acknowledge that these

are necessary components

of a robust strategic

business management that

will further enhance the

value of our Company to

all stakeholders involved.

Our Manual on Corporate

Governance, available for

download on our

corporate website, is

adopted pursuant to

Securities and Exchange

Commission (SEC)

Memorandum Circular No.

6, series of 2009 (Revised

Code of Corporate

Governance) issued on

July 15, 2009, as well as

Insurance Commission (IC)

Circular Letter 31-2005

issued

September 26, 2005, in

order to achieve

policyholder and market

investor‘s confidence and

sustain the growth of the

insurance industry,

ultimately contributing to

the country‘s economic

well-being.

27


at RSIC

I. GOVERNANCE COMPLIANCE

RSIC has consistently complied with the disclosure and reportorial requirements of the Insurance Commission

(IC). In 2012, these included:

Insurance Commission Reportorial Requirements Frequency

1 Negative List of Officers and Employees Quarterly

2 Statistical Report Quarterly

3 Insurance and Reinsurance Brokers Annual Statement of Business Operations Annually

4Biographical Data (Biodata) of Members of the Board of Directors / Trustees and List of

Officers Annually

5 Report of Investment Made and Sold or Disposed of Monthly

6 Statement of Paid-up Capital Reserves and Investments Quarterly

7 Statement of Foreign Exchange Receipts Monthly

8 Evaluation of Quarterly Statistical Report on Catastrophes Quarterly

9 Particulars of Reinsurance Treaties Yearly

10 Submission of Audited Financial Statement Yearly

11Report of Surety / Fidelity Bonds issued in favour of the government of the Philippines or

its political subdivisions and government-owned or controlled corporation Monthly

12 Report on Judicial Bonds issued and all other Bonds Monthly

13 Fire Service Tax Receipts Quarterly

14 Reports on Number of COC’s issued Quarterly

15 Submission of Annual Statement Annually

16 Accreditation of External Auditors Annually

17Anti-Money Laundering Council:

Accomplishment Self-Rating from AMLA Manual Annually

18 Increased in Capitalization Annually

19 Underwriting Guide on Manual

Upon request for approval

of insurance products20 Premium Rates with Statistical Basis

21 Claims Procedures

22 Negative List of Agents Quarterly

23 Audited Financial Statement (Broker) Annually

24 Minimum Requirements for Approval of Life Insurance Products

Upon request for approval

of insurance products25Minimum Requirements from the Approval of Insurance Plans/Forms for Insurance,

applications, riders, clauses, warranty or endorsement

26 Risk Based Capitalization Annually

28


at RSIC

II. OUR POLICIES

RSIC well-defined policies are based on best

practices on Corporate Governance and have

been cascaded from top management to

business operations and line units.

(a)Manual on Corporate GovernanceOur CG Manual is the foundation of our

governance policies and has been

adopted pursuant to both SEC and IC

Memorandum Circulars in order to achieve

policyholder and market investor‘s

confidence and sustain the growth of the

insurance industry, thereby contributing to

the country‘s economic well-being.

(b) Code of Ethics (COE)Our COE is designed to promote the

highest ethical standards in the conduct of

our business to the extent that both our

personal and professional relationships

exceed what is required by insurance

industry practice and applicable laws, rules

and regulations. This Code applies to our

directors, officers, employees and

consultants, as they perform their duties

and responsibilities.

III. BOARD OF DIRECTORS

The Board of Directors (the ―Board‖) is primarily

responsible for the governance of our

Company. It shall also establish the company‘s

vision, mission, strategic objectives, policies and

procedures that shall guide its activities. A

director‘s office is one of trust and confidence.

He shall act in a manner characterized by

transparency, accountability, integrity, and

fairness.

There are nine (9) members of the Board, of

these directors, one is an executive

director, two are independent directors and six

are non-executive directors. The Board

structure and practices provide oversight of the

conduct of the company‘s business to ensure

that it is being properly managed and dealings

with policyholders, claimants and creditors and

other stakeholders are fair and equitable.

(a)Board IndependenceThe elected independent directors for

2012 are Atty. Monico V. Jacob and Mr.

Benito dela Cruz. This is in accordance

with the Securities Regulation Code (SRC)

requiring at least two (2) independent

directors or 20% of the members of the

Board.

Also, considering that the insurance

business is imbued with public interest, the

Company separated the posts of the

Chairman and President, to ensure an

appropriate balance of power, increased

accountability and greater capacity of

the Board for independent decision

making.

(b) Board PerformanceThe Board conducts monthly meetings as

well as special Board Meetings, if

necessary, with the agenda that includes

approval of minutes of previous

meetings, reports on financial

performance by the Chief Finance Officer

and operational performance by the

President. (see page 36 for Board

Member attendance at regular meetings)

Definition:

Executive Director– refers to a director who is

also the head of a department or unit of the

corporation or performs any work related to its

operation;

Non-Executive Director – refers to a director

who is not the head of a department or unit of

the corporation nor performs any work related

to its operation;

Independent Director– refers to a person who

apart from his fees and shareholdings is

independent of Management and free from

any business or other relationship which

could, or could reasonably be perceived

to, materially interfere with his exercise of any

independent judgment in carrying out his

responsibilities as a director in the company.

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at RSIC

IV. BOARD COMMITTEES

(a)Nomination Committee – composed of

four (4) directors and has the responsibility

of reviewing and evaluating the

qualifications of all persons nominated to

Board as well as those nominated to other

positions requiring appointment by the

Board of Directors. It should prepare a

description of the roles and capabilities

required of a particular appointment.

(b)Audit Committee – composed of four (4)

directors, one of whom is independent and

chaired by another independent board

member with accounting and finance

experiences. The AuditCom provides

oversight of the institution‘s internal and

external auditors and is responsible for the

setting-up of internal audit

department, and the appointment of

internal auditors as well as of independent

external auditors. In addition, it also

monitors and evaluates the adequacy and

effectiveness of the internal control system

of the company.

An Audit Committee meeting was held last

March 13, 2013, to approve the 2012 RSIC

Financial Statements. Present in the

meeting are AuditCom members, Mr.

Benito dela Cruz (Chairman), Atty. Monico

V. Jacob and Ms. Betty C. Siy-Yap. Also

present are RSIC executives Pedro P.

Benedicto, Jr. (President and CEO) and Ms.

Cecilia P. Pallon (Chief Finance Officer) as

well as KPMG (external auditor) officers Mr.

Dennis Ilan (Partner), Mr. Ronald Alvarez

(Audit Manager) and Ms. Nerisa Lu

(Auditor).

(c) Risk Oversight Committee – composed of

four (4) directors and has the responsibility

to oversee Management activities in

managing credit, market, liquidity,

operations, legal, underwriting and other

risks of the Company. This function includes

regular receipt from Management of

information on risk management activities.

(d) Compensation and Remuneration Committee – composed of four (4)

directors. It has the responsibility to

establish a formal and transparent

procedure for developing policy on

remuneration of directors and officers to

ensure that their compensation is

consistent with the company‘s

culture, strategy, and the business

environment in which it operates. Also, the

committee oversees the formulation of the

compensation and retirement philosophy

as well as study and evaluate the

appropriate compensation, retention, and

retirement policies and programs for the

officers of the Company as appointed in

accordance with the company‘s By-

Laws, as well as managers or executives

with the rank of assistant vice president

and up .

(e) Investment Committee – composed of four

(4) representatives from the Board of

Directors. The Investment Committee

reviews, advises and recommends

approval to the Board for decision or

action on proposed investment by the

Company‘s Management.

V. MANAGEMENT

The Management is represented by a

Management Committee (ManCom)

composed of corporate officers and

executives formed and headed by the

President. All Principal policies and directions

governing the organization, management and

operation of the Company is formulated and

implemented by this committee, subject to

Board approval when required by existing laws.

The Committee regularly reports to the board

at its regular board meeting , or during special

meeting whenever necessary or requested by

the Board or the President, on all matters

concerning the Company‘s operation as well

as significant events or occurrences affecting

the Company.

VI. RELATIONS WITH STOCKHOLDERS

The Board is committed to maintaining an

effective communications policy that enable

both the Board and management to

communicate effectively with its

stockholders, stakeholders and the general

public. The Board monitors and evaluates

stockholders‘ opinion in whatever way it is

most practical and efficient.

30


at RSIC

VII. INVESTOR’S RIGHT AND PROTECTION

The Board shall commit to respect the following

rights of the stockholders:

1. Voting Right

Stockholders shall have the right to

elect, remove and replace directors and vote

on certain corporate acts in accordance with

the Corporation Code. Cumulative voting shall

be used in the election of directors.

2. Pre-emptive Right

Unless otherwise stated in the Articles of the

Incorporation or Corporation Code of the

Philippines, all stockholders shall enjoy pre-

emptive right to subscribe to all issues or

disposition of shares in proportion to their

respective shareholdings.

3. Right of Inspection

Any stockholder who desires to exercise his

right to inspect corporate books and record of

the Company must make a written request

addressed to the Corporate Secretary. The

Corporate Secretary may elevate the request

for inspection for the information, approval, or

other appropriate action by the Board.

4. Right to Information

Stockholders shall be provided upon

request, with periodic reports filed by the

company with the SEC (e.g. proxy statement/

information statement and annual report)

which disclose personal or personal information

about the Directors and Officers such as their

educational and business

background, holdings of the Company‘s

shares, material transactions with the

Company, relationship with other Directors and

Officers and the aggregate compensation of

Directors and Officers.

5. Right to Dividends

Stockholders shall have the right to receive

declared dividends subject to the procedures

prescribed by the Board. The Company shall

be compelled to declare dividends when its

retained earnings exceeds 100% of its paid –in-

capital stock, except:

a. When justified by definite corporate

expansion projects or programs approved by

the Board; or

b. When the Company is prohibited under any

loan agreement with any financial institution or

creditor, whether local or foreign, from

declaring dividends without its consent, and

such consent has not been secured; or

c. When it can be clearly shown that such

retention is necessary under special

circumstances obtaining in the company, such

as when there is a need for special reserve for

probable contingencies.

6. Appraisal Right

The stockholders shall have appraisal right

under any of the following circumstances:

a. In case any amendment to the Articles of

Incorporation has the effect of changing or

restricting the rights of any stockholders or class

of shares, or of authorizing preferences in any

aspect superior to those of outstanding shares

of any class, or of existing or reducing the term

of corporate existence;

b. In case of sale, lease, exchange,

transfer, mortgage, pledge or other disposition

of all or substantially all of the property and

assets of the Company;

c. In case of merger or consolidation; and

d. Investment of funds in any other corporation

or business or for a purpose other than the

primary purpose for which the Company was

organized.

7. Right to Transfer and Fair Conduct of

Stockholders’ Meeting

The board shall adopt appropriate measures

to ensure that stockholders‘ meetings are

conducted in a fair and transparent manner.

The stockholders should be encouraged to

personally attend such meetings, and if unable

to do so, they should be advised ahead of time

of their right to appoint a proxy on their behalf.

VIII. PUBLIC ACCOUNTABILITY

As custodian of public funds , the Company

ensures that dealings with the public are

always conducted in a fair , honest and

equitable manner and that officers avoid

conflicts of interest and unfair or deceptive

acts of conduct that constitute unfair trade

practices detrimental to policyholders and

claimants.31

MONICO V. JACOB, 67

Chairman/ Independent Director

(since January 2007)

Atty. Monico V. Jacob holds a bachelor of laws

from the Ateneo de Manila University and

Bachelors of Arts from the Ateneo de Naga. He is

at present the President and CEO of STI

Education Services Group; Chairman of CEO‘s

Inc., a business and management consulting

firm; Chairman of Grow Inc., a professional

placement company; and Vice-Chairman of

CBV Asset Management Corp. He is also a

partner in the law firm of Jacob and Jacob. His

areas of specialty are in energy, corporate law

and corporate recovery and rehabilitation work.

He is also a member of the Board of Directors of

the Philsteel Corp, Steel Corp and MIESCOR, a

Meralco subsidiary.

OSCAR S. REYES, 67

Director (since July 2010)

Mr. Oscar S. Reyes is the current President

and Chief Executive Officer of Meralco. He is

a Director of the Philippine Long Distance

Telephone Company since 2001. Among his

other positions are: Chairman of MRL Gold

Phils., Inc and Link Edge, Inc.; Member of the

Board of Bank of the Philippine Islands, Manila

Water Co., Smart Communications, Inc, Pepsi

Cola Products Philippines, Inc., Basic Energy

Corporation, Sun Life Financial Plans, Inc., First

Philippine Electric Corporation. Prior to these

posts, he served the Shell Companies in the

Philippines in various capacities including

Country Chairman and concurrently

President of Pilipinas Shell Petroleum

Corporation and Managing Director of Shell

Philippines Exploration B.V. He is a Member of

the Board of Trustees of Pilipinas Shell

Foundation, Inc., SGV Foundation, and El

Nido Foundation, Inc. He finished his

BA, Major in Economics (Cum Laude) at the

Ateneo de Manila University in 1965. He

undertook post-graduate studies at the

Ateneo Graduate School of

Business, Waterloo Lutheran University and the

Harvard Business School.

BETTY C. SIY-YAP, 52

Director (since April 2009)

Ms. Betty C. Siy-Yap is the current Chief Finance

Officer of MERALCO. She graduated from the

University of the Philippines with a degree of

Bachelor of Science in Business Administration and

Accountancy. She also attended the Special

Executive Program in Finance at the Arthur D. Little

Management Institute in Cambridge, Massachusetts.

She earned her MBA from Northwestern University

(Kellogg School of Management) – The Hong Kong

University of Science and Technology (Kellogg-HKUST

eMBA Program). Prior to MERALCO, she was a

Partner in SGV & Co.

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BOARD OF DIRECTORS

32

RAFAEL L. ANDRADA, 52

Director (since April 2008)

Mr. Rafael L. Andrada is the present Treasurer

of Meralco, completed his B.S. Degree in

Commerce, Major in Management from De

La Salle University. He is a member of the

Board of Directors of Rockwell Land

Corp., First Private Power Corp., Bauang

Private Power Corp., MIESCOR and other

Meralco subsidiaries. He also served Gateway

Business Park as Vice-President for Finance

and Operations and Benpres Holdings Corp

as Vice-President for Finance.

FERDINAND K. CONSTANTINO, 61

Director (since August 2010)

Mr. Ferdinand K. Constantino is Senior

Vice President, Chief Finance Officer

and Treasurer of San Miguel

Corporation. He was previously SMC

Group Comptroller and Chief Finance

Officer of San Miguel Brewery Inc. Mr.

Constantino holds a Bachelors Degree

in Economics from the University of the

Philippines. He also took graduate

courses in Economics and Business in

the same university. Mr. Constantino sits

on the boards of several San Miguel

subsidiaries and affiliates, among them:

San Miguel Brewery Inc., San Miguel

Holdings Ltd.; San Miguel Brewing

International Ltd.; San Miguel Properties

Inc., and San Miguel Yamamura

Packaging Corp. Mr. Constantino has

over 37 years experience in financial

management, financial planning and

analysis, financial systems,

comptrollership, economic

analysis, and strategic planning.

BENITO T. DELA CRUZ, 66

Independent Director (since April 2008)

Mr. Benito T. Dela Cruz is the

President/Director of Meralco Employees

Savings and Loan Association, Inc. (MESALA).

He has been a member of the Board of

Directors of Meralco Financial Services Inc.

since 2004. He was also a former Senior Vice

President and comptroller of Meralco. He

earned a Degree of BSC-Accounting from the

Lyceum of the Philippines in 1967. He pursued

his Master in Business Administration Degree at

the University of San Francisco, California, USA

in 1970.

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BOARD OF DIRECTORS

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MELISSA VERGEL DE DIOS, 50

Director (since August 2010)

Ms. Melissa Vergel de Dios is presently the

Head of Investor Relations at the Philippine

Long Distance Telephone Company; a

position she has held since September 2007.

Prior to her current assignment, Ms. Vergel

de Dios was head of Property and Facilities

Management at PLDT, a position she held

since she joined the company in May 2001.

Before this, Ms. Vergel de Dios spent 16

years with the San Miguel group in various

capacities, with her last assignment being

Chief Finance Officer of San Miguel

Properties. Ms. Vergel de Dios graduated

Magna cum Laude from the Assumption

College holding a Bachelor of Arts degree

in Economics and Bachelor of Science

degrees in Marketing and Management.

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MANOLO C. FERNANDO, 58

Director (since January 2007)

Mr. Manolo C. Fernando is the Senior Assistant

Vice-President and Assistant Treasurer, Head

Treasury Operations of Meralco. He is a

member of the Board of Directors of Meralco

Financial Services Corporation (Meralco

FINSERVE). At present, he is also the

administrator of Meralco Pension Fund. Mr.

Fernando completed his B.S. in Psychology

from the University of the Philippines in 1979. In

1992, he got his Masters Degree in Business

Administration from the Ateneo de Manila

Graduate School of Business.

BOARD OF DIRECTORS

34

PEDRO P. BENEDICTO, Jr., Ph.D., 57

President/ Executive Director (since April 2009)

Dr. Pedro P. Benedicto, Jr. is a man in constant search for knowledge. Already a Doctor in

Insurance and Risk Management (PhD), he continues to pursue another degree as a Doctor of

Business Administration (DBA) at the De La Salle University (Manila) where he is now a

candidate. Prior to his doctoral quest, he finished his Bachelor Degree in Electrical Engineering

at Mapua Institute of Technology (1977); he was also a recipient of a scholarship to attend an

international Fellowship program on ‖International Insurance and Risk Management‖ at the

Georgia State University, Atlanta, GA, USA (1989).

He also received certification as a Master in Insurance and Risk Management in July 2006; in the

same year he was inducted as the Fellow of the Institute of Corporate Directors (FICD) in

December (2006) after completing the Program requirements of the Institute (ICD) that

advocates Corporate Governance Best Practice. To date, he continues to be an active

member of the Society of Fellows of ICD. He started his MBA education at De La Salle University

in 1980 and was able to get his MBA degree in 2007 while currently taking up units in Master of

Science in Financial Engineering (MSFE) in the same University. Through the years, he has

attended various training and conferences conducted in the Philippines and other countries

(USA, Europe, and Asia). He has extensive experience in the insurance industry that he joined in

1982. He gained expertise in the areas of risk management, underwriting and over-all

management of an insurance company (with more than 10 years of CEO experience). He is a

licensed all-lines non life underwriter by the Insurance Commission.

As an insurance executive, he has been actively involved in industry associations where he has

served in various capacities (either as Director and/or President), the latest of which is his role as

the Chairman/President of the Philippine Insurer and Reinsurers Association, Inc. (PIRA) in 2011

and 2012 and as the Philippine representative to the ASEAN Insurance Council (2011-2012). At

present, he continues to give lectures at the insurance Institute for Asia and the Pacific (IIAP)

where he has been teaching since 1990 and was a part-time faculty at De La Salle University‘s

Graduate program – Master in Risk and Insurance Management.

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BOARD OF DIRECTORS

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AUDIT COMMITTEE

Mr. Benito T. de la Cruz -Chairman

Atty. Monico V. Jacob -Member

Ms. Betty C. Siy-Yap -Member

Mr. Ferdinand K. Constantino -Member

COMPENSATION AND REMUNERATION

COMMITTEE

Atty. Monico V. Jacob -Chairman

Mr. Benito T. de la Cruz -Member


Mr. Ferdinand K. Constantino -Member

NOMINATIONS COMMITTEE

Mr. Oscar S. Reyes -Chairman

Mr. Rafael L. Andrada -Member

Mr. Pedro P. Benedicto, Jr. -Member

Mr. Manolo C. Fernando -Member

INVESTMENT COMMITTEE

Mr. Rafael L. Andrada -Chairman

Mr. Oscar S. Reyes -Member

Mr. Manolo C. Fernando -Member

Ms. Melissa V. Vergel de Dios -Member

RISK OVERSIGHT COMMITTEE

Mr. Manolo C. Fernando -Chairman


Mr. Rafael L. Andrada -Member

Mr. Pedro P. Benedicto, Jr. -Member

COMMITTEES

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Dr. Pedro P. Benedicto, Jr.

President & CEO

Mr. Ricardo G. Hernandez

Vice-President /

Chief Marketing Officer & Investor

Relations Officer

Ms. Cecilia P. Pallon

Vice-President /

Chief Finance Officer

Mr. Werhner V. Parel

Vice President / Chief Underwriting

Officer & Chief Risk Officer

Mr. Danilo J. Cabero

Senior Assistant Vice-President /

Head - Reinsurance and Property

Underwriting

Mr. Roberto C. Angeles

Senior Assistant Vice-President /

Head - Corporate Accounts

MANAGEMENT

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Mr. Othello P. Monzon

Assistant Vice-President /

SBU Head - Meralco and Meralco

Subsidiaries

Mr. Ferdinand G. Guillarte

Assistant Vice President /

Head - Motor Car, Claims

and Marketing

Ms. Maria Cielito M. Naranjilla

Treasurer

Mr. Felix de Guzman

Assistant Treasurer

MANAGEMENT

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STRATEGIC BUSINESS UNITS

Roberto C. Angeles

Head – Corporate Accounts (Affiliates)

Danilo J. Cabero

Head – Reinsurance and Property Underwriting

Othello P. Monzon

SBU Head – Meralco and Meralco Subsidiaries

Alejandro A. Dasalla

Head – Retail and Affinity Market

Armando Nolasco M. Tuason

Risk Management Consultant

Nicasio M. Tortona

Legal Consultant

MANAGERS

Rowena E. Aninag

Senior Manager – Surety Bonds

Erlinda L. Espiritu

Manager / Head – Marine Underwriting

Joseph Emilio M. Puangco

Manager / Head – Risk Engineering Services

Ramon O. Tanjuaquio

Manager – Non-Motor Claims

Maria Susan B. Bassig

Senior Manager / Head – HR Personnel Administration

Mary Anne M. Labao

Manager / Head – ICT Department

Eudan Eusebio Y. Bantola III

Manager / Head – Risk and Insurance Research

Zenaida G. Gotladera

Manager / Head – General Services

INVESTOR RELATIONS OFFICER

Ricardo G. Hernandez

Vice-President / Chief Marketing Officer

Phone no: 470-3034

Fax: 470-3027

Email: ric.hernandez@republic-insurance .ph

MANAGEMENT

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OWNERSHIP AND CORPORATE

STRUCTURE

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Par Value Per Share: Php 100.00

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CORPORATE SOCIAL

RESPONSIBILITY

TREE PLANTING PROGRAM

The highlight of RSIC‘s CSR Program was the Tree

Planting and Gift-Giving Activity held in Tanay, Rizal on

August 25, 2012. The company is an adamant believer

that businesses, regardless of size, should strive to

meet the sustainability requirements in the

economic, social and environmental aspects, which

has now become the new measure of organizational

success. As such, the CSR Program, called ―The Green

Education Initiative‖, has given RSIC to opportunity to

implement sustainable development practices and

create ripples of change in both its internal operations

and to the external environment to which the

Company operates.

The tree-planting activity was done in coordination

with the Department of Environment and Natural

Resources (DENR) in support of the latter‘s ―National

Greening Program‖. Meanwhile, the two Gift Giving

activities were part of the outreach program

designed to support students of San Andres

Elementary School.

One of the major environmental challenges

facing the country is massive deforestation. The

Philippine forest cover is said to have dropped to

a low of 6.6 percent, and that the country‘s

deforestation rate of 1.4 percent annually is now

considered to be the highest in both the East Asia

and Southeast Asia. As such, for the First Phase of

the CSR Program, RSIC endeavored to

participate in the tree planting activity with the

DENR, in an effort to contribute in restoring our

ecological balance, promoting environmental

sustainability and ensuring that future generations

shall have a better and cleaner environment to

live in.

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CORPORATE SOCIAL

RESPONSIBILITY

SAN ANDRES, TANAY, RIZAL OUTREACH PROGRAM

One of the eight Millennium Development Goals

set by the United Nations is to ―achieve universal

primary education‖. Indeed, it is through

education that we can enhance our skills and

learn new things which we can use to improve

not only our own lives but also the lives of others.

Lack of access to education and even the

materials needed to study can prevent the

realization of this goal. As such, the second phase

of the CSR program was comprised of a gift-

giving activity held on the same day as the Tree

Planting Activity, with the hope that the provision

of a basic set of school supplies to San Andres

Elementary School can truly make a difference in

aiding eager students to finish their school and

open opportunities for them to lead better lives.

The youth is the hope of our country – this is one of

the impactful ideologies of our national

hero, Jose Rizal, and indeed, helping the youth

achieve primary education can lead to a better

future for the Philippines.

On December 7, 2012, RSIC returned to San

Andres Elementary School for the third phase of

the CSR Program. Another gift-giving activity

was conducted for the school followed by a

Jollibee-themed Christmas Party.

44

CORPORATE SOCIAL

RESPONSIBILITY

SINAG KALINGA OUTREACH PROGRAM

On March 13, 2012, RSIC officers led by Mr. Ric

G. Hernandez, Mr. Rene B. Roño, Jr. and Engr.

Jason Chiong together with Mr. Emmanuel B.

Llave, Head of Meralco Lucena Business Center

went to Lucban, Quezon to personally hand

over the company‘s cash donation and its

employees‘ personal contribution to the Sinag

Kalinga Foundation.

Sinag Kalinga Foundation is a duly registered

NGO providing shelter, comprehensive health

care services for the homeless, abandoned and

destitute elderly citizens not only of Lucban, but

also from neighboring towns of Quezon

province. This CSR program is a joint undertaking

between RSIC and Meralco Lucena Business

Center. Aside from the cash donation, RSIC also

gave gifts to volunteers and elderly residents of

the foundation.

At RSIC, we believe that long term business

sustainability can only be achieved through

genuine care – ―Malasakit‖ through community

service, that we shall share our resources

including our personal time, talents and

resources for the benefit of the less fortunate

members of our community.

MAY-IT ELEMENTARY SCHOOL CSR PROJECT

On August 8, 2012, RSIC started its CSR project –

the construction of an elementary school in

May-it, Lucban in the province of Quezon. The

Company‘s Risk Management

Consultant, Architect Armand Tuason

planned, designed and oversaw the

construction of the said school building. The

school is expected to be inaugurated and

opened in mid-2013.

This project is another way for RSIC to contribute

to ―achieving universal primary education‖ as

detailed in the eight (8) UN Millennium

Development Goals.

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46

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Republic Surety and Insurance Company, Incorporated

7th Floor Tower 1, The Rockwell Business Center

Ortigas Avenue, Pasig City

Report on the Financial Statements

We have audited the accompanying financial statements of Republic Surety and

Insurance Company, Incorporated (a wholly owned subsidiary of Manila Electric

Company), which comprise the statements of financial position as at December

31, 2012 and 2011, and the statements of comprehensive income, statements of

changes in equity and statements of cash flows for the years then ended, and

notes, comprising a summary of significant accounting policies and other explanatory

information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial

statements in accordance with Philippine Financial Reporting Standards, and for such

internal control as management determines is necessary to enable the preparation of

financial statements that are free from material misstatement, whether due to fraud or

error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our

audits. 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 assurance about whether the financial

statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts

and disclosures in the financial statements. The procedures selected depend on the

auditors‘ judgment, including the assessment of the risks of material misstatement of

the financial statements, whether due to fraud or error. In making those risk

assessments, the auditors consider internal control relevant to the entity‘s preparation

and fair presentation of the financial statements in order 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 financial statements.


47

We believe that the audit evidence we have obtained is sufficient and appropriate to

provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements present fairly, in all material respects, the

financial position of Republic Surety and Insurance Company, Incorporated as at

December 31, 2012 and 2011, and its financial performance and its cash flows for the

years then ended in accordance with Philippine Financial Reporting Standards.

Report on the Supplementary Information Required Under Revenue Regulations (RR)

No. 15-2010 and RR No. 19-2011 of the Bureau of Internal Revenue

Our audits were conducted for the purpose of forming an opinion on the basic financial

statements taken as a whole. The supplementary information in Note 26 to the financial

statements is presented for purposes of filing with the Bureau of Internal Revenue and is

not a required part of the basic financial statements. Such information is the

responsibility of management. The information has been subjected to the auditing

procedures applied in our audits of the basic financial statements. In our opinion, the

information is fairly stated in all material respects in relation to the basic financial

statements taken as a whole.

MANABAT SANAGUSTIN & CO., CPAs

DENNIS I. ILAN

Partner

CPA License No. 089564

IC Accreditation No. SP-0099-O, Group A, valid until September 11, 2014

SEC Accreditation No. 1182-A, Group A, valid until January 11, 2015

Tax Identification No. 161-313-405

BIR Accreditation No. 08-001987-28-2011

Issued November 3, 2011; valid until November 2, 2014

PTR No. 3669512MC

Issued January 2, 2013 at Makati City

March 21, 2013

Makati City, Metro Manila


48

FINANCIAL STATEMENTS

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49

Excerpt from the Minutes of the 2013 Annual Stockholders’ Meeting of RSIC:

'The Chairman stated that copies of the audited financial statements for the period ended

December 31, 2012 were distributed to the stockholders prior to this meeting. He then asked if

there were any questions on the financial statements of the Company and there being

none, upon motion made and seconded, the stockholders approved and adopted the following

resolution:

RESOLVED, that the Board of Directors of Republic Surety and Insurance Company, Inc. (the

‗‘Corporation‘‘) hereby approves, confirms and authorizes the issuance of the Corporation‘s

audited financial statements for the period ended December 31, 2012.''

REPUBLIC SURETY AND INSURANCE COMPANY, INCORPORATED

(A Wholly Owned Subsidiary of Manila Electric Company)

STATEMENTS OF FINANCIAL POSITION

December 31

Note 2012 2011

ASSETS

Cash and cash equivalents 5, 6, 7 P248,051,672 P188,950,604

Insurance receivables - net 5, 6, 8 565,062,235 493,097,058

Investments - net 5,6,10 119,226,749 102,110,689

Accrued interest income 5, 6 1,721,802 1,424,021

Deferred reinsurance premiums 9, 14 209,029,612 193,148,190

Deferred acquisition costs 11 9,208,337 10,718,761

Property and equipment - net 12 14,281,661 9,916,216

Deferred tax assets 21 5,535,712 9,886,459

Other assets 13 8,146,764 6,827,221

P1,180,264,544 P1,016,079,219

LIABILITIES AND EQUITY

Liabilities

Accounts payable and accrued expenses 15 P69,972,238 P51,422,869

Income tax payable 1,151,861 3,959,743

Reinsurance liabilities 9 213,518,807 198,350,029

Losses and claims payable 5, 9, 16 299,858,946 270,446,577

Reserve for unearned premiums 9, 14 269,573,598 270,598,165

Deferred reinsurance commission 11 6,567,665 12,571,126

Retirement liability 23 6,073,190 3,122,145

Total Liabilities 866,716,305 810,470,654

Equity

Capital stock 5, 25 175,000,000 175,000,000

Deposit for future capital stock subscription 5, 25 75,000,000 -

Contributed surplus 44,269 44,269

Revaluation reserve on available-for-sale financial assets 10 (197,325) (110,541)

Retained earnings 63,701,295 30,674,837

Total Equity 313,548,239 205,608,565

P1,180,264,544 P1,016,079,219

See Notes to the Financial Statements.

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50



STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

Note 2012 2011

UNDERWRITING INCOME

Gross premiums written 17 P327,486,728 P317,188,309

Reinsurance premiums assumed 17 157,786,356 142,567,576

Gross premiums 14, 17 485,273,084 459,755,885

Reinsurance premiums ceded 14, 17 (366,209,353) (335,907,609)

Premiums retained 14, 17 119,063,731 123,848,276

Decrease (increase) in reserve for unearned premiums -net of deferred reinsurance premiums 17 16,905,989 (9,299,146)

Net premiums earned 14, 17 135,969,720 114,549,130

Commission income 11 46,766,926 52,762,567

Other underwriting income 6,837,936 3,843,283

GROSS UNDERWRITING INCOME 189,574,582 171,154,980

UNDERWRITING EXPENSES

Insurance claims, losses and benefits - net of reinsurance, salvages and recoveries 16 (40,490,238) (27,455,554)

Commission expense 11 (39,393,055) (38,677,643)

Other underwriting expenses (7,816,268) (3,908,933)

(87,699,561) (70,042,130)

NET UNDERWRITING INCOME 101,875,021 101,112,850

OTHER INCOME

Interest income 7, 10 9,591,781 7,025,816

Other income (loss) 18 (1,633,664) 882,290

7,958,117 7,908,106

NET UNDERWRITING INCOME AND OTHER INCOME 109,833,138 109,020,956

OPERATING EXPENSES 19 (66,090,232) (58,641,830)

INCOME BEFORE INCOME TAX 43,742,906 50,379,126

INCOME TAX EXPENSE 21 (10,716,448) (13,955,497)

NET INCOME 33,026,458 36,423,629

OTHER COMPREHENSIVE INCOME

Fair value adjustments on available-for-sale financial assets (86,784) 54,240

TOTAL COMPREHENSIVE INCOME P32,939,674 P36,477,869


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51



STATEMENTS OF CHANGES IN EQUITY


Note 2012 2011

CAPITAL STOCK - P100 par value

Authorized - 2,000,000 shares

Issued and outstanding at beginning of year 5, 25 P175,000,000 P125,000,000

Issuance during the year through stock dividend 25 - 50,000,000

Balance at end of year 5, 25 175,000,000 175,000,000

DEPOSIT FOR FUTURE CAPITAL STOCK SUBSCRIPTION

Deposit for future capital stock subscription received 5, 25 75,000,000 -

CONTRIBUTED SURPLUS 44,269 44,269

REVALUATION RESERVE ON AVAILABLE-FOR-SALE FINANCIAL ASSETS

Balance at beginning of year 10 (110,541) (164,781)

Fair value adjustments on available-for-sale financial assets (86,784) 54,240

Balance at end of year (197,325) (110,541)

RETAINED EARNINGS

Balance at beginning of year 30,674,837 44,251,208

Stock dividends declared 25 - (50,000,000)

Net income for the year 33,026,458 36,423,629

Balance at end of year 63,701,295 30,674,837

P313,548,239 P205,608,565


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STATEMENTS OF CASH FLOWS


Note 2012 2011

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax P43,742,906 P50,379,126

Adjustments for:

Depreciation and amortization 12, 19 4,083,567 3,655,578

Provision for retirement benefits 23 2,951,045 700,000

Unrealized foreign exchange loss (gain) 18 1,204,217 (463,188)

Decrease in:

Reserve for unearned premiums 17 (1,024,567) (11,744,475)

Deferred reinsurance commission (6,003,461) (6,553,988)

Decrease (increase) in:

Deferred reinsurance premiums 17 (15,881,422) 21,043,621

Deferred acquisition costs 1,510,424 2,470,144

Interest income 7, 10 (9,591,781) (7,025,816)

Operating income before working capital changes 20,990,928 52,461,002

Changes in operating assets and liabilities:

Decrease (increase) in operating assets:

Insurance receivables, net of reinsurance recoverable on unpaid losses (61,178,830) (10,069,201)

Other assets 13 (1,319,543) 176,601

Increase (decrease) in operating liabilities:

Accounts payable and accrued expenses 15 18,549,369 2,215,179

Reinsurance liabilities 9 15,168,778 (26,670,845)

Losses and claims payable, net of reinsurance recoverable on unpaid losses 18,626,022 18,911,428

Net cash generated from operations 10,836,724 37,024,164

Income tax paid (9,173,583) (12,022,629)

Net cash provided by operating activities 1,663,141 25,001,535

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to:

Property and equipment 12 (8,449,012) (626,303)

Held-to-maturity investments 10 (20,000,000) (50,161,247)

Matured held-to-maturity investments 10 2,797,156 10,009,227

Interest received 9,294,000 6,968,375

Net cash used in investing activities (16,357,856) (33,809,948)

CASH FLOWS FROM FINANCING ACTIVITIES

Deposit for future capital stock subscription 5, 25 75,000,000 -

Cash dividend paid - (10,000,000)

Net cash provided by (used in) financing activities 75,000,000 (10,000,000)

Forward

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Note 2012 2011

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (P1,204,217) P463,188

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,101,068 (18,345,225)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7 188,950,604 207,295,829

CASH AND CASH EQUIVALENTS AT END OF YEAR P248,051,672 P188,950,604


NOTES TO THE FINANCIAL STATEMENTS

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•Reporting Entity

Republic Surety and Insurance Company, Incorporated (the ―Company‖) was originally

incorporated and registered with the Philippine Securities and Exchange Commission

(SEC) in 1948. The Company‘s corporate life has been extended for another 50 years

up to 2048.

The Company is engaged in the business of undertaking, indemnifying insured parties

against loss, damage or liability arising from unknown or contingent event, for a

consideration. It was issued Certificate of Authority No. 2012/91-R by the Philippine

Insurance Commission (IC) to transact in non-life (fire, marine, casualty and surety)

insurance business until June 30, 2013.

The Company is a wholly-owned subsidiary of Manila Electric Company (MERALCO).

The Company‘s principal office is located at 7th Floor Tower 1, The Rockwell Business

Center, Ortigas Avenue, Pasig City.

The financial statements of the Company as at and for the year ended December 31,

2012 were approved and authorized for issue by the Board of Directors (BOD) on

March 21, 2013.

•Basis of Preparation

Statement of Compliance

The financial statements have been prepared in conformity with Philippine Financial

Reporting Standards (PFRS). PFRS includes statements named PFRS and Philippine

Interpretations from International Financial Reporting Interpretation Committee (IFRIC)

issued by the Financial Reporting Standard Council (FRSC).

Basis of Measurement

The financial statements have been prepared on a historical cost basis, except for

financial instruments classified as available-for-sale (AFS) financial assets, which are

stated at their fair values.

Functional and Presentation Currency

The financial statements of the Company are presented in Philippine peso, which is also

the Company‘s functional currency. All financial information in Philippine peso has

been rounded off to the nearest peso, unless otherwise indicated.

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Use of Estimates and Judgments

The preparation of financial statements in conformity with PFRS requires management

to make judgments, estimates and assumptions that affect the application of

accounting policies and the reported amounts of assets, liabilities, income and

expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to

accounting estimates are recognized in the period in which the estimate is revised

and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical

judgments in applying accounting policies that have the most significant effect on the

amounts recognized in the financial statements are described in Note 4 to the

financial statements.

•Summary of Significant Accounting Policies

The accounting policies set out below have been applied consistently to all years

presented in these financial statements, and have been applied consistently by the

Company, except for changes in accounting policies as explained below.

Adoption of New or Revised Standards, Amendments to Standards and Interpretations

The Company has adopted the following amendments to standards and

interpretations starting January 1, 2012 and accordingly changed its accounting

policies:

•Disclosures - Transfers of Financial Assets (Amendments to PFRS 7, “Financial

Instruments”), require additional disclosures about transfers of financial assets. The

amendments require disclosure of information that enables users of financial

statements to understand the relationship between transferred financial assets that are

not derecognized in their entirety and the associated liabilities; and to evaluate the

nature of, and risks associated with, the entity‘s continuing involvement in

derecognized financial assets.

•Philippine Interpretations Committee (PIC) Q&A No. 2011-03 - Accounting for Inter-

company Loans, provides guidance on how an interest free or below market rate loan

between group companies should be accounted for in the separate/

stand-alone financial statements of the lender and the borrower: (i) on the initial

recognition of the loan; and (ii) during the periods to repayment.


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The adoption of the foregoing amendments to standards and interpretations did not

have any material effect on the Company‘s financial statements. Additional

disclosures required by the foregoing improvements to the standards were included in

the Company‘s financial statements, where applicable.

New or Revised Standards, Amendments to Standards and Interpretations Not Yet

Adopted

A number of new standards, amendments to standards and interpretations are

effective for annual periods beginning after January 1, 2012, and have not been

applied in preparing these financial statements. None of these is expected to have a

significant effect on the financial statements of the Company. Those which may be

relevant to the Company‘s financial statements are set out below. The Company

does not plan to adopt these standards early.

To be Adopted beginning January 1, 2013

•Presentation of Items of Other Comprehensive Income (Amendments to PAS 1). The

amendments:

require that an entity presents separately the items of other comprehensive

income that would be reclassified to profit or loss in the future, if certain

conditions are met from those that would never be reclassified to profit or loss;

do not change the existing option to present profit or loss and other

comprehensive income in two statements; and

change the title of the statement of comprehensive income to the statement

of profit or loss and other comprehensive income. However, an entity is still

allowed to use other titles.

The amendments do not address which items are presented in other comprehensive

income or which items need to be reclassified. The requirements of other PFRS

continue to apply in this regard.

•Disclosures: Offsetting Financial Assets and Financial Liabilities (Amendments to PFRS

7). These amendments include minimum disclosure requirements related to financial

assets and financial liabilities that are:

•offset in the statement of financial position; or

•subject to enforceable master netting arrangements or similar agreements.

This includes a tabular reconciliation of gross and net amounts of financial assets and

financial liabilities, separately showing amounts offset and not offset in the statement

of financial position.


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•PFRS 13, Fair Value Measurement. PFRS 13 replaces the fair value measurement

guidance contained in individual PFRS with a single source of fair value measurement

guidance. It defines fair value, establishes a framework for measuring fair value and

sets out disclosure requirements for fair value measurements. It explains how to

measure fair value when it is required or permitted by other PFRS. It does not introduce

new requirements to measure assets or liabilities at fair value, nor does it eliminate the

practicability exceptions to fair value measurements that currently exist in certain

standards.

•PAS 19, Employee Benefits (Amended 2011). The amended PAS 19 includes the

following requirements:

•actuarial gains and losses are recognized immediately in other comprehensive

income; this change removes the corridor method and eliminates the ability for

entities to recognize all changes in the defined benefit obligation and in plan assets in

profit or loss, which is currently allowed under PAS 19; and

•expected return on plan assets recognized in profit or loss is calculated based on the

rate used to discount the defined benefit obligation.

For defined benefit plans, removal of the accounting policy choice for recognition of

actuarial gains and losses is not expected to have any impact on the Company.

However, the Company may need to assess the impact of the change in

measurement principles of expected return on plan assets.

•Annual Improvements to PFRSs 2009 - 2011 Cycle - various standards contain

amendments to standards with consequential amendments to other standards and

interpretations. The following are the said improvements or amendments to PFRS:

•PAS 1 Presentation of Financial Statements - Comparative Information beyond

Minimum Requirements. This is amended to clarify that only one comparative period

- which is the preceding period - is required for a complete set of financial

statements. If an entity presents additional comparative information, then that

additional information need not be in the form of a complete set of financial

statements. However, such information should be accompanied by related notes

and should be in accordance with PFRS.


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For example, if an entity elects to present a third statement of comprehensive

income, then this additional statement should be accompanied by all related

notes, and all such additional information should be in accordance with PFRS.

However, the entity need not present:

•other primary statements for that additional comparative period, such as a third

statement of cash flows; or

•the notes related to these other primary statements.

•PAS 32 Financial Instruments Presentation - Income Tax Consequences of

Distributions. This is amended to clarify that PAS 12, Income Taxes applies to the

accounting for income taxes relating to:

•distributions to holders of an equity instrument; and

•transaction costs of an equity transaction.

This amendment removes a perceived inconsistency between PAS 32 and

PAS 12. Before the amendment, PAS 32 indicated that distributions to holders of an

equity instrument are recognized directly in equity, net of any related income tax.

However, PAS 12 generally requires the tax consequences of dividends to be

recognized in profit or loss.

A similar consequential amendment has also been made to Philippine Interpretation

IFRIC 2 Members’ Share in Co-operative Entities and Similar Instruments.


•Offsetting Financial Assets and Financial Liabilities (Amendments to PAS 32).

These amendments clarify that:

•An entity currently has a legally enforceable right to set-off if that right is:

•not contingent on a future event; and

•enforceable both in the normal course of business and in the event of

default, insolvency or bankruptcy of the entity and all counterparties.

•Gross settlement is equivalent to net settlement if and only if the gross

settlement mechanism has features that:

•eliminate or result in insignificant credit and liquidity risk; and

•process receivables and payables in a single settlement process or

cycle.


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•PFRS 9, Financial Instruments (2010), PFRS 9, Financial Instruments (2009)

PFRS 9 (2009) introduces new requirements for the classification and measurement of

financial assets. Under PFRS 9 (2009), financial assets are classified and measured

based on the business model in which they are held and the characteristics of their

contractual cash flows. PFRS 9 (2010) introduces additions relating to financial liabilities.

The International Accounting Standards Board (IASB) currently has an active project to

make limited amendments to the classification and measurement requirements of

PFRS 9 and add new requirements to address the impairment of financial assets and

hedge accounting.

Financial Instruments

Date of Recognition

Financial instruments are recognized in the statement of financial position when the

Company becomes a party to the contractual provisions of the instrument. Purchases

or sales of financial assets that require delivery of assets within the timeframe

established by regulation or convention in the marketplace are recognized on the

trade date.

Initial Recognition of Financial Instruments

Financial instruments are recognized initially at fair value of the consideration given

(in case of an asset) or received (in the case of a liability). Except for financial

instruments designated as at fair value through profit or loss (FVPL), the initial

measurement of financial assets includes transaction costs.

The Company classifies its financial assets in the following categories: financial assets at

FVPL, held-to-maturity (HTM) investments, AFS financial assets, and loans and

receivables. The classification depends on the purpose for which the investments were

acquired and whether they are quoted in an active market. Management

determines the classification of its investments at initial recognition and, where allowed

and appropriate, re-evaluates such designation at every reporting date.

Fair Value Measurement

The determination of fair values of financial assets and financial liabilities is based on

quoted market prices or dealer price quotations for financial instruments traded in

active markets. For all other financial instruments, fair value is determined by using

valuation techniques. Valuation techniques include net present value techniques, the

discounted cash flow method, comparison to similar instruments for which market

observable prices exist, and valuation models.

The Company has no financial assets and liabilities designated as FVPL as at

December 31, 2012 and 2011.


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HTM Investments

HTM investments are quoted non-derivative financial assets with fixed or determinable

payments and fixed maturities for which management has the positive intention and

ability to hold to maturity. Where the Company sells other than an insignificant

amount of HTM investments, the entire category would be tainted and reclassified as

AFS financial assets. After initial measurement, these investments are subsequently

measured at amortized cost using the effective interest rate method, less impairment

in value. Amortized cost is calculated by taking into account any discount or

premium on acquisition and fees that are an integral part of the effective interest

rate. The amortization is included in ―Interest income‖ in profit or loss. Gains and

losses are recognized as income when the HTM investments are derecognized and

impaired, as well as through the amortization process. The losses arising from

impairment of such investments are recognized in profit or loss under ―Other income

(loss).‖ The effects of restatement on foreign currency denominated HTM investments

are recognized in profit or loss.

The Company‘s investments in government and corporate debt securities are

classified as HTM investments.

AFS Financial Assets

AFS financial assets are those which are designated as such or do not qualify to be

classified as designated as FVPL, HTM investments or loans and receivables. These

may include government securities, equity investments, and debt instruments,

purchased and held indefinitely, and may be sold in response to liquidity requirements

or changes in market conditions.

After initial measurement, AFS financial assets 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 profit

or loss. Interest earned on holding AFS financial assets is reported as interest income

using the effective interest rate. Dividends earned from holding AFS financial assets

are recognized in profit or loss when the right to receive payment has been

established. The unrealized gains and losses arising from the fair valuation of AFS

financial assets are recognized in other comprehensive income and reported as

―Revaluation reserve on available-for-sale financial assets‖ in the equity section of the

statement of financial position. The losses arising from impairment of such investments

are recognized as provision for impairment losses in profit or loss. When the AFS

financial asset is disposed, the cumulative gains or losses previously recognized in

equity are recognized as realized gains or losses in profit or loss.


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When the fair value of AFS financial assets cannot be measured reliably because of

the absence of reliable estimates of future cash flows and discount rates necessary to

calculate the fair value of unquoted equity instruments, these financial assets are

carried at cost less impairment.

The Company‘s equity investments are included in this category.

Loans and Receivables

Loans and receivables are financial assets with fixed or determinable payments

and fixed maturities that are not quoted in an active market. They are not

entered into with the intention of immediate or short-term resale and are not

classified as financial assets held for trading or designated as AFS or FVPL. This

accounting policy relates to the accounts: (a) cash and cash equivalents; (b)

―Insurance receivables,‖ which arise primarily from premiums due from

policyholders, ceding companies and reinsurers;

(c) accrued receivables under ―Accrued interest income‖ and; (d) receivables

under ―Other assets.‖

After initial measurement, the loans and receivables are subsequently

measured at amortized cost using the effective interest method, less allowance

for impairment. Amortized cost is calculated by taking into account any

discount or premium on acquisition and fees that are an integral part of the

effective interest rate. The amortization is included under ―Other income (loss)‖

in profit or loss. Any losses arising from impairment of such loans and receivables

are recognized in ―Provision for impairment losses‖ in profit or loss.

Cash and Cash Equivalents

Cash and cash equivalents comprise cash balances and bank deposits with

maturities of three months or less from the acquisition date that are subject to an

insignificant risk of changes in value.

Other Financial Liabilities

Issued financial instruments or their components, which are not designated as at

FVPL are classified as other financial liabilities, where the substance of the

contractual arrangement results in the Company having an obligation either to

deliver cash or another financial asset to the holder, or to satisfy the obligation

other than by the exchange of a fixed amount of cash or another financial asset for

a fixed number of own equity shares. This includes investment contracts, which

mainly transfer financial risk and has no or insignificant insurance risk.

After initial measurement, other interest financial liabilities are subsequently

measured at amortized cost using the effective rate method. Amortized cost is

calculated by taking into account any discount or premium on the issue and fees

that are integral part of the effective interest rate.


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This accounting policy applies to the Company‘s accounts payable and accrued

expenses, dividends payable, reinsurance liabilities, and losses and claims payable

that meet the foregoing definition (other than liabilities covered by accounting

standards, other than PAS 39, Financial Instruments: Recognition and

Measurement, such as income tax payable).

Offsetting

Financial assets and financial liabilities are offset and the net amount is reported in the

statements of financial position if, and only if, there is a currently enforceable legal

right to offset the recognized amounts and there is an intention to settle on a net

basis, or to realize the asset and settle the liability simultaneously.

Impairment of Financial Assets

The Company assesses at each reporting date whether a financial asset or group of

financial assets is impaired.

A financial asset or a group of financial assets is deemed to be impaired if, and only

if, there is objective evidence of impairment as a result of one or more events that has

occurred after the initial recognition of the asset (an incurred ‗loss event‘) and that

loss event (or events) has an impact on the estimated future cash flows of the

financial asset or the group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the borrower or a group of

borrowers is experiencing significant financial difficulty, default or delinquency in

interest or principal payments, the probability that they will enter bankruptcy or other

financial reorganization and where observable data indicate that there is measurable

decrease in the estimated future cash flows, such as changes in arrears or economic

conditions that correlate with defaults.

Loans and Receivables

For loans and receivables carried at amortized cost, the Company first assesses

whether objective evidence of impairment exists individually for financial assets that

are individually significant, or collectively for financial assets that are not individually

significant. If the Company determines that no objective evidence of impairment

exists for individually assessed financial asset, whether significant or not, it includes the

asset in a group of financial assets with similar credit risk characteristics and

collectively assesses for impairment. Assets that are individually assessed for

impairment and for which an impairment loss is, or continues to be, recognized are

not included in a collective assessment for impairment.


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If there is objective evidence that an impairment loss has been incurred, the amount

of the loss is measured as the difference between the asset‘s carrying amount and the

present value of the estimated future cash flows. The carrying amount of the asset is

reduced through use of an allowance account and the amount of loss is charged to

profit or loss. If, in a subsequent period, the amount of estimated impairment loss

decreases because of an event occurring after the impairment was recognized, the

previously recognized impairment loss is reversed. Any subsequent reversal of an

impairment loss is recognized in profit or loss, to the extent that the carrying amount of

the asset does not exceed its amortized cost at the reversal date.

The present value of the estimated future cash flows is discounted at the financial

asset‘s original effective interest rate. 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 calculation of the present value of the

estimated future cash flows of a collateralized financial asset reflects the cash flows

that may result from foreclosure less costs for obtaining and selling the collateral,

whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped

on the basis of such credit risk characteristics as type of borrower, collateral type, past

due status and term.

AFS Financial Assets Carried at Fair Value

In case of equity instruments classified as AFS, impairment indicators would include a

significant or prolonged decline in the fair value of the investment below its cost.

When there is evidence of impairment, the cumulative loss, which is measured as the

difference between the acquisition cost and the current fair value, less any

impairment loss on that financial asset previously recognized in equity, is removed from

equity and recognized in profit or loss. Impairment losses on equity investments are

not reversed through profit or loss. Increase in fair value after impairment is recognized

directly in other comprehensive income and in equity.


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In the case of debt instruments classified as AFS, impairment is assessed based on the

same criteria as financial assets carried at amortized cost. Interest continues to be

accrued at the original effective interest rate on the reduced carrying amount of the

asset and is recorded as part of other income in profit or loss. If, in subsequent

year, the fair value of a debt instrument increased and the increase can be

objectively related to an event occurring after the impairment loss was recognized in

other comprehensive income, the impairment loss is reversed through profit or loss.

AFS Financial Assets Carried at Cost

If there is 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 carrying amount and the present

value of estimated future cash flows discounted at the current market rate of return for

a similar financial asset.

Impairment of Non-financial Assets

The carrying amounts of the Company‘s non-financial assets, other than deferred tax

assets, are reviewed at each reporting date to determine whether there is any

indication of impairment. If any such indication exists, then the asset‘s recoverable

amount is estimated.

An impairment loss is recognized if the carrying amount of an asset or its cash-

generating unit exceeds its recoverable amount. A cash-generating unit is the

smallest identifiable asset group that generates cash flows that are largely

independent from other assets and groups. Impairment losses are recognized in profit

or loss. Impairment losses recognized in respect of cash-generating units are

allocated first to reduce the carrying amount of any goodwill allocated to the units

and then to reduce the carrying amount of the other assets in the unit (group of units)

on a pro rata basis.

The recoverable amount of an asset or cash-generating unit is the greater of fair value

less cost to sell and value in use. Fair value less cost to sell is the amount obtainable

from the sale of an asset or cash-generating unit in an arm‘s length transaction

between knowledgeable, willing parties, less the cost of disposal. Value in use is the

present value of the future cash flows expected to be derived from an asset or cash-

generating unit. In assessing value in use, the estimated future cash flows are

discounted to their present values using a pre-tax discount rate that reflect current

market assessment of the time value of money and the risks specific to the asset. Any

impairment loss is recognized in profit or loss.


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In respect of other assets, impairment losses recognized in prior periods are assessed at

each reporting date for any indications that the loss has decreased or no longer exists.

An impairment loss is reversed if there has been a change in the estimates used to

determine the recoverable amount. An impairment loss is reversed only to the extent

that the asset‘s carrying amount does not exceed the carrying amount that would

have been determined, net of depreciation or amortization, if no impairment loss had

been recognized.

Derecognition of Financial Assets and Liabilities

Financial Asset

A financial asset (or, where applicable a part of a financial asset or part of a group of

similar financial assets) is derecognized when:

•The rights to receive cash flows from the asset have expired;

•The Company retains the right to receive cash flows from the asset, but has assumed

an obligation to pay them in full without material delay to a third party under a

‗pass through‘ arrangement; or

•The Company has transferred its right to receive cash flows from the asset and either:

(a) has transferred substantially all the risk and rewards of the asset; or (b) has neither

transferred nor retained substantially all the risk and rewards of the assets, but has

transferred control of the asset.

Where the Company has transferred its right to receive cash flows from an asset and

has either transferred nor retained substantially all the risks and rewards of the asset

nor transferred control of the asset, the asset is recognized to the extent of the

Company‘s continuing involvement in the asset.

Financial Liability

A financial liability is derecognized when the obligation under the liability is

discharged or cancelled or expired. Where an existing financial liability is replaced by

another from the same lender on substantially different terms, or the terms of an

existing liability are substantially modified, such an exchange or modification is treated

as a derecognition of the original liability and the recognition of a new liability, and

the difference in the respective carrying amounts is recognized in profit or loss.

Revenue Recognition

Revenue is recognized to the extent that it is probable that economic benefits will flow

to the Company and the revenue can be reliably measured.


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Premiums from insurance contracts are recognized as revenue over the period of the

contracts using the 24th method, except for contracts covering marine cargo risks

wherein premiums written during the first 10 months of the current year and the last two

months of the preceding year are recognized as revenue in the current year. The

portion of the premiums written that relate to the unexpired periods of the policies at

each reporting date is accounted for as ―Reserve for unearned premiums‖ and

presented in the liabilities section of the statement of financial position. The related

reinsurance premiums ceded that pertains to the unexpired periods at each reporting

date is accounted for as ―Deferred reinsurance premiums‖ and shown in the assets

section of the statement of financial position. The net changes in these accounts

between reporting dates are credited to or charged against profit or loss.

Ceded reinsurance recoveries are accounted for in the same period as the underlying

claim.

Commission Income

Reinsurance commissions are recognized as revenue over the period of the contract.

The portion of the commissions that relates to the unexpired periods of the policies at

the reporting date is accounted for as ―Deferred reinsurance commission‖ in the

liabilities section of the statement of financial position.

Income from Pools

Income from pools presented under ―Other underwriting income‖ is recognized as

revenue when the Company receives its proportionate share from the pool.

Other Income

Interest Income

For all financial instruments measured at amortized cost and interest bearing financial

instruments classified as AFS financial assets, interest income is calculated using the

effective interest rate, which is the rate that exactly discounts estimated future cash

payments or receipts through the expected life of the financial instrument or a shorter

period, where appropriate, to the carrying amount of the financial asset. The

calculation takes into account all contractual terms of the financial instrument (for

example, prepayment options), includes any fees 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.

Once the recorded value of a financial asset or group of similar financial assets has

been reduced due to an impairment loss, interest income continues to be recognized

using the original effective interest rate applied to the new carrying amount.


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Benefit, Claims and Expenses Recognition

Benefit and Claims

Benefits and claims consist of all costs incurred during the year which are recognized

when the Company receives notification from policyholders. Estimates have to be

made as at the reporting date both for the expected ultimate cost of claims reported

and for the expected ultimate cost of the claims incurred but not yet reported (IBNR).

The primary technique adopted by management in estimating the cost of notified

and IBNR claims is that of using past claim settlement trends to project future claims

settlement trends. At each reporting date, prior year claims estimates are reassessed

for adequacy and changes made are charged to provision. Claims provisions are not

discounted for the time value of money.

Costs and Expenses

Costs and expenses are recognized when incurred.

Insurance Contract

Insurance contract is an agreement whereby one party, called the insurer, undertakes

for a consideration paid by the other party, called the insured, promises to pay

money, or its equivalent or to do some act valuable to the latter, upon happening of

a loss, liability or disability arising from an unknown or contingent event.

Contract Classification

The Company issues short-term insurance contracts categorized as: (i) casualty;

(ii) property; and (iii) short-duration accident insurance.

Casualty insurance contracts protect assureds against the risk causing harm to third

parties as a result of their legitimate activities. Damages covered include both

contractual and non-contractual events. Property insurance contracts mainly

compensate the Company‘s assureds for damages suffered to their properties or for

the value of property lost. Short-duration accident insurance policies protect assureds

from the consequences of events such as death or disability in connection with a

specific travel whether for business or pleasure. Short-duration covers also apply to

insurance of goods or equipment while being transported from point of origin to point

of destination under special risks or marine cargo insurance contracts. An insurance

contract remains in force at the inception date of policy until its maturity-expiry

regardless of the number of the claims reported and, for as long as the coverage is

sufficient.

Liability Adequacy Test

At each reporting date, liability adequacy test is performed to ensure the adequacy

of the insurance liabilities. The test considers current best estimates of all contractual

cash flows, claims and claims handling cost. If the test shows that the liability is

inadequate, the entire deficiency is recognized in profit or loss.


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Claim Cost Recognition

Liabilities for unpaid claim costs and claim adjustment expenses relating to insurance

contracts are accrued when the insured events occur.

Deferred Acquisition Costs

Commission and other acquisition costs incurred during the financial period that vary

with and are related to securing new insurance contracts and or renewing existing

insurance contracts, but which relates to subsequent financial periods, are deferred

to the extent that they are recoverable out of future revenue margins. All other

acquisition costs are recognized as expense when incurred.

Subsequent to initial recognition, these costs are amortized on a straight-line basis

using the 24th method over the life of the contract. Amortization is charged to profit or

loss. The unamortized acquisition costs are shown as ―Deferred acquisition costs‖

(DAC) in the statement of financial position.

An impairment review is performed at each reporting date or more frequently when

an indication of impairment arises. The carrying amount is written down to the

recoverable amount. The impairment loss is charged to profit or loss. DAC is also

considered in the liability adequacy test at each reporting period.

DAC is derecognized when the related contracts are settled or disposed.

Reinsurance

The Company cedes insurance risk in the normal course of business. Reinsurance

assets primarily include balances due from both insurance and reinsurance

companies. Amounts due from reinsurers are estimated in a manner consistent with

the associated reinsured policies and in accordance with the reinsurance contracts.

An impairment review is performed on all reinsurance assets when an indication of

impairment occurs. Reinsurance assets are impaired only if there is objective

evidence that the Company may not receive all amount due to it under the terms of

the contract and when the impact on the amounts that the Company will receive

from the reinsurer can be measured reliably. The impairment loss is charged to profit

or loss.

Ceded reinsurance arrangements do not relieve the Company from its obligation to

policyholders.

The Company also assumes reinsurance risk in the normal course of business for

insurance contracts. Premiums and claims on assumed reinsurance are recognized

as income and expense in the same manner as they would be if the reinsurance

were considered direct business, taking into account the product classification of the

reinsured business. Reinsurance liabilities represent balances due to reinsurers.

Amounts payable are estimated in a manner consistent with the associated

reinsurance contract.


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Premiums and claims are presented on a gross basis for both ceded and assumed

reinsurance.

Reinsurance assets and liabilities are derecognized when the contractual right is

extinguished or expired or when the contract is transferred to another party.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and

amortization and impairment losses, if any.

Initially, an item of property and equipment is measured at its cost, which comprises its

purchase price and any directly attributable costs of bringing the asset to the location

and condition for its intended use. Subsequent costs that can be measured reliably

are added to the carrying amount of the asset when it is probable that future

economic benefits associated with the asset will flow to the Company. The cost of

day-to-day servicing of an asset is recognized as an expense in the period in which

they are incurred.

Depreciation is computed using the straight-line method over the estimated useful

lives of the property and equipment other than leasehold improvements.

Amortization is computed on a straight-line basis over the estimated useful life of the

leasehold improvements or the term of the lease, whichever is shorter. The estimated

useful lives are as follows:

Number of Years

Furniture, fixtures, and equipment 5

Transportation equipment 5

Computer software 5

Leasehold improvements5

The residual value, useful lives, depreciation and amortization methods for items of

property and equipment are reviewed, and adjusted if appropriate, at each reporting

date.

When an asset is disposed of, or is permanently withdrawn from use and no future

economic benefits are expected from its disposal, the cost and the related

accumulated depreciation and impairment losses, if any, are removed from the

accounts and any resulting gain or loss arising from the retirement or disposal is

recognized in profit or loss.


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Income Tax

Current tax assets and liabilities are measured at the amount expected to be

recovered from or paid to the taxation authorities. The tax rate and the tax laws used

to compute amount are those that are enacted or substantively enacted as at the

reporting date.

Deferred income tax is provided using the balance sheet liability method. Deferred tax

assets and liabilities are recognized for the future tax consequences attributable to

temporary differences between the carrying amounts of assets and liabilities for

financial reporting purposes and amounts used for taxation purposes.

Deferred tax assets are recognized for all deductible temporary differences and the

carry forward of unused tax losses to the extent that it is probable that taxable profit

will be available against which the deferred tax asset can be utilized. Deferred tax

liabilities are recognized for all taxable temporary differences. Deferred tax assets and

liabilities are measured at the tax rate that are applicable to the period when the

asset is realized or the liability is settled, based on tax rates that have been enacted or

substantively enacted as at the reporting date.

The carrying amount of deferred tax assets is reviewed at each reporting date and

reduced to the extent that it is no longer probable that sufficient taxable profit will be

available to allow all or part of the deferred tax assets to be utilized. Unrecognized

deferred tax assets are reassessed at each reporting date and are recognized to the

extent that it has become probable that future taxable profit will allow the deferred

tax assets to be recovered.

Current tax and deferred tax are recognized in profit or loss except to the extent that it

relates to a business combination or items recognized directly in equity or in 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 the deferred taxes

relate to the same taxable entity and the same taxation authority.

Equity

Capital stock is determined using the nominal value of stocks that have been issued.

Contributed surplus represents excess contributions of the stockholders to the

Company.

Revaluation reserve comprises gains and losses due to the revaluation of AFS financial

assets.

Retained earnings represent accumulated earnings less dividends, if any.


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Operating Lease

Lease in which a significant portion of the risks and rewards of ownership are retained

by the lessor are classified as operating leases. Payments made under operating

leases are recognized in profit or loss on a straight-line basis over the term of the lease.

Retirement Benefit Cost

The Company has an unfunded, noncontributory retirement plan covering its

permanent employees. Retirement benefit costs are actuarially determined using the

projected unit credit method. This method reflects services rendered by employees to

the date of the valuation and incorporates assumptions concerning employees‘

projected salaries. Retirement benefit cost includes current service cost, interest cost,

amortization of unrecognized past service costs, actuarial gains and losses, experience

adjustments and changes in actuarial assumptions over the expected average

remaining working lives of the covered employees. Actuarial gains and losses are

recognized as income or expense when the net cumulative unrecognized actuarial

gains and losses of the plan at the end of the previous reporting year exceeded the

10% of the higher of defined benefit obligation and the fair value of the plan assets at

that date. These gains or losses are recognized over the expected average remaining

working lives of the employees participating in the plan.

The net retirement liability recognized by the Company in respect of the defined

benefit retirement plan is the aggregate of the present value of the defined benefit

obligation and unrecognized actuarial gains and losses reduced by unrecognized

past service cost.

The present value of the defined benefit obligation is determined by discounting the

estimated future cash outflow using risk-free interest rates of government bonds that

have terms of maturity approximating the terms of the related retirement liability.

Related Parties

Parties are considered to be related if one party has the ability, directly or indirectly, to

control the other party or exercise significant influence over the other party in making

financial and operating decisions. Parties are also considered to be related if they are

subject to common control or common significant influence.

Provisions

Provisions are recognized only when the Company has: (a) a present obligation (legal

or constructive) as a result of a past event; (b) it is probable (i.e. more likely than not)

that an outflow of resources embodying economic benefits will be required to settle

the obligation; and (c) a reliable estimate can be made of the amount of the

obligation. Provisions are reviewed at each reporting date and adjusted to reflect the

current best estimate.


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Contingencies

Contingent liabilities are not recognized in the financial statements. They are

disclosed to the notes to the financial statements unless the possibility of an outflow of

resources embodying benefits is remote. Contingent assets are not recognized in the

financial statements but are disclosed in the notes to financial statements when an

inflow of economic benefits is probable.

Events After the End of the Reporting Period

Post year-end events that provide additional information about the Company's

financial position at the end of the reporting period (adjusting events) are reflected in

the financial statements. Post year-end events that are not adjusting events are

disclosed in the notes to the financial statements when material.

•Significant Accounting Judgments and Estimates

The following are the critical judgments, key estimates and assumptions that have a

significant risk of material adjustment to the carrying amounts of assets and liabilities

within the next financial year and/or in future periods:

Judgments

Determination of Functional Currency

Based on the economic substance of the underlying circumstance relevant to the

Company, the functional currency of the Company has been determined to be the

Philippine peso. The Philippine peso is the currency of the primary economic

environment in which the Company operates. It is the currency that mainly influences

the income and costs arising from the Company‘s operations.

Operating Lease - Company as a Lessee

The Company has entered into a lease agreement as lessee. The Company has

determined that all the significant risks and rewards of ownership of these properties

are retained by the lessor.

Rent expense charged to operations for the years ended December 31, 2012 and

2011 amounted to P3.69 million and P4.53 million, respectively (see Notes 19 and 22).

Classification of HTM Investments

The Company follows the guidance in PAS 39, Financial Instruments: Recognition and

Measurement, on classifying non-derivative financial assets with fixed or determinable

payments and fixed maturity as HTM. This classification requires significant judgment.

In making such judgment, the Company evaluates its intention and ability to hold

such investments to maturity. If the Company fails to keep these investments to

maturity other than for the specific circumstances, for example, selling more than an

insignificant amount close to maturity, the entire portfolio shall be reclassified as AFS

and would therefore be measured at fair value and not at amortized cost.


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Estimates

Fair Value Estimation

The fair value of financial instruments traded in active markets (such as AFS financial

assets) is based on quoted market prices as at the reporting date. If the financial

instrument is not traded in an active market, the fair value is determined using

valuation techniques. Where valuation techniques are used to determine fair values,

they are validated and periodically reviewed by management. To the extent

practical, models use only observable data, however, areas such as credit risk (both

own and counterparty), volatilities and correlations require management to make

estimates. Changes in assumptions about these factors could affect reported fair

values of financial instruments (see Note 6).

Impairment Losses on Insurance Receivables

The Company reviews its receivables to assess impairment at least on an annual basis,

or as the need arises, depending on the volume and nature of transactions.

Receivables from policyholders and reinsurers that are individually significant are

assessed to determine whether objective evidence of impairment exists on an

individual basis, while those that are not individually significant are assessed for

objective evidence of impairment either on an individual or on collective basis. In

determining whether an impairment loss should be recorded in profit or loss, the

Company makes judgments as to whether there is any observable data indicating

that there is a measurable decrease in the estimated future cash flows from a portfolio

of receivables before the decrease can be identified with an individual receivable in

that portfolio. Management uses estimates based on historical loss experience for

assets with credit risk characteristics and objective evidence of impairment similar to

those in the receivables when scheduling its future cash flows. The methodology and

assumptions used for estimating both the amount and timing of future cash flows are

reviewed regularly to reduce any differences between loss estimates and actual loss

experience.

Impairment of Investments

The Company considers that investments are impaired when there has been a

significant or prolonged decline in the fair value below their cost. The determination

of what is significant or prolonged decline requires judgment. In making this

judgment, the Company evaluates among other factors, the normal volatility in

market price. In addition, impairment may be appropriate when there is evidence of

deterioration in the financial health of the investee, industry and sector performance,

changes in technology, and operational and financing cash flows.


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As at December 31, 2012 and 2011, there is no impairment loss on the Company‘s

investments.

Insurance Liabilities Arising from Insurance Contracts

Estimates have to be made both for the expected ultimate cost of claims reported at

the reporting date and for the expected ultimate cost of claims IBNR at the reporting

date. It can take a significant period of time before the ultimate claims cost can be

established with certainty.

The primary technique adopted by the management in estimating the cost of IBNR is

using the past claims settlement trend to predict the future claims settlement trend.

At each reporting date, prior year claims estimates are assessed for adequacy and

changes made and are charged to provisions. Insurance contract liabilities are not

discounted for the time value of money.

As at December 31, 2012 and 2011, gross carrying amount of insurance liabilities

arising from insurance contract amounted to P299.86 million and P270.45 million,

respectively (see Notes 9 and 16).

Estimated Useful Lives of Property and Equipment

The Company estimates useful lives of property and equipment based on the period

over which the assets are expected to be available for use and are updated if

expectations differ from previous estimates due to physical wear and tear, technical

and commercial obsolescence. The useful lives and depreciation method are

reviewed periodically to ensure that the method and period of depreciation are

consistent with the expected pattern of economic benefits from items of property

and equipment.

As at December 31, 2012 and 2011, property and equipment, net of accumulated

depreciation and amortization, amounted to P14.28 million and P9.92

million, respectively (see Note 12).

Estimation of Retirement Benefit Cost

The determination of the Company‘s obligation and benefit cost and other retirement

benefits is dependent on management‘s selection of certain assumptions used by

actuaries in calculating such amounts.


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The assumptions for benefit costs and other retirement benefits are described in Note

23 to the financial statements and include among others, discount rates and rates of

compensation increase. In accordance with PFRS, actual results that differ from

assumptions are accumulated and amortized over future periods and

therefore, generally affect the Company‘s recognized expense and recorded

obligation in such future periods. While management believes that the assumptions

are reasonable and appropriate, significant differences in actual experience or

significant changes in management assumptions may materially affect the

Company‘s retirement benefit costs.

As at December 31, 2012 and 2011, retirement benefit liability amounted to

P6.07 million and P3.12 million, respectively. Retirement benefit costs amounted to

P2.95 million and P0.70 million in 2012 and 2011, respectively (see Note 23).

Realizability of Deferred Tax Assets

The Company reviews the carrying amounts of deferred income tax assets at the end

of each reporting period and reduces these to the extent that it is no longer probable

that sufficient taxable income will be available to allow all or part of the deferred tax

asset to be utilized. Assessment on the recognition of deferred income tax assets on

deductible temporary differences is based on the level and timing of forecasted

taxable income for the subsequent reporting periods. This forecast is based on the

past results and future expectations on revenues and expenses as well as future tax

planning strategies. However, there is no assurance that the Company will generate

sufficient taxable income to allow all or part of the recorded deferred income tax

assets to be utilized.

As at December 31, 2012 and 2011, deferred tax assets amounted to P5.54 million and

P9.89 million, respectively (see Note 21).


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•Fair Value Measurement

The table below sets out the financial assets and financial liabilities showing the

carrying values and the related fair values as at December 31, 2012 and 2011:

The carrying amounts of cash and cash equivalents, insurance receivables, accounts

payable and accrued expenses, reinsurance liabilities and losses and claims payable

approximate their fair values due to the relatively short-term maturities of the financial

instruments.

The fair value of HTM investments are generally based on quoted market prices.

The Company measures fair values of AFS financial assets using the following fair value

hierarchy that reflects the significance of the inputs used in making the

measurements.

Level 1:Quoted market price (unadjusted) in an active market for an identical

instruments.

Level 2: Valuation techniques based on observable inputs, either directly (i.e., as

prices) or indirectly (i.e., derived from prices). This category includes instruments

valued using quoted market prices in active markets for similar instruments; quoted

prices for identical or similar instruments in markets that are considered less than

active; or other valuation techniques where all significant inputs are directly

observable from market data.

Level 3: Valuation techniques using significant unobservable inputs. This category

includes all instruments where the valuation technique includes inputs not based on

observable data and the unobservable inputs have a significant effect on the

instrument‘s valuation. This category includes instruments that are valued based on

quoted prices for similar instruments where significant unobservable adjustments or

assumptions are required to reflect differences between the instruments.


76

2012 2011

Fair Value Carrying Value Fair Value

Carrying

Value

Financial Assets

Cash and cash equivalents P248,051,672 P248,051,672 P188,950,604 P188,950,604

Insurance receivables-net 565,062,235 565,062,235 493,097,058 493,097,058

Investments:

AFS 942,080 942,080 1,028,864 1,028,864

HTM 124,171,528 118,284,669 101,370,044 101,081,825

Accrued interest income 1,721,802 1,721,802 1,424,021 1,424,021

Receivables 3,211,540 3,211,540 2,759,340 2,759,340

P943,160,857 P937,273,998 P788,629,931 P788,341,712

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The table below analyzes AFS financial assets measured at fair value at the reporting

date, by the level in the fair value hierarchy into which the AFS financial assets is

categorized:

•Cash and Cash Equivalents

This account consists of:

Cash in banks and short-term bank deposits earn interest at prevailing bank interest

rates. Interest income earned on these deposits amounted to P3.96 million and P3.40

million in 2012 and 2011, respectively.

•Insurance Receivables


In 2012, the premiums receivable of P57,753 were fully written off against the

allowance of impairment losses for which it was previously set up for.


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Level 1 Level 2 Level 3 Total

As at December 31, 2012 P922,080 P - P20,000 P942,080

As at December 31, 2011 P1,008,864 P - P20,000 P1,028,864

Note 2012 2011

Cash on hand 6 P1,318,362 P1,213,564

Cash in banks 5, 6 120,669,522 71,920,600

Short-term bank deposits 5, 6 126,063,788 115,816,440

5, 6 P248,051,672 P188,950,604

Note 2012 2011

Premiums receivable 5 P235,569,393 P218,148,695

Due from ceding companies and reinsurers -net of premium

deposits 9 24,443,214 20,206,290

Funds held by ceding companies and reinsurers 9 2,265,659 1,613,736

Reinsurance recoverable on unpaid losses 9, 16 254,149,906 243,363,560

Reinsurance recoverable on paid losses 9 48,634,063 9,822,530

565,062,235 493,154,811

Allowance for impairment losses - (57,753)

P565,062,235 P493,097,058

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•Reinsurance

The Company utilizes reinsurance agreements to minimize its exposure to large losses in

all aspects of its insurance business. Reinsurance permits recovery of a portion of losses

from reinsurers, although it does not discharge the primary liability of the Company as

direct insurer of the risks of the reinsured.

The gross amounts of assets and liabilities, net of reinsurance, are as follows:

The amount of due from ceding companies and reinsurers presented under ―Net of

reinsurance‖ is derived after deducting reinsurance liabilities amounting to

P213.52 million and P198.35 million as at December 31, 2012 and 2011, respectively.

Losses and claims payable presented under ―Net of reinsurance‖ is derived after

deducting reinsurance recoverable on unpaid losses of P254.15 million and

P243.36 million as at December 31, 2012 and 2011, respectively (see Note 8).

Reserve for unearned premiums presented under ―Net of reinsurance‖ is derived after

deducting deferred reinsurance premiums amounting to P209.03 million and

P193.15 million as at December 31, 2012 and 2011, respectively (see Note 14).

•Investments

Reconciliation of the carrying amount of the investments is shown below:


78

As Reported Net of Reinsurance

2012 2011 2012 2011

Due from ceding companies and

reinsurers P73,077,277 P30,028,820 (P140,441,530) (P168,321,209)

Funds held by ceding companies 2,265,659 1,613,736 2,265,659 1,613,735

Losses and claims payable 299,858,946 270,446,577 45,709,040 27,083,017

Reserve for unearned premiums - net 269,573,598 270,598,165 60,543,986 77,449,975

2012

AFS Financial Assets HTM Investments

Total

Investments

Cost as at January 1 P1,139,405 P101,081,825 P102,221,230

Unrealized losses as at January 1 (110,541) - (110,541)

Fair value as at January 1 1,028,864 101,081,825 102,110,689

Fair value gains recognized in

comprehensive income (86,784) - (86,784)

Additions - 20,000,000 20,000,000

Cost of financial asset matured - (2,797,156) (2,797,156)

Fair value as at December 31 P942,080 P118,284,669 P119,226,749

Cost as at December 31 P1,139,405 P118,284,669 P119,424,074

Unrealized losses as at December 31 (P197,325) P - (P197,325)

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AFS financial assets represent equity instruments with quoted and unquoted market

values. For AFS financial assets with no active market, fair value is determined through

other valuation techniques or by reference to published financial statements of the

issuer.

HTM investments consist of:

As at December 31, 2012 and 2011, government securities totaling P56.16 million

lodged with Registry of Scripless Securities (RoSS) are earmarked as non-tradable in

accordance with the provision of the Insurance Code as security for the benefit of

policyholders and creditors of the Company. Interest income earned in HTM

investments amounted to P5.63 million and P3.62 million in 2012 and 2011, respectively.

•Deferred Acquisition Cost and Deferred Reinsurance Commission

The details and movements of these accounts follow:

Deferred acquisition cost:


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2011

AFS Financial Assets HTM Investments

Total

Investments

Cost as at January 1 P1,139,405 P60,929,805 P62,069,210

Unrealized losses as at January 1 (164,781) - (164,781)

Fair value as at January 1 974,624 60,929,805 61,904,429

Fair value gains recognized in

comprehensive income 54,240 - 54,240

Additions - 50,161,247 50,161,247

Cost of financial asset matured - (10,009,227) (10,009,227)

Fair value as at December 31 P1,028,864 P101,081,825 P102,110,689

Cost as at December 31 P1,139,405 P101,081,825 P102,221,230

Unrealized losses as at December 31 (P110,541) P - (P110,541)

Balance as at December 31

Debt instruments Coupon Term 2012 2011

Government securities 3.3%- 6.9% 3-7 years P80,284,669 P80,580,367

Globe Telecoms, Inc. 4.5%

5 years and 4

mos 10,000,000 -

San Miguel Brewery, Inc. 5.0% 7 years 10,000,000 -

Philippine National Bank 4.1% 5 years 10,000,000 10,000,000

Robinsons Land Corporation 8.2%-8.5% 5 years 8,000,000 8,000,000

Home Mutual Fund Development 5% 5 years - 2,501,458

P118,284,669 P101,081,825

2012 2011

Balance as at January 1 P10,718,761 P13,188,905

Cost deferred for the year 37,882,631 36,207,499

Commissions incurred for the year (39,393,055) (38,677,643)

Balance as at December 31 P9,208,337 P10,718,761

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Deferred reinsurance commission:

•Property and Equipment

Property and equipment consists of:


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2012 2011

Balance as at January 1 P12,571,126 P19,125,114

Commissions deferred for the year 40,763,465 46,208,579

Commissions earned for the year (46,766,926) (52,762,567)

Balance as at December 31 P6,567,665 P12,571,126

2012

Furniture,

Fixtures and

Equipment

Transportation

Equipment

Computer

Software

Leasehold

Improvements Total

Gross carrying amount:

Balances as at January 1 P2,836,044 P5,638,810 P2,664,237 P7,617,324 P18,756,415

Additions 93,117 - 8,355,895 - 8,449,012

Balances as at December 31 2,929,161 5,638,810 11,020,132 7,617,324 27,205,427

Accumulated depreciation

and amortization:

Balances as at January 1 1,349,715 2,216,316 1,382,546 3,891,622 8,840,199

Depreciation and amortization

for the year 562,844 1,127,762 869,496 1,523,465 4,083,567


Net carrying amount:


Balances as at December 31 P1,016,602 P2,294,732 P8,768,090 P2,202,237 P14,281,661

2011

Furniture,

Fixtures and

Equipment

Transportation

Equipment

Computer

Software

Leasehold

Improvements Total

Gross carrying amount:


Additions 105,716 450,000 70,587 - 626,303


Accumulated depreciation

and amortization:

Balances as at January 1 783,380 1,112,721 920,363 2,368,157 5,184,621

Depreciation and amortization

for the year 566,335 1,103,595 462,183 1,523,465 3,655,578


Net carrying amount:

Balances as at January 1 P1,946,948 P 4,076,089 P1,673,287 P5,249,167 P12,945,491

Balances as at December 31 P1,486,329 P 3,422,494 P1,281,691 P3,725,702 P9,916,216

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•Other Assets


•Reserve for Unearned Premiums and Deferred Reinsurance Premiums

The analysis of this account follows:

•Accounts Payable and Accrued Expenses


Accounts payable and accrued expenses are non-interest bearing and payable

within one year. Other taxes payable includes accrual of withholding taxes, local

government taxes and other fees payable to various regulatory agencies.


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Note 2012 2011

Receivables 5 P3,211,540 P2,759,340

Input value - added tax (VAT) 2,847,260 2,221,550

Rental deposits 2,067,842 1,798,352

Others 20,122 47,979

P8,146,764 P6,827,221

2012 2011

Premiums Premiums

Written Ceded Net Written Ceded Net

Balance as at January 1 P270,598,165 P193,148,190 P77,449,975 P282,342,640 P214,191,811 P68,150,829

Policies written during

the year 485,273,084 366,209,353 119,063,731 459,755,885 335,907,609 123,848,276

Premiums earned

during the year (486,297,651) (350,327,931) (135,969,720) (471,500,360) (356,951,230) (114,549,130)

Balance as at December

31 P269,573,598 P209,029,612 P60,543,986 P270,598,165 P193,148,190 P77,449,975

2012 2011

Accounts payable and accrued expenses P28,540,812 P17,624,220

Deferred output VAT payable 32,926,317 25,799,600

Other taxes payable 8,505,109 7,999,049

P69,972,238 P51,422,869

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•Losses and Claims Payable

Losses and claims payable consists of estimated liability for reported claims and

accruals of estimated IBNR losses.

The details of this account, net of reinsurance, as at December 31 are as follows:

The movement of this account, net of reinsurance, is accounted for as follows:

In 2012, from the gross claims of P299.86 million, P108.75 million is related to flood losses

from storm-enhanced Habagat (August 2012). MERALCO‘s claims from Habagat

amounted to P47.70 million while the remaining P61.05 million represents claims from

assumed business and other direct accounts.

In 2011, from the gross claims of P270.45 million, P127.07 million were related to losses

from typhoons Pedring (September 2011) and Sendong (December 2011).

MERALCO‘s claims from typhoon Pedring amounted to P73.35 million while the

remaining P53.72 million represents claims from reinsurance assumed business.

•Net Insurance Revenue


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Note 2012 2011

Gross claims 9 P299,858,946 P270,446,577

Less reinsurance recoverable on unpaid losses 8 254,149,906 243,363,560

P45,709,040 P27,083,017

2012 2011

Balance at beginning of year P27,083,017 P8,171,589

Claims and losses incurred during the year 40,490,238 27,455,554

Claims and losses paid 21,864,215 8,544,126

Balance at end of year P45,709,040 P27,083,017

Direct Reinsurance Reinsurance Net Premiums

Business Assumed Total Ceded Retained/Earned

2012

Premiums written P327,486,728 P157,786,356 P485,273,084 P366,209,353 P119,063,731

Changes in unexpired risk (1,074,081) 2,098,648 1,024,567 (15,881,422) 16,905,989

Net P326,412,647 P159,885,004 P486,297,651 P350,327,931 P135,969,720

Direct Reinsurance Reinsurance Net Premiums

Business Assumed Total Ceded Retained/Earned

2011

Premiums written P317,188,309 P142,567,576 P459,755,885 P335,907,609 P123,848,276

Changes in unexpired risk (14,835,450) 26,579,925 11,744,475 21,043,621 (9,299,146)

Net P302,352,859 P169,147,501 P471,500,360 P356,951,230 P114,549,130

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•Other Income


•Operating Expenses

Operating Expenses consists of:

•Reconciliation of Net Income under PFRS and Regulatory Accounting Policies (RAP)

PFRS varies in certain respects from RAP as prescribed by the IC particularly in the

computation of reserve for unearned premiums. A reconciliation of net income under

PFRS and net income under RAP as at December 31 follows:


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2012 2011

Unrealized foreign exchange gain (loss) (P1,492,017) P471,988

Realized foreign exchange gain (loss) (195,877) 80,684

Other income 54,230 329,618

(P1,633,664) P882,290

Note 2012 2011

Salaries, allowances and employee benefits 24 P39,607,026 P36,001,240

Rent and utilities 22 4,820,264 4,687,219

Depreciation and amortization 12 4,083,567 3,655,578

Entertainment, amusement and representation 3,310,607 3,969,910

Retirement expenses 23 2,951,045 700,000

Professional fees 2,995,368 2,518,819

Transportation and travel 1,932,507 1,952,168

Professional development 1,886,941 654,412

Repairs and maintenance 1,267,273 1,154,742

Communication and postage 835,888 831,145

Supplies 671,329 742,000

Regulatory and association dues 628,501 364,207

Taxes and licenses 349,700 640,225

Miscellaneous 750,216 770,165

P66,090,232 P58,641,830

2012 2011

PFRS net income P33,026,458 P36,423,629

Add (deduct):

Difference in change in:

Reserve for unearned premiums - net of deferred reinsurance

premiums (14,970,950) (3,543,107)

Deferred reinsurance commission (6,003,461) (6,553,988)

Deferred acquisition costs 1,510,424 2,470,144

Income tax effect 5,839,197 2,288,085

RAP net income P19,401,668 P31,084,763

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•Income Tax

Income tax expense consists of:

The reconciliation of income tax expense computed at statutory tax rate to the

income tax expense shown in profit or loss follows:

The Company‘s deferred tax assets and liability recognized in the statements of

financial position are composed of the following:


84

2012 2011

Current P6,365,702 P12,005,823

Deferred 4,350,747 1,949,674

P10,716,449 P13,955,497

2012 2011


Income tax using the statutory income tax rate P13,122,872 P15,113,738

Tax effect of:

Interest income subjected to final tax (2,877,534) (2,107,745)

Non-deductible expenses 487,381 1,411,005

Non-taxable income (16,270) (3,254)

Movement of deferred tax assets - (458,247)

P10,716,449 P13,955,497

2012 2011


Income tax using the statutory income tax rate P13,122,872 P15,113,738

Tax effect of:

Interest income subjected to final tax (2,877,534) (2,107,745)

Non-deductible expenses 487,381 1,411,005

Non-taxable income (16,270) (3,254)

Movement of deferred tax assets - (458,247)

P10,716,449 P13,955,497

2012 2011

Tax Base

Deferred Tax

Asset Tax Base

Deferred Tax

Asset

Excess of reserve for unearned premiums

per books over tax basis P13,137,418 P3,941,225 P28,108,368 P8,432,510

Accrued retirement liability 6,073,190 1,821,957 3,122,145 936,644

Deferred reinsurance commissions

(deferred acquisition costs), net (2,640,672) (792,202) 1,852,365 555,710

Unrealized foreign exchange (gain)/loss 1,492,017 447,605 (471,988) (141,597)

Excess of straight-line lease

over actual lease per contract 390,422 117,127 343,975 103,192

P18,452,375 P5,535,712 P32,954,865 P9,886,459

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The future tax benefit on deferred income tax assets are expected to be realized

primarily upon realization of excess of recorded reserve for unearned premiums and

deferrals of commissions over tax basis.

Transitory provisions of Revenue Regulation No. 16-2008 introduced the Optional

Standard Deduction (OSD) as an alternative deduction for corporations. The

Company used itemized method of deduction for its annual income tax return in 2012

and 2011.

•Lease Commitments

On August 1, 2009, the Company entered into a lease agreement with Rockwell Land

Corporation, an entity under common control, for its office space and parking slots

for a period of five years beginning October 16, 2009 with monthly rental of P0.23

million and renewable upon mutual consent of both parties. The annual rental is

subject to 5% escalation rate starting on the second year of the contract term.

Future minimum annual lease commitments as at December 31, 2012 and 2011 are

as follows:

Rent expense for its office space and parking slots presented under ―Operating

expenses‖ amounted to P3.30 million for the years ended December 31, 2012 and

2011, respectively.

•Retirement Benefit Cost

The Company does not have an existing employee retirement plan. However, it is

subject to the minimum retirement benefit under Republic Act (R.A.) No. 7641 or the

―Retirement Pay Law‖ which requires the private employers should provide minimum

retirement benefit to employees who have reached age sixty (60) with at least five (5)

years of service with the Company.

Retirement benefit cost has been determined based on the computation by an

independent actuary using the projected unit credit method. Under this method,

retirement benefit costs include current service cost and the amount recognized in

the current period related to past service cost. Under this calculation, the normal

retirement age is 60 years with the completion of at least 10 years of service. Normal

retirement benefit is equivalent to one month final salary of employee as at the date

of retirement multiplied by years of service.


85

2012 2011

Not later than one year P3,514,317 P3,346,968

Later than one year but not later than five years 2,733,358 6,247,674

P6,247,675 P9,594,642

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In 2012 and 2011, retirement benefit cost recognized in profit or loss is as follows:

As at December 31, 2012 and 2011, retirement benefit liability shown in the statements

of financial position consists of the present value of net defined benefit obligation.

Movements in retirement benefit liability for the year ended December 31, 2012 and

2011 consist of the accrual of retirement benefit cost of P2.95 million and P0.70

million, respectively.

Changes in the present value of the defined benefit obligation for the year ended

December 31, 2012 and 2011 are as follows:

The principal actuarial assumptions used to determine retirement benefit cost for the

Company as at December 31, are shown below:

The historical information for the current and previous period is as follows:


86

2012 2011

Current service cost P1,249,795 P700,000

Interest cost 252,894 -

Amortization for actuarial loss 1,448,356 -

P2,951,045 P700,000

2012 2011

At January 1 P3,122,145 P2,422,145

Current service cost 1,249,795 700,000

Interest cost 252,894 -

Amortization for actuarial loss 1,448,356 -

At December 31 P6,073,190 P3,122,145

2012 2011

Discount rate 8.10% 8.90%

Future salary increase rate 5.00% 5.00%

2012 2011 2010

Present value of defined benefit obligation (unfunded

liability) P6,073,190 P3,122,145 P2,422,145

Experience adjustments P507,943 P - P239,642

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•Related Party Transactions

Related party transactions in the ordinary course of business are as follows:

* Included as part of “Insurance receivables - net”

**Outstanding balances from cessions and losses are included as part of” Reinsurance liabilities” and” Losses and claims

payable”, respectively.

24a Premiums relate to one year insurance policies issued to MERALCO and other

related entities under common control to cover certain assets amounting.

Outstanding balance is presented as part of ―Insurance receivables - net.‖

24b On August 1, 2009, the Company entered into a lease agreement with

Rockwell Land Corporation for its office space and parking slots for a period of

five years beginning October 16, 2009 (see Note 22).

This includes car rentals amounting to P.28 million for the year 2012 and 2011.

Compensation of Key Management Personnel

Key management personnel are those persons having authority and responsibility for

planning, directing and controlling the activities of the entity, directly or indirectly,

including any director, whether executive or otherwise, of that entity.

The key management personnel received short-term compensation totalling to P15.03

million and P14.67 million in 2012 and 2011, respectively.


87

Outstanding Balance

Category/Transaction Year Note

Amount of the

Transaction

Due from

Related

Parties*

Due to

Related

Parties** Terms Conditions

Parent

Premiums 2012 24a P256,890,930 P226,935,841 P - On demand; non-

interest bearing

Unsecured; no

impairment

2011 259,640,737 217,030,530 - On demand; non-

interest bearing

Unsecured; no

impairment

Losses 2012 18,298,600 - 55,674,797 On demand; non-

interest bearing

Unsecured; no

impairment

2011 28,680,886 - 78,180,807 On demand; non-

interest bearing

Unsecured; no

impairment

Entities Under Common

Control

Premiums 2012 24a 60,764,495 7,325,867 - On demand; non-

interest bearing

Unsecured; no

impairment

2011 49,011,931 4,881,462 - On demand; non-

interest bearing

Unsecured; no

impairment

Cessions 2012 41,115,092 - 41,115,092 On demand; non-

interest bearing

Unsecured; no

impairment

2011 43,045,913 - 43,045,913 On demand; non-

interest bearing

Unsecured; no

impairment

Losses 2012 10,583,484 - 30,384,808 On demand; non-

interest bearing

Unsecured; no

impairment

2011 29,411,204 - 29,414,836 On demand; non-

interest bearing

Unsecured; no

impairment

Rent 2012 24b 3,579,093 - - On demand; non-

interest bearing

Unsecured; no

impairment

2011 4,301,726 - - On demand; non-

interest bearing

Unsecured; no

impairment

Utilities 2012 703,437 - - On demand; non-

interest bearing

Unsecured; no

impairment

2011 - - - On demand; non-

interest bearing

Unsecured; no

impairment

TOTAL 2012 P135,044,201 P7,325,867 P127,174,697

TOTAL 2011 P414,092,397 P221,911,992 P150,641,556

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•Regulatory Requirements

MOS Requirements

Under the Insurance Code, an insurance company doing business in the Philippines

shall maintain at all times 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 excess of the value of its admitted assets (as defined under the same code),

exclusive of its paid-up capital, over the amount of its liabilities (including unearned

premiums and reinsurance reserves).

As at December 31, 2012 and 2011, the estimated amounts of non-admitted assets, as

defined under the insurance regulations, which are included in the statements of

financial position follow:

The final amount of MOS can be determined only after the accounts of the Company

have been examined by the IC, particularly with respect to the determination of

admitted and non-admitted assets.

Fixed Capitalization Requirements

Department of Finance (DOF) Order 27-06 provides for the capitalization requirements

for life, non-life and reinsurance companies. Under the Order, the minimum statutory

net worth and minimum paid-up capital requirements vary depending on the level of

the foreign ownership in the insurance company. The statutory net worth shall include

the Company‘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 fixed at 50% of the minimum statutory net worth.

Under the Order 27-06, the required minimum statutory net worth and minimum paid-

up capital for the Company, being a 100% domestic-owned insurance company is

P350 million and P175 million, respectively, as at December 31, 2011.

To comply with this minimum paid-up capital requirement in 2011, the stockholders of

the Company approved a resolution of the BOD on December 26, 2011, declaring

stock dividend consisting of 500,000 shares with par value of P100 a share out of the

unrestricted retained earnings as at November 30, 2011.


88

2012 2011

Property and equipment at net book value excluding computers P5,513,571 P8,634,525

Deferred tax assets 5,535,712 9,919,056

Deferred acquisition cost- net of deferred commission income 2,640,672 (1,852,365)

Other assets excluding receivables 4,935,224 4,181,954

P18,625,179 P20,883,170

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On June 1, 2012, DOF Order 15-2012 (pursuant to DO 27-06 and IMC 10-2006) was

issued to all existing insurance companies doing business in the Philippines. Under the

Order 15-2012, the required minimum paid-up capital and the schedule of

compliance dates are as follows:

After 2012, compliance with the prescribed paid-up capital requirement may be

deferred for existing insurance and professional reinsurance companies that meet the

Risk-Based Capital (RBC) Hurdle Rate as follows:

Department Order No. 15-2012 did not prescribe any net worth requirement.

To comply with this minimum paid-up capital requirement in 2012, the stockholders of

the Company approved a resolution of the BOD on November 14, 2012, to increase

the Company‘s authorized capital stock from P200 million divided into 2,000,000 with

par value of P100 a share to P600 million, divided into 6,000,000 shares with the same

par value. Furthermore, MERALCO, the parent company, paid P75 million in cash as

deposit for future capital stock subscription to meet the P250 million minimum paid-

up capital requirement in 2012. In December 2012, the Company filed an application

for increase in the Company‘s authorized capital stock with SEC. SEC approved the

increase in the Company‘s authorized capital stock on January 28, 2013.

The deposit for future capital stock subscription is presented under equity in the

statement of financial position as at December 31, 2012 since the Company has met

all the conditions required for such recognition at the end of the reporting period.


89

Compliance Date

Minimum

Paid-up Capital

On or before December 31, 2012 (pursuant to DO 27-06 and IMC

10-2006)

P250 million

On or before December 31, 2014 400 million



On or before December 31, 2020 1,000 million

Basis of RBC Ratio Review Year RBC Hurdle Rate

2013 Synopsis 2014 150%

2015 Synopsis 2016 150%

2017 Synopsis 2018 150%

2019 Synopsis 2020 150%

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Risk Based Capital Requirements

Insurance Memorandum Circular (IMC) No. 6-2006 provides for the Risk Based Capital

(RBC) framework for the non-life insurance industry to establish the required amounts

of capital to be maintained by the insurance companies in relation to their investment

and insurance risks. Every non-life insurance company is annually required to

maintain an RBC ratio of at least 100% and not to fail the trend test. Failure to meet

the minimum RBC ratio shall subject the insurance company to regulatory intervention

which could be at various levels depending on the degree of the violation.

The RBC ratio shall be calculated as ―net worth divided by the RBC requirement.‖ Net

worth shall include an insurance company‘s paid-up capital, contributed and

contingency surplus and unassigned surplus. Revaluation and fluctuation reserve

accounts shall form part of net worth only to the extent authorized by the IC. RBC

requirement shall be computed based on the formula provided in the Circular and

shall include asset default risk, insurance pricing risk, interest rate risk and general

business risk.

The following table shows the internal calculation of RBC ratio as at December 31,

2012 and 2011:

The final amount of the RBC ratio is determined only after the accounts of the

Company have been examined by the IC, specifically as to admitted and non-

admitted assets as defined under the Insurance Code.

Consolidated Compliance Framework

IMC No. 10-2006 integrated the compliance standards for the fixed capitalization and

RBC framework. Subsequent to 2006, the fixed capitalization requirement for a given

period may be suspended for insurers that comply 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 Rates from 2007 to 2011. The

IMC provides the annual schedule of progressive rates for the Industry RBC Ratio

Compliance Rates and RBC Hurdle Rates from 2007 to 2011.


90

2012 2011

Networth P297,721,157 P209,949,523

RBC requirement 126,790,043 115,665,154

RBC ratio 235% 182%

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For the review year 2009 which shall be based on the 2008 synopsis, the Industry RBC

Ratio Compliance Rate is 85% and the RBC Hurdle Rate is 175%. For the review year

2011 which shall be based on the 2010 synopsis, the Industry RBC Ratio Compliance

Rate is 85% and the RBC Hurdle Rate is 200%. The IC has not yet provided the Industry

RBC Ratio Compliance Rates and RBC Hurdle Rates for 2012. Failure to achieve one of

the rates will result in the imposition of the fixed capitalization requirement for the year

under review.

•Supplementary Information Required by the Bureau of Internal Revenue (BIR)

In addition to the disclosures mandated under PFRS, and such other standards and/or

conventions as may be adopted, companies are required by the BIR to provide in the

notes to the financial statements, certain supplementary information for the taxable

year. The amounts relating to such information may not necessarily be the same with

those amounts disclosed in the financial statements which were prepared in

accordance with PFRS. The following is the tax information required for the taxable

year ended

December 31, 2012:

•Based on Revenue Regulations (RR) No. 19-2011

a. Sales/Receipts/Fees

b. Cost of Services


91

Special Regular/

Exempt Rate Normal Rate Total

Sale of services P - P - P120,998,770 P120,998,770

Special Regular/


Cost of services

Direct charges - claims and losses paid P - P - P40,490,238 P40,490,238

Direct charges - commission - - 37,882,631 37,882,631

Direct charges - salaries, wages and

benefits - - 12,124,759 12,124,759

Direct charges - underwriting - - 7,816,268 7,816,268

Direct charges - depreciation - - 1,313,516 1,313,516

Direct charges - materials, supplies and

facilities - - 398,954 398,954

Direct charges - rental - - 390,436 390,436

Direct charges - others - - 1,856,200 1,856,200

P - P - P102,273,002 P102,273,002

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c. Non-operating and Taxable Other Income

d. Itemized Deductions


92

Special Regular/


Commission income P - P - P40,763,465 P40,763,465

Underwriting income - - 6,837,936 6,837,936

Realized foreign exchange gain - - 276,111 276,111

P - P - P47,877,512 P47,877,512

Special Regular/


Salaries and allowances P - P - P25,869,153 P25,869,153

Rent - - 3,251,867 3,251,867

Professional fees - - 2,873,833 2,873,833

Depreciation and amortization - - 2,770,051 2,770,051

Entertainment, amusement and

representation - - 1,510,295 1,510,295

Professional development - - 1,488,204 1,488,204

Transportation and travel - - 1,351,939 1,351,939

Repairs and maintenance - - 1,165,555 1,165,555

Employee welfare and benefits - - 1,070,917 1,070,917

Utilities - - 1,027,946 1,027,946

Communication and postage - - 734,569 734,569

Regulatory and association - - 584,001 584,001

SSS,HDMF and PHIC contributions - - 542,197 542,197

Supplies - - 375,944 375,944

Taxes and licenses - - 101,351 101,351

Miscellaneous - - 666,451 666,451

P - P - P45,384,273 P45,384,273

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•Based on RR No. 15-2010

a. Value Added Tax (VAT)

b. Documentary Stamp Tax

c. Withholding Taxes

d. All Other Taxes (Local and National)


93

Net Receipts Output VAT

1. Output VAT P361,655,700 P43,398,684

1. Input VAT

Balance at beginning of year P538,053

Current year’s domestic purchases:

a. Capital goods subject to amortization 334,487

a. Capital goods not subject to amortization 87,107

a. Other than capital goods 580,498

a. Services lodged under operating expenses 5,286,757

Claims for tax credit/refund and other adjustments 178,699

Balance at end of year P7,005,601

On policies issued P40,426,030

Other 74,039

P40,500,069

Tax on compensation and benefits P7,771,928

Expanded withholding taxes 1,503,984

Final withholding taxes 331,479

P9,607,391

Other taxes paid during the year recognized under

“Taxes and licenses” account under Operating Expenses

License and permit fees P99,260

Others 27,439

P126,699

Ortigas Avenue, Pasig City PhilippinesTelephone Number: 470-77-42

Fax Number: 470-30-27www.republic-insurance.ph

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