BPI/MS Insurance Corporation · BPI/MS Insurance Corporation Notes to Financial Statements As at...

BPI/MS InsuranceCorporationFinancial StatementsAs at and for the years ended December 31, 2014 and 2013

BPI/MS Insurance Corporation

Statements of Financial PositionDecember 31, 2014 and 2013

(In thousands of Philippine Peso)

Notes 2014 2013

A S S E T S

CASH AND CASH EQUIVALENTS 5 429,292 1,701,191

INSURANCE BALANCES RECEIVABLE, net 6 1,699,742 1,082,928

REINSURANCE RECOVERABLE ON UNPAID LOSSES 7 2,248,756 2,653,369

DEFERRED REINSURANCE PREMIUM 7 1,832,204 1,988,217

DEFERRED ACQUISITION COST, net 67,029 43,011

HELD-TO-MATURITY FINANCIAL ASSETS 8 946,173 810,722

AVAILABLE-FOR-SALE FINANCIAL ASSETS 9 1,965,740 1,245,670

OTHER RECEIVABLES, net 10 37,659 55,570

INVESTMENT INCOME DUE AND ACCRUED 11 39,401 28,309

PROPERTY AND EQUIPMENT, net 12 100,837 85,117

SOFTWARE COSTS, net 13 3,689 4,068

DEFERRED INCOME TAX ASSETS, net 20 120,681 108,181

OTHER ASSETS, net 14 16,727 15,787

Total assets 9,507,930 9,822,140

LIABILITIES AND EQUITY

RESERVE FOR OUTSTANDING LOSSES 7,18 2,707,810 3,082,276

RESERVE FOR UNEARNED PREMIUMS 7 2,972,539 2,971,268

DUE TO REINSURERS AND CEDING COMPANIES 7 841,276 722,838

FUNDS HELD FOR REINSURERS 7 224,259 208,784

ACCOUNTS PAYABLE AND ACCRUED EXPENSES 15 595,613 570,036

Total liabilities 7,341,497 7,555,202

SHARE CAPITAL 21 350,000 350,000

SHARE PREMIUM 425,972 425,972

RETAINED EARNINGS 21 1,386,809 1,516,993

ACCUMULATED OTHER COMPREHENSIVE INCOME(LOSS) 21 3,506 (26,027)

STOCK OPTIONS RESERVE 21 146 -Total equity 2,166,433 2,266,938Total liabilities and equity 9,507,930 9,822,140

(The notes on pages 1 to 55 are an integral part of these financial statements.)


Statements of IncomeFor the years ended December 31, 2014 and 2013


Notes 2014 2013UNDERWRITING INCOME

Premiums written, net of returns 5,229,100 5,105,271Reinsurance premiums ceded 3,074,780 3,175,653Net premiums retained 2,154,320 1,929,618Increase in reserve for unearned premiums, net (157,284) (110,537)Premiums earned 1,997,036 1,819,081Reinsurance commissions 306,054 254,625

GROSS UNDERWRITING INCOME 2,303,090 2,073,706UNDERWRITING EXPENSES

Losses and claims, net of reinsurance 869,158 698,978Commission expense 553,899 518,264

Total underwriting expenses 1,423,057 1,217,242NET UNDERWRITING INCOME 880,033 856,464GENERAL AND ADMINISTRATIVE EXPENSES

Staff costs 16 289,485 248,265Occupancy and equipment related expenses 12,13,23,25 78,766 69,574Communication and postage 24,053 20,555Professional fees 15,637 13,978Printing and supplies 14,555 12,893Taxes and licenses 14,182 1,140Association and pool dues 8,252 7,633Travel and transportation 7,282 5,991Entertainment 6,665 6,303Advertising and promotion 4,944 5,636Training and development 4,365 3,587Interest expense 2,595 2,672Provision for (reversal of) impairment loss 10,14 90 (148)Other 8,260 8,071

Total general and administrative expenses 479,131 406,150OPERATING INCOME 400,902 450,314INVESTMENT AND OTHER INCOME

Interest income 19 129,938 166,519Gain on sale of investments, net 9 88,091 131,805Dividend income 9 9,061 10,784Other 14 8,838 29,881

Net investment and other income 235,928 338,989INCOME BEFORE INCOME TAX 636,830 789,303PROVISION FOR INCOME TAX 20 155,424 177,720NET INCOME FOR THE YEAR 481,406 611,583



Statements of Total Comprehensive IncomeFor the years ended December 31, 2014 and 2013


Notes 2014 2013NET INCOME FOR THE YEAR 481,406 611,583OTHER COMPREHENSIVE INCOME (LOSS)Items that may be subsequently reclassified to profit or loss 9, 21

Changes in fair value of available-for-sale financial assets 21,146 (74,879)Fair value losses (gains) transferred to profit or loss 6,999 (41,327)

Item that will not be reclassified to profit or loss 21Actuarial gains (losses) on defined benefit plan, net of tax

effect 1,388 (5,734)Other comprehensive income (loss), net of tax effect 29,533 (121,940)TOTAL COMPREHENSIVE INCOME FOR THE YEAR 510,939 489,643



Statements of Changes in EquityFor the years ended December 31, 2014 and 2013


Sharecapital

(Note 21)Share

premium

Retainedearnings(Note 21)

Accumulatedother

comprehensiveincome (loss)

(Note 21)

Stock optionsreserve

(Note 21) TotalBalances at January 1, 2013 350,000 425,972 1,475,140 95,913 - 2,347,025Comprehensive income

Net income for the year - - 611,583 - - 611,583Other comprehensive loss for the year - - - (121,940) - (121,940)

Total comprehensive income (loss) for the year - - 611,583 (121,940) - 489,643Transactions with owners

Cash dividends - - (569,730) - - (569,730)Balances at December 31, 2013 350,000 425,972 1,516,993 (26,027) - 2,266,938Comprehensive income

Net income for the year - - 481,406 - - 481,406Other comprehensive income for the year - - - 29,533 - 29,533

Total comprehensive income for the year - - 481,406 29,533 - 510,939Transactions with owners

Cash dividends - - (611,590) - - (611,590)Executive stock plan amortization - - - - 146 146

Total transactions with owners - - (611,590) - 146 (611,444)Balances at December 31, 2014 350,000 425,972 1,386,809 3,506 146 2,166,433



Statements of Cash FlowsFor the years ended December 31, 2014 and 2013


Notes 2014 2013CASH FLOWS FROM OPERATING ACTIVITIES

Cash generated from operations 22 164,100 786,643Interest received 4,893 2,493Interest paid (2,595) (2,672)Corporate income taxes paid (127,823) (158,703)Final income taxes paid (546) (420)Net cash from operating activities 38,029 627,341

CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of:

Held-to-maturity financial assets 8 (192,225) -Available-for-sale financial assets 9 (6,696,763) (4,391,611)Property and equipment 12 (43,787) (26,951)Software costs and other assets 13 (1,465) (5,367)

Proceeds from:Collection of loans and other receivables 2,189 5,188Maturities of held-to-maturity financial assets 8 54,250 531,660Disposals of available-for-sale financial assets 9 6,076,313 4,715,503Disposals of property and equipment and investment

property 14 495 44,913Interest received 113,953 179,726Dividends received 9 9,061 10,784Final income taxes paid (28,793) (34,541)

Net cash (used in) from investing activities (706,772) 1,029,304CASH FLOW USED IN FINANCING ACTIVITIES

Payment of cash dividends 21 (611,590) (569,730)NET (DECREASE) INCREASE IN CASH AND CASH

EQUIVALENTS (1,280,333) 1,086,915CASH AND CASH EQUIVALENTS

January 1 1,701,191 594,074Effect of exchange rate changes on cash and cash

equivalents 8,434 20,202December 31 429,292 1,701,191



Notes to Financial StatementsAs at and for the years ended December 31, 2014 and 2013(In the notes, all amounts are shown in thousands of Philippine Peso unless otherwise stated)

Note 1 - General information

BPI/MS Insurance Corporation (the “Company”) was incorporated and registered with the Securitiesand Exchange Commission (SEC) primarily to carry on and engage in the business of insurance,reinsurance, bonding, fidelity and guaranty except life insurance.

The Company’s immediate and ultimate parent company is the Bank of the Philippine Islands (BPI orParent Company), a local universal bank listed in the Philippine Stock Exchange, Inc., with a 51.4%ownership. The other 48.5% is owned by MSIG Holdings (Asia) PTE. Ltd. (MSIG), a corporationregistered in Singapore.

The Company’s registered office address, which is also its principal place of business, is at the 11th, 14thand 16th Floors of Ayala Life-FGU Center, 6811 Ayala Avenue, Makati City.

These financial statements were approved and authorized for issuance by the Company’s Board ofDirectors on March 5, 2015.

Note 2 - Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set outbelow. These policies have been consistently applied to both years presented, unless otherwise stated.

2.1 Basis of preparation

The financial statements of the Company have been prepared in accordance with Philippine FinancialReporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, PhilippineAccounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC),Standing Interpretations Committee (SIC) and International Financial Reporting InterpretationsCommittee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC)and adopted by the SEC.

The financial statements have been prepared under the historical cost convention, as modified by therevaluation of available-for-sale (AFS) financial assets.

The preparation of financial statements in conformity with PFRS requires the use of certain criticalaccounting estimates. It also requires management to exercise its judgment in the process of applyingthe Company’s accounting policies. The areas involving a higher degree of judgment or complexity, orareas where assumptions and estimates are significant to the financial statements are disclosed inNote 4.

(2)

2.2 Changes in accounting policy and disclosures

(a) New interpretation and amended standards adopted by the Company

The following standards have been adopted by the Company effective January 1, 2014:

Amendment to PAS 32, ‘Financial instruments: Presentation’ on offsetting financial assets andfinancial liabilities. This amendment clarifies that the right of set-off must not be contingent on afuture event. It must also be legally enforceable for all counterparties in the normal course ofbusiness, as well as in the event of default, insolvency or bankruptcy. The amendment alsoconsiders settlement mechanisms. The amendment did not have a significant effect on theCompany’s financial statements.

Amendment to PAS 36, ‘Impairment of assets’, on the recoverable amount disclosures for non-financial assets. This amendment removed certain disclosures of the recoverable amount of cashgenerating units (CGUs) which had been included in PAS 36 by the issue of PFRS 13, Fair ValueMeasurement. The amendment did not have a significant effect on the Company’s financialstatements.

Philippine Interpretation IFRIC 21, ‘Levies’, sets out the accounting for an obligation to pay a levyif that liability is within the scope of PAS 37, ‘Provisions’. The interpretation addresses what theobligating event is that gives rise to pay a levy and when a liability should be recognized. Theinterpretation did not have a significant effect on the Company’s financial statements.

Other standards, amendments and interpretations which are effective for the financial year beginningon January 1, 2014 are not considered relevant and significant to the Company.

(b) New standards, amendments and interpretations not yet adopted

A number of new standards, amendments to standards and interpretations are effective for annualperiods beginning after January 1, 2014, and have not been applied in preparing these financialstatements. The relevant standards applicable to the Company are set out below:

PFRS 9, ‘Financial Instruments’. This new standard addresses the classification, measurement andrecognition of financial assets and financial liabilities. The complete version of PFRS 9 was issuedin July 2014. It replaces the guidance in PAS 39 that relates to the classification and measurementof financial instruments. PFRS 9 retains but simplifies the mixed measurement model andestablishes three primary measurement categories for financial assets: amortized cost, fair valuethrough other comprehensive income and fair value through profit or loss. The basis ofclassification depends on the entity’s business model and the contractual cash flow characteristicsof the financial asset. Investments in equity instruments are required to be measured at fair valuethrough profit or loss with the irrevocable option at inception to present changes in fair value inother comprehensive income with no recycling to profit or loss. There is now a new expected creditlosses model that replaces the incurred loss impairment model used in PAS 39. For financialliabilities, there were no changes to classification and measurement except for the recognition ofchanges in own credit risk in other comprehensive income for liabilities designated at fair valuethrough profit or loss. PFRS 9 relaxes the requirements for hedge effectiveness by replacing thebright line hedge effectiveness tests. It requires an economic relationship between the hedged itemand hedging instrument and for the ‘hedged ratio’ to be the same as the one management actuallyuse for risk management purposes. Contemporaneous documentation is still required but isdifferent to that currently prepared under PAS 39.

(3)

The standard is effective for accounting periods beginning on or after January 1, 2018. Earlyadoption is permitted. The Company is in the process of assessing the full impact of PFRS 9 atreporting date. Based on the initial assessment, the standard is not expected to have a significantimpact on the Company’s financial statements.

PFRS 15, ‘Revenue from contracts with customers’. This new standard deals with revenuerecognition and establishes principles for reporting useful information to users of financialstatements about the nature, amount, timing and uncertainty of revenue and cash flows arisingfrom an entity’s contracts with customers. Revenue is recognized when a customer obtains controlof a good or service and thus has the ability to direct the use and obtain the benefits from the goodor service. The standard replaces PAS 18 ‘Revenue’ and PAS 11 ‘Construction contracts’ and relatedinterpretations. The standard is effective for annual periods beginning on or after January 1, 2017and earlier application is permitted. The Company is in the process of assessing the full impact ofPFRS 15 at reporting date. Based on the initial assessment, the standard is not expected to have asignificant impact on the Company’s financial statements.

There are no other standards, amendments or interpretations that are not yet effective that have amaterial impact on the Company.

2.3 Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, deposits held at call with banks and othershort-term highly liquid investments with maturities of three months or less from the date ofacquisition and that are subject to insignificant risk of changes in value.

2.4 Financial assets

2.4.1 Classification

The Company classifies its financial assets in the following categories: (a) financial assets at fair valuethrough profit or loss, (b) loans and receivables, (c) held-to-maturity financial assets, and(d) available-for-sale financial assets. Management determines the classification of its financial assetsat initial recognition.

(a) Financial assets at fair value through profit or loss

Financial assets at fair value through profit or loss are classified as held for trading if they are acquiredprincipally for the purpose of selling in the near term or they are part of a portfolio of identifiedfinancial instruments that are managed together and for which there is evidence of a recent actualpattern of short-term profit taking. The Company has no investments classified at fair value throughprofit or loss as at December 31, 2014 and 2013.

(b) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that:(i) are not quoted in an active market, (ii) with no intention of being traded, and (iii) that are notdesignated as available-for-sale. The Company’s loans and receivables comprise cash and cashequivalents, insurance balances receivable, other receivables, and investment income due and accrued.

(4)

(c) Held-to-maturity financial assets

Held-to-maturity investments are non-derivative financial assets with fixed or determinable paymentsand fixed maturities that the Company’s management has the positive intention and ability to hold tomaturity. If the Company were to sell other than an insignificant amount of held-to-maturity financialassets, the entire category would be tainted and reclassified as available-for-sale.

(d) Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in thiscategory or not classified in any of the other categories.

2.4.2 Recognition and measurement

Regular-way purchases and sales of held-to-maturity and available-for-sale financial assets arerecognized on trade-date, the date on which the Company commits to purchase or sell the asset. Loansand receivables are recognized upon origination when cash is advanced to the borrowers. Financialassets are initially recognized at fair value plus transaction costs that are directly attributable to theacquisition for all financial assets not carried at fair value through profit or loss.

Available-for-sale financial assets are subsequently carried at fair value. Loans and receivables andheld-to-maturity financial assets are subsequently carried at amortized cost using the effective interestmethod. Gains and losses arising from changes in the fair value of available-for-sale financial assets arerecognized directly in other comprehensive income, until the financial asset is derecognized orimpaired at which time the cumulative gain or loss previously recognized in other comprehensiveincome should be recognized in profit or loss.

Interest on available-for-sale financial assets calculated using the effective interest method isrecognized in profit or loss as part of interest income. Dividends on available-for-sale equityinstruments are recognized in profit or loss as part of dividend income when the Company’s right toreceive payment is established.

2.4.3 Financial asset reclassification

The Company may choose to reclassify financial assets that would meet the definition of loans andreceivables or held-to-maturity out of the available-for-sale category if the Company has the intentionand ability to hold these financial assets for the foreseeable future or until maturity at the date ofreclassification.

Reclassifications are made at fair value as at the reclassification date. Fair value becomes the new costor amortized cost as applicable, and no reversals of fair value gains or losses recorded beforereclassification date are subsequently made until the financial assets are sold or impaired. Effectiveinterest rates for financial assets reclassified to loans and receivables and held-to-maturity categoriesare determined at the reclassification date. Further increases in estimates of cash flows adjust effectiveinterest rates prospectively.

(5)

2.4.4 Derecognition of financial assets

Financial assets are derecognized when the contractual right to receive the cash flows from these assetshas ceased to exist or the assets have been transferred and substantially all the risks and rewards ofownership of the assets are also transferred (that is, if substantially all the risks and rewards have notbeen transferred, the Company tests control to ensure that continuing involvement on the basis of anyretained powers of control does not prevent derecognition).

2.5 Impairment of financial assets

(a) Assets carried at amortized cost

The Company assesses at each reporting date whether there is objective evidence that a financial assetor a group of financial assets is impaired. A financial asset or a group of financial assets is impairedand impairment losses are incurred only if there is objective evidence of impairment as a result of oneor more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event(or events) has an impact on the estimated future cash flows of the financial asset or group of financialassets that can be reliably estimated.

The criteria that the Company uses to determine if there is an objective evidence of impairmentinclude:

Delinquency in contractual payments of principal or interest; Cash flow difficulties experienced by the borrower (for example, equity ratio, net income

percentage of sales);

Breach of loan covenants or conditions; Initiation of bankruptcy proceedings; Deterioration of the borrower’s competitive position; and Deterioration in the value of collateral.

The Company first assesses whether objective evidence of impairment exists individually for financialassets that are individually significant, and collectively for financial assets that are not individuallysignificant. If the Company determines that no objective evidence of impairment exists for anindividually assessed financial asset, whether significant or not, it includes the asset in a group offinancial assets with similar credit risk characteristics and collectively assesses them for impairment.Financial assets that are individually assessed for impairment and for which an impairment loss is orcontinues to be recognized are not included in a collective assessment of impairment.

The amount of loss is measured as the difference between the financial asset’s carrying amount and thepresent value of estimated future cash flows (excluding future credit losses that have not been incurred)discounted at the asset’s original effective interest rate (recoverable amount). The calculation ofrecoverable amount of a collateralized financial asset reflects the cash flows that may result fromforeclosure less costs of obtaining and selling the collateral, whether or not foreclosure is probable. If aloan or held-to-maturity financial asset has a variable interest rate, the discount rate for measuring anyimpairment loss is the current effective interest rate determined under the contract. Impairment loss isrecognized in profit or loss and the carrying amount of the asset is reduced through the use of anallowance account.

(6)

For purposes of a collective evaluation of impairment, financial assets are grouped on the basis ofsimilar credit risk characteristics (i.e., on the basis of the Company’s grading process that considersasset type, industry, geographical location, collateral type, past-due status and other relevant factors).Those characteristics are relevant to the estimation of future cash flows for groups of such assets bybeing indicative of the debtors’ ability to pay all amounts due according to the contractual terms of theassets being evaluated.

Loans and receivables are written-off in the year determined to be uncollectible. Loans and receivablesare determined to be uncollectible after exerting effort to collect the accounts and upon approval by theCompany’s Board of Directors.

If in a subsequent period, the amount of impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognized (such as an improvement in thedebtor’s credit rating), the previously recognized impairment loss is reversed by adjusting theallowance account. The amount of reversal is recognized in profit or loss.

(b) Assets classified as available-for-sale

The Company assesses at each reporting date whether there is evidence that a debt security classified asavailable-for-sale is impaired. For an equity security classified as available-for-sale, a significant orprolonged decline in the fair value below cost is considered in determining whether the securities areimpaired. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Companytreats ‘significant’ generally as 20% or more and ‘prolonged’ as greater than twelve (12) months.The cumulative loss (difference between the acquisition cost and the current fair value less anyimpairment loss on that financial asset previously recognized in profit or loss) is removed from othercomprehensive income and recognized in profit or loss when the asset is determined to be impaired.Impairment losses recognized in profit or loss on equity instruments are not reversed through profit orloss. If in a subsequent period, the fair value of a debt instrument classified as available-for-saleincreases and the increase can be objectively related to an event occurring after the impairment losswas recognized in profit or loss, the impairment loss is reversed through profit or loss. Reversal ofimpairment losses recognized previously on equity instruments is made directly to othercomprehensive income.

(7)

2.6 Financial liabilities

The Company classifies its financial liabilities as financial liabilities at amortized cost. Financialliabilities measured at amortized cost include cash collateral, accounts payable and accrued expenses(included in Accounts payable and accrued expenses in the statement of financial position), due toreinsurers and ceding companies, and funds held for reinsurers.

Financial liabilities are initially measured at fair value plus transaction costs. It is subsequentlymeasured at amortized cost using the effective interest method.

Financial liabilities are derecognized when they have been redeemed or otherwise extinguished.

2.7 Offsetting of financial assets and liabilities

Financial assets and liabilities are offset and the net amount reported in the statement of financialposition when there is a legally enforceable right to offset the recognized amounts and there is anintention to settle on a net basis, or realize the asset and settle the liability simultaneously.

2.8 Determination of fair value of financial instruments

The fair values of quoted investments are based on current market prices. If the market for a financialasset is not active (and for unlisted securities), the Company establishes fair value by using valuationtechniques. These include the use of recent arm’s length transactions, reference to other instrumentsthat are substantially the same, discounted cash flow analysis, and option pricing models makingmaximum use of market inputs and relying as little as possible on entity-specific inputs.

A financial instrument is regarded as quoted in an active market if quoted prices are readily andregularly available from an exchange, dealer, broker, industry group, pricing service or regulatoryagency, and those prices represent actual and regularly occurring market transactions on an arm’slength basis. If the above criteria are not met, the market is regarded as being inactive. Indicationsthat a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offerspread or there are few recent transactions. For all other financial instruments, fair value isdetermined using valuation technique and observable market data.

In cases when the fair value of unlisted equity instruments cannot be determined reliably, theinstruments are carried at cost less impairment. The fair value for loans and advances, as well asliabilities to customers, is determined using a present value model on the basis of contractually agreedcash flows, taking into account credit quality, liquidity and costs.

2.9 Investment in an associate

An associate is an entity over which the Company has significant influence but not control, generallyaccompanying a shareholding of between 20% and 50% of the voting rights.

Investment in an associate (included in Other assets) in the Company’s financial statements isaccounted for using the cost method. Under this method, income from investment is recognized inprofit or loss only to the extent that the investor receives distributions from accumulated profits of theinvestee arising after the acquisition date. Distributions received in excess of such profits are regardedas a recovery of investment and are recognized as a reduction of the cost of the investment. Investmentin an associate is also subject to impairment assessment.

Investment in an associate is derecognized when the shareholding interest is sold.

(8)

2.10 Property and equipment

Property and equipment are stated at historical cost less accumulated depreciation, amortization, andimpairment, if any. Historical cost includes expenditure that is directly attributable to the acquisition ofthe asset.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, asappropriate, only when it is probable that future economic benefits associated with the item will flow tothe Company and the cost of the item can be measured reliably. All other repairs and maintenance arecharged to profit or loss during the year in which they are incurred.

Depreciation is calculated using the straight-line method to allocate the cost or residual values over theestimated useful lives of the assets, as follows:

Condominium units 25 yearsEDP equipment 5 yearsFurniture, fixtures and office equipment 5 yearsLeasehold improvements 5 years or lease term, whichever is shorterTransportation equipment 5 years

The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each reportingdate. Assets are reviewed for impairment whenever events or changes in circumstances indicate thatthe carrying amount may not be recoverable.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’scarrying amount is greater than its estimated recoverable amount. The recoverable amount is thehigher of an asset’s fair value less costs to sell and value in use.

An item of property and equipment is derecognized upon disposal or when no future economic benefitsare expected to arise from the continued use of the asset. Any gain or loss arising from derecognition ofthe asset (calculated as the difference between net disposal proceeds and the carrying amount of theitem) is included in profit or loss in the year the item is derecognized.

2.11 Investment property

Property that is held either to earn rental or for capital appreciation or for both and that is notsignificantly occupied by the Company is classified as investment property (included in Other assets).

Investment property comprises land held for undetermined future use. Investment property is measuredinitially at cost, including transaction costs. Subsequent to initial recognition, investment property isstated at cost less accumulated impairment losses, if any. Impairment test is conducted when there isan indication that the carrying amount of the asset may not be recovered. An impairment loss isrecognized for the amount by which the property’s carrying amount exceeds its recoverable amount,which is the higher of the property’s fair value less costs to sell and value in use.

Investment property is derecognized when it has been disposed of or when permanently withdrawnfrom use and no future benefit is expected from its disposal. Any gain or loss on the retirement ordisposal of investment properties is recognized in profit or loss in the year of derecognition.

(9)

2.12 Software costs

Software costs are capitalized on the basis of the costs incurred to acquire and bring to use the specificsoftware. These costs are amortized over their estimated useful life of five years.

Costs associated with maintaining computer software programs are recognized as an expense as incurred.Development costs previously recognized as an expense are not recognized as an asset in a subsequentperiod.

Software costs are derecognized upon disposal or when no future economic benefits are expected fromits use or disposal.

2.13 Impairment of non-financial assets

Assets that have an indefinite useful life, for example land, are not subject to amortization and aretested annually for impairment. Assets that have definite useful lives are subject to depreciation oramortization and are reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. An impairment loss is recognized for the amount bywhich the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higherof an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets aregrouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal ofimpairment at each reporting date.

2.14 Classification of insurance and investment contracts

The Company issues contracts that transfer insurance risk or financial risk or both.

Insurance contracts are contracts that transfer significant insurance risk. Such risks include thepossibility of having to pay benefits on the occurrence of an insured event. The Company may alsotransfer insurance risk in insurance contracts through its reinsurance arrangements, to hedge against agreater possibility of claims occurring than expected. As a general guideline, the Company defines assignificant insurance risk the possibility of having to pay benefits on the occurrence of an insured eventthat are at least 10% more than the benefits payable if the insured event did not occur.

Investment contracts are those contracts that transfer financial risk with no significant insurance risk.The Company has no outstanding investment contracts for the years 2014 and 2013.

2.15 Insurance contracts

2.15.1 Recognition and measurement

Short-term insurance contracts of the Company include property and casualty insurance contracts.

For all these contracts, premiums are recognized as revenue (premiums earned) as follows:

(a) Direct business

Gross premiums written are recognized at the inception date of the risks underwritten and are earnedover the period of cover in accordance with the incidence of risk using the 24th method. The portion ofthe gross premiums written that relates to the unexpired periods of the policies at year-end is referredto as reserve for unearned premiums in the liability section of the statement of financial position.

(10)

(b) Inward reinsurance business

Gross premiums written are recognized based on the date of notification by the ceding companies(generally one month after the inception date of the underlying risks underwritten) and are earned overthe period of cover in accordance with the incidence of risk using the 24th method. The portion of thegross premiums written that relates to the unexpired periods of the policies at year-end is referred to asreserve for unearned premiums in the liability section of the statement of financial position.

Claims and loss adjustment expenses are charged against profit or loss as incurred based on theestimated liability for compensation owed to contract holders or third parties damaged by the contractholders. They include direct and indirect claims settlement costs and arise from events that haveoccurred up to the reporting date even if they have not yet been reported to the Company. TheCompany does not discount its liabilities for unpaid claims. Liabilities for unpaid claim costs includingthose for incurred but not reported (IBNR) are estimated and accrued. The liabilities for unpaid claimsare based on the estimated ultimate cost of settling the claims using the input of assessment forindividual cases reported to the Company. The method of determining such estimates and establishingreserves is continually reviewed and updated. Changes in estimates of claims costs resulting from thecontinuous review process and differences between estimates and payments for claims are recognizedin profit or loss in the year in which the estimates are changed or payments are made. Estimatedrecoveries on settled and unsettled claims are evaluated in terms of estimated realizable values of thesalvage recoverable and deducted from the liability for unpaid claims. Outstanding claims and IBNRare presented in the liability section of the statement of financial position as part of reserve foroutstanding losses.

2.15.2 Reinsurance commission

Reinsurance commission is initially deferred upon acceptance of the premium cession by reinsurersand earned in proportion to premium revenue recognized.

2.15.3 Acquisition costs

Costs that vary with and are primarily related to the acquisition of new and renewal insurance contractssuch as commissions are deferred and charged to expense in proportion to premium revenuerecognized. Unamortized acquisition costs are shown in the statement of financial position as deferredacquisition cost (DAC).

Reinsurance commissions are deferred and deducted from the applicable DAC, subject to the sameamortization method as the related acquisition costs.

2.15.4 Liability adequacy test

At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contractliabilities net of related DAC. In performing these tests, current best estimates of future contractual cashflows and claims handling and administration expenses, as well as investment income from the assetsbacking such liabilities, are used. Any deficiency is immediately charged to profit or loss initially bywriting-off DAC and by subsequently establishing a provision for losses arising from liability adequacytests (the unexpired provision).

Any DAC written off as a result of this test cannot be subsequently reinstated.

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2.15.5 Reinsurance contracts held

Contracts entered by the Company with reinsurers which compensate the Company for losses on one ormore contracts issued and meet the classification requirements for insurance contracts are classified asreinsurance contracts held. Insurance contracts entered into by the Company under which the contractholder is another insurer (inward reinsurance) are classified as insurance contracts. Contracts that donot meet these classification requirements are classified as financial assets.

The benefits to which the Company is entitled under its reinsurance contracts held are recognized asreinsurance assets. These assets consist of due from reinsurers (classified within insurance balancesreceivable) and reinsurers’ share in insurance liabilities. Amounts recoverable from or due toreinsurers are measured consistently with the amounts associated with the reinsured insurancecontracts and in accordance with the terms of each reinsurance contract. Reinsurance liabilities areprimarily premiums payable for reinsurance contracts and are recognized as an expense uponrecognition of related premiums.

The Company assesses its reinsurance assets for impairment annually. If there is an objective evidencethat the reinsurance asset is impaired, the Company reduces the carrying amount of the reinsuranceasset to its recoverable amount and recognizes the impairment loss in profit or loss. The Companygathers the objective evidence that a reinsurance asset is impaired using the same process adopted forfinancial assets held at amortized cost. The impairment loss is also calculated following the samemethod used for these financial assets. These processes are described in Note 2.5.

2.15.6 Receivables and payables related to insurance contracts

Receivables and payables are recognized when the right to receive payment is established or when theobligation becomes due. These include amounts due to and from agents, brokers and insurance contractholders.

If there is an objective evidence that the insurance receivable is impaired, the Company reduces thecarrying amount of the insurance receivable accordingly and recognizes that impairment loss in profitor loss. The Company gathers the objective evidence that an insurance receivable is impaired using thesame process adopted for loans and receivables. The impairment loss is also calculated under the samemethod used for these financial assets. These processes are described in Note 2.5.

2.16 Interest income and expense

Interest income on loans and investments, and interest expense, are recognized in profit or loss for allinterest-bearing financial instruments using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or afinancial liability and of allocating the interest income or interest expense over the relevant period. Theeffective interest rate is the rate that exactly discounts estimated future cash payments or receiptsthrough the expected life of the financial instrument or when appropriate, a shorter period to the netcarrying amount of the financial asset or financial liability.

When calculating the effective interest rate, the Company estimates cash flows considering allcontractual terms of the financial instrument but does not consider future credit losses. Thecalculation includes all fees paid or received between parties to the contract that are an integral part ofthe effective interest rate, transaction costs and all other premiums or discounts.

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Once a financial asset or a group of similar financial assets has been written down as a result of animpairment loss, interest income is recognized using the rate of interest used to discount future cashflows for the purpose of measuring impairment loss.

2.17 Dividend income

Dividend income is recognized in profit or loss when the right to receive payment is established.

2.18 Foreign currency transactions and translation

(a) Functional and presentation currency

Items in the financial statements are measured using the currency of the primary economicenvironment in which the Company operates (the “functional currency”). The financial statements arepresented in Philippine Peso, which is the Company’s functional and presentation currency.

(b) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange ratesprevailing at the dates of the transactions. Foreign exchange gains and losses resulting from thesettlement of such transactions and from the translation at year-end exchange rates of monetary assetsand liabilities denominated in foreign currencies are recognized in profit or loss. Non-monetary itemsmeasured at historical cost denominated in a foreign currency are translated at the exchange rate as atthe date of initial recognition. Non-monetary items in a foreign currency that are measured at fairvalue are translated using the exchange rate at the date when the fair value is determined.

Changes in the fair value of monetary securities denominated in foreign currency and classified asavailable-for-sale are analyzed between translation differences resulting from changes in the amortizedcost of the security, and other changes in the carrying amount of the security. Translation differencesare recognized in profit or loss, and other changes in carrying amount are recognized in othercomprehensive income.

Translation differences on non-monetary financial instruments, such as equities classified asavailable-for-sale, are included in other comprehensive income.

2.19 Provisions

Provisions are recognized when all of the following conditions are met: (i) the Company has a presentlegal or constructive obligation as a result of past events; (ii) it is probable that an outflow of resourceswill be required to settle the obligation; and (iii) the amount has been reliably estimated. Provisionsare not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required insettlement is determined by considering the class of obligations as a whole. A provision is recognizedeven if the likelihood of an outflow with respect to any one item included in the same class ofobligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle theobligation using a pre-tax rate that reflects the current market assessment of the time value of money andthe risk specific to the obligation. The increase in provision due to the passage of time is recognized asinterest expense.

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2.20 Income taxes

(a) Current income tax

Income tax payable is calculated on the basis of the applicable tax law and is recognized as an expense forthe year except to the extent that the current tax is related to items (for example, current tax onavailable-for-sale financial assets) that are charged or credited in other comprehensive income or directlyto equity.

Interest income from cash in banks and investments are subject to final withholding tax. Such incomeis presented at its gross amounts and the tax paid or withheld is included in Provision for income tax.

(b) Deferred income tax

Deferred income tax is provided in full on temporary differences arising between the tax bases of assetsand liabilities and their carrying amounts in the financial statements. The deferred income tax is notaccounted for if it arises from initial recognition of an asset or liability in a transaction, other than abusiness combination, that at the time of the transaction affects neither accounting nor taxable profitor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted orsubstantively enacted by the reporting date and are expected to apply when the related deferred incometax asset is realized or the deferred income tax liability is settled.

Deferred income tax assets are recognized for all deductible temporary differences, carry-forward ofunused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimumcorporate income tax or MCIT) to the extent that it is probable that future taxable profit will beavailable against which the temporary differences can be utilized. Deferred income tax liabilities arerecognized in full for all taxable temporary differences.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offsetcurrent tax assets against current tax liabilities and when the deferred income tax assets and liabilitiesrelate to income taxes levied by the same taxation authority where there is an intention to settle thebalances on a net basis.

The Company reassesses at each reporting date the need to recognize a previously unrecognized deferredincome tax asset.

Deferred income tax expense or credit included in Provision for income tax is recognized for thechanges during the year in the deferred income tax assets and liabilities.

2.21 Employee benefits

(a) Pension obligations

The Company has a trustee-administered, non-contributory defined benefit plan covering all qualifiedofficers and employees. A defined benefit plan is a pension plan that defines an amount of pensionbenefit that an employee will receive on retirement, usually dependent on one or more factors such asage, years of service and compensation.

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The liability recognized in the statement of financial position in respect of defined benefit pension planis the present value of the defined benefit obligation at the reporting date less the fair value of planassets. The defined benefit obligation is calculated annually by independent actuaries using theprojected unit credit method. The present value of the defined benefit obligation is determined bydiscounting the estimated future cash outflows using interest rates of high-quality government bondsthat are denominated in the currency in which the benefits will be paid and have terms to maturity thatapproximate the terms of the related pension obligation.

Where the calculation results in a benefit to the Company, the recognized asset is limited to the lower ofthe surplus in the defined benefit plan and the present value of any economic benefits available in theform of refunds from the plan or reductions in future contributions to the plan.

Current service costs and net interest on the net defined benefit liability (asset) are recognized in profitor loss. Remeasurements of the net defined benefit liability (asset), including the actuarial gains andlosses arising from experience adjustments and changes in actuarial assumptions, are recognized inother comprehensive income. Remeasurements of the net defined benefit liability (asset) recognized inother comprehensive income are not reclassified to profit or loss in a subsequent period.

Past-service costs are recognized immediately in profit or loss.

(b) Profit-sharing and bonus plans

The Company recognizes a liability and an expense for bonuses and profit-sharing based on a formulathat takes into consideration the profit attributable to the Company’s shareholders after certainadjustments. The Company recognizes a provision where contractually obliged or where there is a pastpractice that has created a constructive obligation.

(c) Share-based compensation

The Company’s management awards high-performing employees bonuses in the form of options topurchase BPI’s common shares, from time to time, on a discretionary basis. The options are subject tocertain service vesting condition, and their fair value is recognized as an employee benefits expensewith a corresponding increase in reserves over the vesting period.

2.22 Share capital; Share premium

Common shares are classified as share capital.

Share premium includes the consideration received in excess of par value on the issuance of sharecapital.

2.23 Cash and stock dividends

Cash and stock dividends are recorded in the period in which they are approved by the Company’s Boardof Directors and the Insurance Commission (IC).

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2.24 Leases (Company as a lessee)

Leases in which substantially all the risks and rewards of ownership are retained by another party, thelessor, are classified as operating leases. Payments, including prepayments, made under operatingleases (net of any incentives received from the lessor) are charged to profit or loss on a straight-linebasis over the period of the lease.

Refundable deposits paid to the lessor are carried at the present value of the future cash flows using anappropriate discount rate. The difference between the carrying amount and the actual considerationpaid is treated as additional rental incentive which is amortized on a straight-line basis over the term ofthe lease.

2.25 General and administrative expenses

General and administrative expenses are recognized when incurred.

2.26 Related party relationships and transactions

Related party relationships exist when one party has the ability to control, directly, or indirectlythrough one or more intermediaries, the other party or exercises significant influence over the otherparty in making financial and operating decisions. Such relationships also exist between and/or amongentities which are under common control with the reporting enterprise, or between and/or among thereporting enterprise and its key management personnel, directors, or its shareholders. In consideringeach possible related party relationship, attention is directed to the substance of the relationship, andnot merely the legal form.

2.27 Subsequent events (or Events after reporting date)

Post year-end events that provide additional information about the Company’s financial position atreporting date (adjusting events) are reflected in the financial statements. Post year-end events thatare not adjusting events are disclosed in the notes to financial statements when material.

Note 3 - Insurance and financial risk management objectives and policiesand capital management

The Company issues contracts that transfer insurance risk or financial risk or both. This sectionsummarizes these risks and the way the Company manages them.

3.1 Insurance risk

The risk under any one insurance contract is the occurrence of the insured event and the uncertainty ofthe amount of the resulting claim. By the very nature of an insurance contract, this risk is random andtherefore unpredictable. For a portfolio of insurance contracts where the theory of probability isapplied to pricing and provisioning, the principal risk that the Company faces under its insurancecontracts is that the actual claim payments exceed the carrying amount of the insurance liabilities. Thiscould occur because the frequency or severity of claims is greater than estimated. Insurance events arerandom and the actual number and amount of claims will vary from year to year from the estimateestablished using statistical techniques.

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The Company decides on its retention, or the absolute amount it is ready to assume from one event.The retention amount is a function of capital, experience, actuarial study and risk appetite or aversion.The retention amount is for the best type of risk and is further downgraded when the account is lessthan standard. In excess of its retention, the Company arranges reinsurance with reputable andfinancially sound insurance/reinsurance companies.

For event losses like earthquake that can involve several retained amounts, the Company is secured bya reinsurance protection based on the Company’s estimated maximum loss exposure. The sameadheres to the IC's minimum catastrophe cover requirements. Severity is managed through lossprevention programs while frequency is managed through correct pricing.

Summarized below are the aggregate exposures (gross and net of reinsurance) of the Company toearthquake, typhoon and flood arising from the insurance contracts as at December 31:

2014

ZonesEarthquake Typhoon Flood

Gross Retention Gross Retention Gross Retention1 4,655,239 4,100,554 15,269,735 7,763,731 15,076,848 7,570,8442 31,273,153 14,857,025 215,342,564 20,431,450 214,680,471 19,898,4443 3,300 3,300 201,422,903 80,001,149 196,810,757 75,737,4934 187,223 108,772 388,176,222 45,615,224 384,279,551 42,466,7515 114,022,905 70,401,547 2,389,094 2,087,792 2,298,077 2,006,7766 374,117,215 44,619,086 2,204,298 2,133,934 1,900,730 1,830,3667 155,850,350 19,908,211 - - - -8 56,352,306 5,753,567 - - - -9 6,655,862 4,250,496 - - - -

10 62,762,956 1,703,379 - - - -805,880,509 165,705,937 824,804,816 158,033,280 815,046,434 149,510,674

2013

ZonesEarthquake Typhoon Flood

Gross Retention Gross Retention Gross Retention1 3,234,911 2,299,038 10,327,167 6,142,438 10,129,927 5,945,1992 27,656,381 13,684,347 185,809,679 14,854,788 184,877,311 14,338,9693 3,300 3,300 210,581,924 65,010,156 206,101,011 60,873,8304 180,842 102,390 316,873,380 37,071,914 308,937,063 34,675,9915 92,714,718 58,362,606 2,840,656 1,419,331 2,757,947 1,336,6236 311,120,225 36,979,213 1,478,144 1,377,505 1,311,023 1,236,2997 132,206,284 14,921,690 - - - -8 48,486,375 5,230,466 - - - -9 4,116,478 3,161,445 - - - -

10 91,926,607 811,724 - - - -711,646,121 135,556,219 727,910,950 125,876,132 714,114,282 118,406,911

Zones pertain to geographical locations set internally by the Company.

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3.2 Financial risk

The Company is exposed to financial risk through its financial assets, financial liabilities, reinsuranceassets and insurance and reinsurance liabilities. In particular, the key financial risk is that the proceedsfrom its financial assets are not sufficient to fund obligations arising from its insurance contracts.Components of this financial risk include market risk, credit risk and liquidity risk.

The Company maintains a high level of liquid assets for the adequate and prompt servicing of itsinsurance liabilities. The Company's investible funds are managed by BPI's Asset & Management TrustGroup (AMTG). The investments are governed by the investment guidelines approved by the Board ofDirectors and in compliance with the guidelines of the IC. The funds are generally in medium andlong-term instruments, balancing the market risks against the desired yields, with provision forliquidity as defined by the Company. The working capital funds are invested in short-term instrumentswith BPI.

The Company's senior management approves the credit terms to be extended to intermediaries andreinsurance clients, evaluates the quality of receivables and the level of impairment, and decides thecancellation rules and credit and collection policies.

Internal controls are well-defined and compliance of the Company to such is closely monitored.

3.2.1 Foreign exchange risk

The foreign exchange risk is the risk that the value of a financial instrument will fluctuate because ofchanges in foreign exchange rates.

The insurance business of the Company is mostly denominated in local currency. Currency exposuresarise from the holding of monetary assets and liabilities denominated in foreign currencies, mainlydebt securities, bank balances and deposits with financial institutions. The Company minimizes itsexposure to any significant foreign exchange rate risk by generally investing in assets denominated inthe same currency as insurance and reinsurance liabilities.

The details of the Company’s foreign currency denominated assets and liabilities as at December 31are as follows:

2014 2013

US DollarJapanese

Yen US DollarJapanese

YenAssets

Cash and cash equivalentsCash in banks 1,229 31,341 4,465 37,319Time deposits 4,123 - 1,489 -

Available-for-sale financial assets 469 - 375 -5,821 31,341 6,329 37,319

LiabilitiesDue to reinsurers and ceding companies 14,024 3,032 11,318 4,904Net (liabilities) assets (8,203) 28,309 (4,989) 32,415Peso equivalent (366,838) 10,514 (221,487) 13,747

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The exchange rates of one unit of US Dollar and Japanese Yen into Philippine Peso as at December 31are as follows:

2014 2013US Dollar 44.720 44.395Japanese Yen 0.3714 0.4241

Unrealized foreign exchange gain, net, recognized in the statement of income for the year endedDecember 31, 2014 amounts to P9 million (2013 - P4 million).

The table below presents the impact of possible movements of Philippine Peso against the US Dollarand Japanese Yen, with all other variables held constant, on the Company’s income after tax. There isno impact on the Company’s equity other than those already affecting income after tax.

At December 31, 2014

Change inexchange

rate

Impact onincomeafter tax

US Dollar +4% (10,271)US Dollar -4% 10,271Japanese Yen +9% 662Japanese Yen -9% (662)

At December 31, 2013

Change inexchange

rate

Impact onincomeafter tax

US Dollar +5% (7,752)US Dollar -5% 7,752Japanese Yen +14% 1,347Japanese Yen -14% (1,347)

The reasonably possible movement in foreign currency exchange rates is based on projection by theCompany’s investment manager using year-on-year historical experience.

3.2.2 Interest rate risk

Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because ofchanges in market interest rate. Interest rate risk is managed by targeting a desired return, which isreviewed periodically, based on the Company’s long-term view on interest rates. Strict investmentguidelines, as approved by the AMTG and the IC, are in place and reviewed regularly to provide thegeneral direction for the investment funds and to monitor the risk undertaken.

The Company’s policy is to pursue a stable return on investment in order to maintain solid solvency.Priority is given to safety and liquidity as these assets are mainly for payment of insurance claims.

The Company’s interest rate risk arises primarily from investments in government securities classifiedas available-for-sale.

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On the assumption that the interest rate had increased/decreased by 100 basis points atDecember 31, 2014 and 2013, fair value reserve is expected to increase by P95 million(2013 - P50 million) or decrease by P111 million (2013 - P57 million) as a result of changes in the fairvalue of available-for-sale debt financial assets. The assumptions are based on the reasonable possibleshift of interest rate as determined by management based on historical year-on-year movements ofsimilar instruments.

To minimize the interest rate risk, the Company does not pre-terminate its investments before theirdue date. It manages its working capital to ensure that funds are available when a liability becomesdue.

3.2.3 Price risk

The Company is exposed to price risk because of equity investments held by the Company and classifiedin the statement of financial position as available-for-sale.

To minimize the price risk exposure in equity securities, the Company has put in place a loss cut policyin which the fund manager shall provide the Company’s Board of Directors an update andrecommendation should the market value of an investment fall to less than 85% of the acquisition costof any share.

The analysis below presents the impact of reasonable possible movements in the Philippine StockExchange Index (PSEi) and the net asset value per share (NAVps) of existing investments in mutualfunds on the Company’s fair value reserve as at December 31:

2014Assumedvolatility

Impact onequity

PSEi +12% 9,253PSEi -12% (9,253)NAVps of Mutual funds +2% 1,241NAVps of Mutual funds -2% (1,241)

2013Assumedvolatility

Impact onequity

PSEi +22% 4PSEi -22% (4)NAVps of Mutual funds +19% 3NAVps of Mutual funds -19% (3)

The assumed volatility in the PSEi is based on the historical year-on-year movements of the PSEi. Theassumed volatility in NAVps on existing investments in mutual funds is based on the projectedmovement in the first quarter of the succeeding year. The assumed volatilities are consistent with theassumption that all the variables are held constant and all the Company’s listed equity instruments andinvestments in mutual funds moved according to the historical correlation with the stock index andNAVps, respectively.

3.2.4 Credit risk

Credit risk represents the loss that would be recognized if counterparties to reinsurance, investment inavailable-for-sale and held-to-maturity debt securities and insurance and reinsurance transactions areunable or unwilling to fulfill their obligations.

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(i) Credit risk management, risk limit and mitigation policies

(a) Reinsurance receivable balances

Reinsurance is used to manage insurance risks. This does not, however, discharge the Company’sliability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Company remainsliable for the payment to the policyholder. The creditworthiness of reinsurers is considered on anannual basis by reviewing their financial strength prior to finalization of any contract.

The Company restricts its exposure to credit losses from its reinsurance business by entering intomaster netting arrangements with counterparties. Master netting arrangements do not generally resultin an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis.However, the credit risk associated with favorable contracts (asset position) is reduced by a masternetting arrangement to the extent that if a default occurs, all amounts with the counterparty areterminated and settled on a net basis. The Company accredits its reinsurers and sets a limit as to whatcan be reinsured with such reinsurance company. The minimum rating allowed for a reinsurancecounterparty is A- based on Standard & Poor’s (S&P) rating. The reinsurance treaties and theaccreditation of reinsurers require the approval of the Company’s Board of Directors.

The credit risk arising from insurance operations is closely monitored by the Collections Unit ofFinance Group on an ongoing basis.

(b) Available-for-sale debt instruments, held-to-maturity financial assets and cash in banks

One of the Company’s primary investment objectives is to seek the preservation of its portfolio bymitigating the credit risk which is the risk of loss due to failure of the issuer to make good on itsobligation when maturity becomes due. This is mitigated by investing in safe securities anddiversifying its investment portfolio so that the failure of any one issuer would not materially affect thecash flow of the Company. Within the guidelines provided by the IC, the AMTG ensures that theCompany invests in allowable categories of investment instruments and within the provided limitationas to the percentage of the portfolio that can be invested in a certain category. Presently, the Companyhas substantial investments in government securities.

For time deposits and debt securities, external ratings such as those provided by Philippine RatingServices Corporation (Philratings) and S&P or their equivalent are used by the Company for managingcredit risk exposures. Investments in these deposits and securities are viewed as a way to gain bettercredit quality mix and at the same time, maintain a readily available source to meet fundingrequirements.

(c) Mortgage loans

In measuring credit risk of mortgage loans, the Company considers three components: (i) theprobability of default by the borrower on its contractual obligations; (ii) current exposures to theborrower and its likely future development; and (iii) the likely recovery ratio on the defaultedobligations.

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The Company structures the levels of credit risk it undertakes by placing limits on the amount of riskaccepted in relation to one borrower, or groups of borrowers, and to geographical and industrysegments. Such risks are monitored on a regular basis and subject to an annual or more frequentreview, when considered necessary. Limits on large exposures and credit concentration are approvedby the Board of Directors.

Exposure to credit risk is also managed through regular analysis of the ability of borrowers andpotential borrowers to meet interest and capital repayment obligations and by changing the lendinglimits where appropriate.

The Company also accepts collateral type of loans in order to mitigate credit risk and require securityfrom its borrowers.

(d) Other receivables

The Company’s other receivables consist primarily of employees’ car loan as well as receivable fromagents.

Exposure to credit risk is low considering that the employees’ car loan is amortized monthly throughsalary deduction while agents’ accounts are deducted from the commissions due to them.

(ii) Maximum exposure to credit risk

Credit risk exposures relating to financial assets are as follows:

2014 2013Cash and cash equivalents, excluding cash on hand 429,145 1,701,052Insurance balances receivable 1,746,375 1,129,561Held-to-maturity financial assets 946,173 810,722Available-for-sale financial assets, excluding equity securities and mutual

funds 1,313,879 752,759Other receivables

Mortgage loansEmployees 4,128 4,673Non-employees 437 702

Accounts receivableTrade 1,529 1,943Non-trade 13,232 22,053

Investment income due and accrued 39,401 28,3094,494,299 4,451,774

Allowance for impairment on insurance balances receivable and other receivables amounts toP47 million and P1.5 million, respectively (2013 - P47 million and P1.7 million, respectively).

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(iii) Credit ratings of cash and cash equivalents (excluding cash-on-hand),held-to-maturity and available-for-sale financial assets (excluding equity securities)

The Company deposits its cash balance in universal, commercial and thrift banks to minimize creditrisk exposure. Amounts deposited in these banks as at December 31 are as follows:

2014 2013Universal banks 221,754 1,596,816Commercial banks 205,181 102,100Thrift banks 2,210 2,136

429,145 1,701,052

The table below presents the ratings of debt securities at December 31:

Philratings S&P2014 AAA A+ to A- BBB- Unrated TotalHeld-to-maturity - - 946,173 - 946,173Available-for-sale

Fixed-term debt securities 49,844 - 1,243,081 - 1,292,925US dollar Treasury bonds - - 20,954 - 20,954

49,844 - 2,210,208 - 2,260,052

Philratings S&P2013 AAA A+ to A- BB+ Unrated TotalHeld-to-maturity - - 810,722 - 810,722Available-for-sale

Fixed-term debt securities 97,586 - 638,527 - 736,113US dollar Treasury bonds - - 16,646 - 16,646

97,586 - 1,465,895 - 1,563,481

(iv) Insurance and other receivables and Investment income due and accrued

Insurance and other receivables and investment income due and accrued are summarized as follows:

2014

Neitherpast due

norimpaired

Past due but not impaired

Impaired

Grosscarryingamount

91-180days

181-360days

More than360 days

Insurance balances receivable 1,508,683 148,392 27,065 15,602 46,633 1,746,375Mortgage loans

Employees 3,941 - - - 187 4,128Non-employees - - - - 437 437

Accounts receivableTrade 702 - - - 827 1,529Non-trade 13,232 - - - - 13,232

Investment income due and accrued 39,401 - - - - 39,4011,565,959 148,392 27,065 15,602 48,084 1,805,102

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2013

Neitherpast due

norimpaired

Past due but not impaired

Impaired

Grosscarryingamount

91-180days

181-360days

More than360 days

Insurance balances receivable 914,657 146,395 21,876 - 46,633 1,129,561Mortgage loans

Employees 4,513 - - - 160 4,673Non-employees - - - - 702 702

Accounts receivableTrade 1,116 - - - 827 1,943Non-trade 20,782 138 7 1,126 - 22,053

Investment income due and accrued 28,309 - - - - 28,309969,377 146,533 21,883 1,126 48,322 1,187,241

The Company maintains a normal credit term of 90 days for insurance balances receivable andconsiders past due as those outstanding beyond 90 days.

The details of allowance for impairment are as follows:

2014 2013Insurance balances receivable 46,633 46,633Mortgage loans 624 862Accounts receivable - trade 827 827

48,084 48,322

The total impairment for mortgage loans represents the portfolio provision.

Further information of the impairment allowance is provided in Notes 6 and 10. The credit risk arisingfrom mortgage loans is not significant as this is covered by collateral. For accounts receivable -non-trade, this will be deducted by the Company from the salary of the employees. Majority ofinvestment income due and accrued come from government securities issued and guaranteed by thePhilippine Government.

(v) Repossessed or foreclosed collateral

As at December 31, 2014 and 2013, the Company has possession of collaterals held as security formortgage and other loans with carrying amount of P2 million (2013 - P2 million). The relatedforeclosed collaterals have aggregate fair value of P4 million (2013 - P4 million).

Repossessed properties are sold as soon as practicable and are classified as assets held-for-saleincluded in Other assets in the statement of financial position.

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(vi) Concentrations of risks of financial assets with credit risk exposure

The Company’s main credit exposure at their carrying amounts at December 31 as categorized byindustry sectors follows:

2014Financial

institutionsReal

estate OthersLess

allowance TotalCash and cash equivalents, excluding

cash on hand 429,145 - - - 429,145Insurance balances receivable, net 1,621,322 - 125,053 46,633 1,699,742Held-to-maturity financial assets 946,173 - - - 946,173Available-for-sale financial assets, excluding

equity securities and mutual funds 49,844 - 1,264,035 - 1,313,879Other receivables, net

Mortgage loansEmployees - 4,128 - 187 3,941

Non-employees - 437 - 437 -Accounts receivable

Trade 1,161 - 368 827 702Non-trade 1,597 - 11,635 - 13,232

Investment income due and accrued 39,401 - - - 39,4013,088,643 4,565 1,401,091 48,084 4,446,215

2013Financial

institutionsReal

estate OthersLess

allowance TotalCash and cash equivalents, excluding

cash on hand 1,701,052 - - - 1,701,052Insurance balances receivable, net 1,055,241 - 74,320 46,633 1,082,928Held-to-maturity financial assets 810,722 - - - 810,722Available-for-sale financial assets, excluding

equity securities and mutual funds 88,142 - 664,617 - 752,759Other receivables, net

Mortgage loansEmployees - 4,673 - 160 4,513Non-employees - 702 - 702 -

Accounts receivableTrade 536 - 1,407 827 1,116Non-trade 4,569 5,285 12,199 - 22,053

Investment income due and accrued 28,309 - - - 28,3093,688,571 10,660 752,543 48,322 4,403,452

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3.2.5 Liquidity risk

Liquidity risk is the risk that the Company will be unable to meet its financial obligations when due.The Company manages the risk by close monitoring of cash flows to ensure that the operationmaintains optimum levels of liquidity at all times sufficient to meet contractual obligations as and whenthey fall due.

It is also the Company’s policy to maintain adequate liquidity to meet its cash flow requirements.Accordingly, each portfolio is structured in a manner that ensures sufficient cash is available to meetanticipated liquidity needs. Selection of investment maturities is consistent with the cash requirementsin order to avoid the forced sale of securities prior to maturity.

Net insurance claim liabilities as detailed in Notes 7 and 18 are expected to be settled within thesucceeding year. Due to reinsurer and ceding companies are settled within the premium warrantyperiod as stipulated in the insurance contract which normally covers one year. Accounts payable andaccrued expenses are expected to be settled within one year. Cash collateral covers construction bondsexpected to be completed within one year.

The table below analyzes the financial liabilities of the Company. Amounts disclosed in the table arethe expected undiscounted cash flows of financial liabilities which are all due within one year. Balancesdue within one year equal their carrying balances as the impact of discounting is not significant.

2014 2013Due to reinsurer and ceding companies 841,276 722,838Funds held for reinsurers 224,259 208,784Accounts payable and accrued expenses

Accounts payable 163,376 138,980Accrued expenses 122,264 106,286Cash collateral 59,379 76,743

1,410,554 1,253,631

The maturity analyses of financial assets are individually shown in their respective notes to financialstatements.

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3.2.6 Fair value determination

(i) Fair value of financial assets and liabilities

The table below summarizes the carrying amount and fair value of those significant financial assets andliabilities not presented in the statement of financial position at fair value.

Carrying value Fair value2014 2013 2014 2013

Financial assetsCash and cash equivalents 429,292 1,701,191 429,292 1,701,191Insurance balances receivable, net 1,699,742 1,082,928 1,699,742 1,082,928Held-to-maturity financial assets 946,173 810,722 1,016,764 937,276Other receivables, net (excluding prepayments,

advance rentals and creditable withholdingtaxes) 17,875 27,682 17,875 27,682

Investment income due and accrued 39,401 28,309 39,401 28,3093,132,483 3,650,832 3,203,074 3,777,386

Financial liabilitiesDue to reinsurers and ceding companies 841,276 722,838 841,276 722,838Funds held for reinsurers 224,259 208,784 224,259 208,784Accounts payable and accrued expenses

(excluding taxes payable) 345,019 322,009 345,019 322,0091,410,554 1,253,631 1,410,554 1,253,631

(a) Held-to-maturity financial assets

Fair value of held-to-maturity financial assets is based on market prices or broker/dealer pricequotations. Where this information is not available, fair value is estimated using quoted market pricesfor securities with similar credit, maturity and yield characteristics.

(b) Other receivables

The estimated fair value of other receivables represents the discounted amount of estimated future cashflows expected to be received. Expected cash flows are discounted at current market rates to determinefair value. The carrying values of other receivables approximate their respective fair values at reportingdate due to their short-term nature.

(c) Other financial assets and financial liabilities

The carrying values of other financial assets and financial liabilities approximate their respective fairvalues at reporting date due to their short-term nature.

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(ii) Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.

The Company classifies fair value measurements using a fair value hierarchy that reflects thesignificance of the input used in making the measurements. The fair value hierarchy has the followinglevels:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This levelincludes listed equity securities and debt instruments on exchanges (for example, Philippine StockExchange, Inc., Philippine Dealing and Exchange Corp., etc.).

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset orliability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primarysource of input parameters is Bloomberg. For unquoted equity instruments, reference is also madeto the prior year’s pricing which is assumed to be a reasonable approximation of fair value given thelimited transactions and circumstances of the instruments. This level includes unlisted shares andheld-to-maturity financial assets with fair values disclosed in the notes to financial statements.

Level 3 - Inputs for the asset or liability that are not based on observable market data(unobservable inputs). This level includes equity investments and debt instruments with significantunobservable components. This hierarchy requires the use of observable market data whenavailable. The Company considers relevant and observable market prices in its valuations wherepossible.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair valuehierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurementin its entirety falls is determined based on the lowest level input that is significant to the fair valuemeasurement in its entirety. The Company's assessment of the significance of a particular input to thefair value measurement in its entirety requires judgment. In making the assessment, the Companyconsiders factors specific to the asset or liability.

The following table presents the fair value hierarchy of the Company’s financial assets at December 31:

2014 Level 1 Level 2 TotalRecurring measurements

AFS financial assetsDebt securities 1,264,035 49,844 1,313,879Equity securities, net 512,461 61,840 574,301Investment in mutual funds 77,560 - 77,560

1,854,056 111,684 1,965,740

2014 Level 1 Level 2 TotalFair value disclosed

Held-to-maturity financial assets - 1,016,764 1,016,764

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2013 Level 1 Level 2 TotalRecurring measurements

AFS financial assetsDebt securities 610,174 142,585 752,759Equity securities, net 429,977 62,918 492,895Investment in mutual funds 16 - 16

1,040,167 205,503 1,245,670

2013 Level 1 Level 2 TotalFair value disclosed

Held-to-maturity financial assets - 937,276 937,276

The Company has no financial instruments that fall under the Level 3 category as at December 31, 2014and 2013. There were no transfers between Level 1 and Level 2 during the year.

3.3 Capital management

The Company’s objectives when managing capital (total equity as shown in the statement of financialposition) are:

to comply with the capitalization requirement through the Margin of Solvency (MOS) set by the IC; to safeguard the Company’s ability to continue as a going concern so that it can continue to provide

returns for shareholders and benefits for other stakeholders; and to maintain a strong capital base to support the development of its business.

The Philippine President has signed Republic Act No. 10607, the Amended Insurance Code(the “Code”), into law effective September 20, 2013. Among the more significant provisions of the Codeinclude the requirement for domestic insurance companies to maintain a minimum statutory net worthof P250 million by June 30, 2013; P550 million by December 31, 2016; P900 million byDecember 31, 2019; and P1.3 billion by December 31, 2022.

The Company is compliant with the minimum statutory net worth as at December 31, 2014 and 2013.

Margin of Solvency Requirements

The Code grants the Insurance Commissioner the power to prescribe solvency requirements based oninternationally accepted solvency frameworks. Since the Insurance Commissioner has not prescribednew solvency requirements as yet, the margin of solvency requirements of the previous insurance codewas followed. The previous code states that a non-life insurance company doing business in thePhilippines shall maintain at all times MOS equal to P500,000 or 10% of the total amount of its netpremiums written during the preceding year, whichever is higher. The MOS shall be the excess of thevalue of its admitted assets (as defined under the previous code), exclusive of its security deposits overthe amount of its liabilities, reserve for unearned premiums and reinsurance reserves in thePhilippines. Reserve for unearned premiums determined in accordance with the same code forpurposes of MOS amounts to P818 million (2013 - P736 million).

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In the accompanying financial statements, the PFRS net reserve for unearned premiums atDecember 31 follows:

2014 2013Reserve for unearned premiums 2,972,539 2,971,268Deferred reinsurance premiums 1,832,204 1,988,217

1,140,335 983,051

The MOS computations of the Company at December 31 follow:

2014 2013Total assets 9,507,930 9,822,140Non-admitted assets

Due from agents and brokers 388,268 312,266Deferred reinsurance premium 1,832,204 1,988,217Deferred acquisition cost, net 67,029 43,011Other receivables 2,370 11,205Property and equipment, net 33,240 21,504Retirement benefit assets 12,297 11,468Deferred income tax assets, net 120,681 108,181Other assets 19,785 16,800

2,475,874 2,512,652Total admitted assets 7,032,056 7,309,488Total liabilities and share capital

Reserve for unearned premiums 817,502 735,957Other liabilities 4,368,957 4,583,934Paid-up capital 350,000 350,000

5,536,459 5,669,891Available for MOS 1,495,597 1,639,597Minimum MOS 192,962 173,914Excess MOS 1,302,635 1,465,683

The final amounts of the MOS can be determined only after the accounts of the Company have beenexamined by the IC, specifically as to admitted and non-admitted assets as defined in the Code.

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Risk-Based Capital Framework

The IC is expected to issue a revised RBC framework following the international standards inaccordance with the amended Insurance Code. While the revised RBC framework is still under studyand evaluation by the IC, the Company calculated its RBC ratio following the Insurance CommissionMemorandum Circular No. 7-2006.

Insurance Commission Memorandum Circular No. 7-2006 provides for the risk-based capitalframework for the insurance industry to establish the required amounts of capital to be maintained bythe companies in relation to their investment and insurance risks. Every insurance company is requiredannually to maintain a minimum RBC ratio of 100% and not fail the trend test. Failure to meet theminimum RBC ratio shall subject the insurance company to the corresponding regulatory interventionwhich has been defined at various levels.

The RBC ratio shall be calculated as net worth divided by the RBC requirement. Net worth shall includethe 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 authorizedby the IC.

The Company calculates the RBC ratio based on the requirements of the previously issued Circular.As at December 31, 2014 and 2013, the Company is compliant with the required RBC ratio.

Note 4 - Critical accounting estimates, assumptions and judgments in applyingaccounting policies

The Company makes estimates and assumptions that affect the reported amounts of assets andliabilities. Estimates and judgments are continually evaluated and are based on historical experienceand other factors, including expectations of future events that are believed to be reasonable under thecircumstances. It is reasonably possible that the outcomes within the next financial year could differfrom assumptions made at reporting date and could result in the adjustment to the carrying amount ofaffected assets or liabilities.

A. Critical accounting estimate

The ultimate liability arising from claims made under insurance contracts (Note 18)

The estimation of the ultimate liability arising from claims made under insurance contracts is theCompany’s most critical accounting estimate. There are several sources of uncertainty that need to beconsidered in the estimate of the liability that the Company will ultimately pay for such claims. Themajor uncertainties are the frequency of claims due to the contingencies covered and the timing ofbenefit payments.

The Company considers that it is impracticable to disclose with sufficient reliability the possible effectsof sensitivities surrounding the ultimate liability arising from claims made under insurance contracts asthe major uncertainties may differ significantly. With this, it is reasonably possible, based on existingknowledge, that the outcomes within the next financial year are different from assumptions and couldrequire a material adjustment to the carrying amount of the asset or liability affected including reservefor outstanding losses and related reinsurance balances.

The carrying value of reserve for outstanding losses as at December 31, 2014 and 2013 amounts toP2,708 million and P3,082 million, respectively.

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B. Critical accounting judgments

(a) Classification of held-to-maturity financial assets (Note 8)

The Company follows the guidance of PAS 39 in classifying non-derivative financial assets with fixed ordeterminable payments and fixed maturity as held-to-maturity. This classification requires significantjudgment. In making this judgment, the Company evaluates its intention and ability to hold suchinvestments to maturity. If the Company fails to keep these investments to maturity other than for thespecific circumstances - for example, selling an insignificant amount close to maturity - it will berequired to reclassify the entire class to available-for-sale financial assets. The investments willtherefore be measured at fair value and not at amortized cost.

If the entire class of held-to-maturity financial assets is tainted, the fair value would increase byP71 million (2013 - P126 million) with a corresponding increase in other comprehensive income.

(b) Impairment of available-for-sale financial assets (Note 9)

The Company follows the guidance of PAS 39 to determine when an available-for-sale financial asset isimpaired. This determination requires significant judgment. The determination of what is ‘significant’or ‘prolonged’ requires judgment. The Company treats ‘significant’ generally as 20% or more and‘prolonged’ as greater than twelve (12) months. In making this judgment, the Company evaluates,among other factors, the duration and extent to which the fair value of an investment is less than itscost; and the financial health and near-term business outlook of the issuer, including factors such asindustry and sector performance, changes in technology and operational and financing cash flows.

(c) Impairment of other financial assets (Notes 6, 8, 10 and 11)

The Company reviews other financial assets at each reporting date to assess whether an allowance forimpairment should be recorded in profit or loss. In particular, judgment by management is required inthe estimation of the amount and timing of future cash flows when determining the level of allowancerequired. The amount and timing of recorded expenses for any period would differ if the Companymade different judgment. An increase in allowance for impairment losses would increase recordedexpenses and decrease net income.

Other financial assets consist of insurance balances receivable, held-to-maturity financial assets, otherreceivables and investment income due and accrued.

The allowance for impairment recognized for other financial assets as at December 31 follows:

Notes 2014 2013Insurance balances receivable 6 46,633 46,633Other receivables 10 1,451 1,689

48,084 48,322

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(d) Income taxes (Note 20)

Management reviews at each reporting date the carrying amounts of deferred tax assets. The carryingamount of deferred tax assets is reduced to the extent that the related tax assets cannot be utilized dueto insufficient taxable profit against which the deferred tax losses will be applied. Management believesthat sufficient taxable profit will be generated to allow all or part of the deferred income tax assets to beutilized.

Deferred tax assets as at December 31, 2014 amount to P147 million (2013 - P125 million).

Note 5 - Cash and cash equivalents

The details of the account at December 31 follow:

2014 2013Cash on hand 147 139Cash in banks

Philippine peso 135,866 315,363US dollar 54,951 198,240Japanese yen 11,640 15,830

202,457 529,433Time deposits

Philippine peso 42,306 1,105,496US dollar 184,382 66,123

226,688 1,171,619429,292 1,701,191

The Philippine peso and US dollar time deposits have maturities of 90 days or less. The Philippinepeso time deposits have annual interest rates ranging from 0.375% to 0.75% (2013 - 0.038% to 1.75%).The US dollar time deposits bear interest rates ranging from 0.5% to 1.85% (2013 - 0.93% to 1.30%).

Interest income earned on cash and cash equivalents amounts to P3 million (2013 - P2 million)(Note 19).

Note 6 - Insurance balances receivable, net


2014 2013Due from agents and brokers 1,482,578 981,755Reinsurance recoverable on paid losses 171,827 80,881Due from ceding companies 78,883 56,079Funds held by ceding companies 13,087 10,846

1,746,375 1,129,561Allowance for impairment (46,633) (46,633)

1,699,742 1,082,928

All insurance receivables are due within one year.

There are no movements in allowance for impairment during 2014 and 2013.

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Note 7 - Reinsurance balances

The Company utilizes reinsurance agreements to minimize its exposure to large losses in all aspects ofits insurance business. Reinsurance permits recovery of a portion of losses from reinsurers, although itdoes not discharge the primary liability of the Company as direct insurer of the risks reinsured.

The details of reinsurance balances at December 31 are as follows:

2014 2013Insurance balances receivable, gross 1,746,375 1,129,561Less: Reinsurance balances

Due to reinsurers and ceding companies (841,276) (722,838)Funds held for reinsurers (224,259) (208,784)

Balance, net of reinsurance 680,840 197,939

Reserve for outstanding losses 2,707,810 3,082,276Less: Reinsurance recoverable on unpaid losses (2,248,756) (2,653,369)Balance, net of reinsurance 459,054 428,907

Reserve for unearned premiums 2,972,539 2,971,268Less: Deferred reinsurance premium (1,832,204) (1,988,217)Balance, net of reinsurance 1,140,335 983,051

Note 8 - Held-to-maturity financial assets

The account consists of peso-denominated fixed-term Treasury notes with interest rates ranging from3.77% to 9.90% in 2014 (2013 - 4.70% to 9.90%).

2014 2013Current 225,036 54,237Non-current 721,137 756,485

946,173 810,722

Movements in the account follow:

2014 2013At January 1 810,722 1,342,683Additions 192,225 -Maturities (54,250) (531,660)Amortization of premium, net (2,524) (301)At December 31 946,173 810,722

Securities amounting to P148 million (2013 - P88 million) are deposited with the IC in accordance withthe provisions of the Insurance Code of the Philippines for the benefit of policyholders and creditors ofthe Company.

The fair value of the held-to-maturity financial assets at December 31, 2014 amounts to P1,017 million(2013 - P937 million).

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Interest income earned from held-to-maturity securities amount to P78 million (2013 - P85 million)(Note 19).

Note 9 - Available-for-sale financial assets

Available-for-sale financial assets at December 31 consist of:

2014 2013Equity securities

Listed shares 512,461 429,977Unlisted shares 61,840 62,918

Debt securitiesFixed-term Treasury notes 1,292,925 736,113US dollar Treasury bonds 20,954 16,646

Investment in mutual funds 77,560 161,965,740 1,245,670

2014 2013Current 4,778 51,244Non-current 1,960,962 1,194,426

1,965,740 1,245,670

Movements in the account follow:

2014 2013At January 1 1,245,670 1,545,262Additions 6,696,763 4,391,611Disposals (5,988,222) (4,583,698)Amortization of premium, net (16,848) (10,034)Net fair value gain (loss) 28,145 (116,206)Reversal of impairment on disposal - 17,461Exchange differences 232 1,274

1,965,740 1,245,670

Listed equity securities include common shares of BPI Parent amounting to P25 million(2013 - P19 million) with additional investment on stock rights subscription. Dividend income earnedfrom listed securities and unlisted equity securities as of December 31, 2014 amounts to P9 million andP20 thousand, respectively (2013 - P9 million and P2 million, respectively).

Debt securities have interest rates in 2014 ranging from 1.30% to 8.75% (2013 - 3.91% to 9.9%).

The Company has an Investment Management and Custodianship Agreement with BPI.

Interest income earned on available-for-sale financial assets amounts to P47 million(2013 - P77 million) (Note 19).

The Company sold certain available-for-sale securities which resulted in a gain of P88 million in 2014(2013 - P132 million). Proceeds from disposals of available-for-sale securities amount to P6,076 million(2013 - P4,716 million).

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Note 10 - Other receivables, net


2014 2013Mortgage loans

Employees 4,128 4,673Non-employees 437 702

Accounts receivableTrade 1,529 1,943Non-trade 13,232 22,053

Prepayments 8,310 7,560Advance rentals 8,103 5,600Creditable withholding taxes 3,371 14,728

39,110 57,259Allowance for impairment (1,451) (1,689)

37,659 55,570

2014 2013Current 13,211 24,231Non-current 24,448 31,339

37,659 55,570

Movements in allowance for impairment follow:

2014 2013At January 1 1,689 1,837Reversal of impairment (238) (148)At December 31 1,451 1,689

Breakdown of the allowance for impairment follows:

2014 2013Mortgage loans 624 862Accounts receivable - trade 827 827

1,451 1,689

The Company’s mortgage loans - non-employees pertain to participation on a without recourse basis inthe mortgage loan portfolio of BPI-Philam Life Assurance Corporation (BPLAC), a related party.

The Company has a Service Agreement with BPI Family Savings Bank, Inc. (BPI Family Bank), arelated party, for the processing, servicing and administration of the Company’s mortgage and otherloans (Note 23).

Interest income on mortgage and other loans amounts to P1.6 million (2013 - P1.8 million) (Note 19).

Accounts receivable - non-trade consists mainly of employee salary and car facility loans while accountsreceivable - trade represents receivable from agents for unremitted premium collections.

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Note 11 - Investment income due and accrued

The account at December 31 represents income earned but not yet received from the following:

2014 2013Cash in bank

Time deposits 1 54Financial assets

Held-to-maturity financial assets 19,839 20,048Available-for-sale financial assets 19,561 8,207

39,401 28,309

The amounts presented above are expected to be realized within one year.

Note 12 - Property and equipment, net

The details of the account are as follows:

Condominiumunits

EDPequipment

Furniture,fixtures and

officeequipment

Leaseholdimprovements

Transportationequipment Total

Year ended December 31, 2014Opening net book value 56,115 5,832 5,053 16,131 1,986 85,117Additions - 15,661 5,038 22,060 1,028 43,787Disposals - - (41) - (454) (495)Depreciation charge (5,064) (6,318) (5,041) (10,112) (1,037) (27,572)Closing net book value 51,051 15,175 5,009 28,079 1,523 100,837

At December 31, 2014Cost 126,687 83,768 21,832 53,563 11,413 297,263Accumulated depreciation (75,636) (68,593) (16,823) (25,484) (9,890) (196,426)Net book value 51,051 15,175 5,009 28,079 1,523 100,837

Year ended December 31, 2013Opening net book value 61,178 6,986 5,797 3,617 2,845 80,423Additions - 4,970 3,447 17,101 1,433 26,951Disposals - - - - (197) (197)Depreciation charge (5,063) (6,124) (4,191) (4,587) (2,095) (22,060)Closing net book value 56,115 5,832 5,053 16,131 1,986 85,117

At December 31, 2013Cost 126,687 70,056 17,553 46,764 11,337 272,397Accumulated depreciation (70,572) (64,224) (12,500) (30,633) (9,351) (187,280)Net book value 56,115 5,832 5,053 16,131 1,986 85,117

Depreciation charge is included in Occupancy and equipment-related expenses in the statement ofincome.

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Note 13 - Software costs, net


2014 2013Opening net book value 4,068 311Additions 1,465 4,735Amortization charge (1,844) (978)Closing net book value 3,689 4,068

Amortization charge is included in Occupancy and equipment-related expenses in the statement ofincome.

Note 14 - Other assets, net

The details of the account at December 31 are as follows:

Note 2014 2013Current

Certificate of Cover (COC) revolving fund (a) 551 112Non-current

Retirement asset 17 12,297 11,468Investment in an associate (b) 2,277 2,605Assets held-for-sale, net (c) 1,563 1,563Security fund (d) 21 21Other properties 18 18

16,176 15,67516,727 15,787

(a) COC Revolving Fund

COC revolving fund is a seed fund maintained at third-party service providers which covers thedocumentary stamp taxes (DST) and value added taxes (VAT) for certificates of cover issued onoutstanding policies.

(b) Investment in an associate

Investment in an associate at December 31, 2014 and 2013 consist of the acquisition cost of the 49%ownership in FCS Insurance Agency and Consultants, Inc., net of allowance for impairment ofP2.0 million (2013 - P1.7 million).

Movements in allowance for impairment follow:

2014 2013At January 1 1,652 1,652Provision for impairment 328 -At December 31 1,980 1,652

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(c) Assets held-for-sale

Assets held-for-sale as at December 31, 2014 and 2013 is net of allowance for impairment ofP161 thousand.

(d) Security fund

Security fund is maintained in compliance with Sections 378 and 380 of the Amended InsuranceCode. The amount of security fund is determined by and deposited with the IC to pay valid claimsagainst insolvent insurance companies.

(e) Investment property

In 2013, the Company sold its residential estate property previously held for undetermined future use.The property was sold for P44 million resulting in a gain of P29 million.

Note 15 - Accounts payable and accrued expenses

The details of the account at December 31 are as follows:

2014 2013Taxes payable 250,594 248,027Accounts payable 163,376 138,980Accrued expenses 122,264 106,286Cash collateral 59,379 76,743

595,613 570,036

Cash collateral pertains to cash deposits posted primarily by building contractors as security for thebond issued by the Company.

Accrued expenses include contingent profit commission amounting to P34 million (2013 - P45 million).The contingent profit commission pertains to bonuses to intermediaries in relation to insurancepremiums generated during the year. Other accrued expenses consist mainly of service fees due torelated parties (Note 23) and performance bonus.

Accounts payable and accrued expenses as at December 31, 2014 and 2013 are all due within one yearand considered as current.

Note 16 - Staff costs

The details of the account for the years ended December 31 are as follows:

Note 2014 2013Salaries and wages 244,220 209,005Pension costs 17 14,154 10,577Social security costs 6,874 6,005Other employee benefits 24,237 22,678

289,485 248,265

The Company has 402 employees as at December 31, 2014 (2013 - 366).

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Other employee benefits pertain primarily to medical and fringe benefits of personnel.

Note 17 - Post-employment benefit plan

The Company has a trusteed defined benefit plan. Under the plan, the normal retirement age is 60 yearsor the employee should have completed at least 10 years of service, whichever is earlier. The normalretirement benefit is equal to 125% of the final basic monthly salary for each year of service for below10 years and 175% of the final basic monthly salary for each year of service for 10 years and above.

The amounts recognized in the statement of financial position under Other assets, net are as follows:

2014 2013Fair value of plan assets 197,995 178,282Present value of obligation 185,698 166,814Retirement benefit asset 12,297 11,468

The movements in the fair value of plan assets are as follows:

2014 2013At January 1 178,282 169,626Contributions 13,000 14,785Asset return in net interest cost 9,467 11,298Benefits paid (4,105) (13,873)Remeasurement - return on plan assets 1,351 (3,554)At December 31 197,995 178,282

The movements in the present value of defined benefit obligation are as follows:

2014 2013At January 1 166,814 154,175Current service cost 14,763 11,607Interest cost 8,858 10,268Benefits paid (4,105) (13,873)Actuarial (gain) loss on obligation (632) 4,637At December 31 185,698 166,814

The Company has no other transactions with the fund other than the contributions presented above for2014 and 2013.

Pension plan assets of the retirement plan include investment in BPI’s common shares with carryingamount of P1.2 million (2013 - P0.9 million) and fair value of P1.3 million at December 31, 2014(2013 - P1 million). Realized and unrealized gains coming from BPI’s common shares amount to niland Po.1 million in 2014, respectively (2013 - P93 thousand and Po.1 million, respectively). An officerof the Company exercises the voting rights over the plans’ investment in BPI’s common shares.

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The carrying value of plan assets as at December 31, 2014 and 2013 is the same as its fair value. Theseassets, which are held in trust and governed by local regulations and practices in the Philippines, are asfollows:

2014 2013Amount % Amount %

Cash and cash equivalents 2,302 1.16 21,003 11.78Government securities 112,038 56.59 111,982 62.81Corporate and other debt securities 36,093 18.23 10,056 5.64Equity securities 37,222 18.80 25,676 14.40Others 10,340 5.22 9,565 5.37

197,995 100.00 178,282 100.00

The amounts recognized in other comprehensive income in equity are as follows:

2014 2013Actuarial gain (loss)

Due to change in demographic assumptions 20,429 -Due to changes in financial assumptions (19,376) (5,089)Due to experience adjustment (421) 452

Remeasurement - return on plan assets 1,351 (3,554)1,983 (8,191)

The amounts recognized in the statement of income under Staff costs are as follows:

2014 2013Current service cost 14,763 11,607Net interest cost (609) (1,030)

14,154 10,577

The principal actuarial assumptions used are as follows:

2014 2013Discount rate 4.26% 5.31%Salary increase rate 5.00% 4.00%

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions atDecember 31 follows:

Impact on defined benefit obligation

2014Change in

assumptionIncrease inassumption

Decrease inassumption

Discount rate 0.50% (2,013) 2,440Rate of salary increase 1.00% 5,609 (3,654)

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2013

Impact on defined benefit obligationChange inassumption

Increase inassumption

Decrease inassumption

Discount rate 0.5% (2,114) 2,497Rate of salary increase 1.0% 5,675 (3,897)

The above sensitivity analyses are based on a change in an assumption while holding all otherassumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptionsmay be correlated. When calculating the sensitivity of the defined benefit obligation to significantactuarial assumptions, the same method (present value of the defined benefit obligation calculated withthe projected unit credit method at the end of the reporting period) has been applied as whencalculating the retirement liability recognized within the statement of financial position.

There are no changes from the prior year in the methods and assumptions used in preparing thesensitivity analyses.

The defined benefit plan typically exposes the Company to a number of risks such as investment risk,interest rate risk and salary risk. The most significant of which relate to investment and interest raterisk. The present value of the defined benefit obligation is determined by discounting the estimatedfuture cash outflows using interest rates of government bonds that are denominated in the currency inwhich the benefits will be paid, and that have terms to maturity approximating the terms of the relatedretirement obligation. A decrease in government bond yields will increase the defined benefitobligation although this will also be partially offset by an increase in the value of the plan’s fixedincome holdings. Hence, the present value of defined benefit obligation is directly affected by thediscount rate to be applied by the Company. However, the Company believes that due to the long-termnature of the retirement obligation and the strength of the Company itself, the mix of debt and equitysecurities holdings of the plan is an appropriate element of the Company’s long term strategy tomanage the plan efficiently.

The Company ensures that the investment positions are managed within an asset-liability matchingframework that has been developed to achieve long-term investments that are in line with theobligations under the plan. The Company’s main objective is to match assets to the defined benefitobligation by investing primarily in long-term debt securities with maturities that match the benefitpayments as they fall due. The asset-liability matching is being monitored on a regular basis andpotential change in investment mix is being discussed with the Company, as necessary to better ensurethe appropriate asset-liability matching.

The average remaining service life of employees as at December 31, 2014 is 12 years (2013 - 20 years).The Company contributes to the plan depending on the suggested funding contribution as calculated byan independent actuary. The expected contributions for 2015 amounts to P18.7 million.

The expected maturity analysis of undiscounted retirement benefit payments as at December 31 is asfollows:

Less thana year

Between1-5 years

Between5-10 years

Between10-15 years

Between15-20 years

Over20 years

2014 31,095 29,685 78,548 155,958 244,214 1,503,6412013 - 43,278 76,800 126,281 220,474 1,001,016

(42)

Note 18 - Provision for losses and claims

(a) Process used to decide on assumptions

A loss is registered immediately upon receipt of a notice of claim from policyholders. Since insurancecompanies are required to set-up provisional loss reserve, a physical inspection is done on the damagedproperty to ensure a more accurate estimate on the amount of loss. For property and engineeringinsurance, services of a professional adjustment firm are sought to do the inspection, investigation anddata gathering while marine surveyors are contacted to do loss surveys for marine losses. Motor carlosses are mostly handled by the Company’s motor car damage evaluators.

(b) Changes in assumptions and sensitivity analysis

There were no changes in the assumptions made in reserves for outstanding losses net of reinsurance claimsin 2014 and 2013. Majority of the Company’s claims are from motor car insurance which account for about86% (2013 - 84%) of the total number of claims received. Since motor car line is fully retained, it isimportant to underwrite this line using the proper rates, terms and conditions. Proper claims controlshould always be exercised so that unreasonable payment of losses can be avoided.

(c) Claims development table

Presented below is a table that shows the development of claims, excluding IBNR losses, over a periodof time on a gross and net of reinsurance basis.

i. Gross of reinsurance

As at December 31, 2014

Accident yearYear of payment 2010 2011 2012 2013 2014 Total

2010 18,651 - - - - 18,6512011 (52,955) (13,039) - - - (65,994)2012 (427) (5,388) 62,614 - - 56,7992013 118 627 22,600 1,019,842 - 1,043,1872014 54 7,335 16,540 845,670 2,707,919 3,577,518

Current estimate ofcumulative claims (34,559) (10,465) 101,754 1,865,512 2,707,919 4,630,161

Cumulative payments todate (1,368) (19,966) (88,116) (1,243,995) (692,952) (2,046,397)

Liability recognized in thestatement of financialposition (35,927) (30,431) 13,638 621,517 2,014,967 2,583,764

Liability in respect of prior years 104,646Total gross liability included in the statement of financial position, excluding IBNR 2,688,410Provision for IBNR 19,400Reserve for outstanding losses 2,707,810

(43)



2009 (6,379) - - - - (6,379)2010 (8,061) 119,958 - - - 111,8972011 (26) 2,373 41,129 - - 43,4762012 3,915 143 5,886 387,368 - 397,3122013 1,291 2,483 5,044 99,983 3,514,447 3,623,248

Current estimate ofcumulative claims (9,260) 124,957 52,059 487,351 3,514,447 4,169,554

Cumulative payments todate (3,207) (155) (206,215) (490,833) (566,316) (1,266,726)

Liability recognized in thestatement of financialposition (12,467) 124,802 (154,156) (3,482) 2,948,131 2,902,828

Liability in respect of prior years 160,048Total gross liability included in the statement of financial position, excluding IBNR 3,062,876Provision for IBNR 19,400Reserve for outstanding losses 3,082,276

ii. Net of reinsurance



2010 (130) - - - - (130)2011 1,707 (4,998) - - - (3,291)2012 (431) 204 19,363 - - 19,1362013 118 625 18,589 326,758 - 346,0902014 54 7,037 11,160 663,678 438,729 1,120,658

Current estimate ofcumulative claims 1,318 2,868 49,112 990,436 438,729 1,482,463

Cumulative payments toDate (7,450) (11,208) (41,850) (436,047) (591,860) (1,088,415)

Liability recognized in thestatement of financialposition (6,132) (8,340) 7,262 554,389 (153,131) 394,048

Liability in respect of prior years 45,606Total net liability included in the statement of financial position, excluding IBNR 439,654Provision for IBNR 19,400Reserve of outstanding losses 459,054

(44)



2009 (11,990) - - - - (11,990)2010 128 (3,626) - - - (3,498)2011 (24) 884 (853) - - 72012 2,604 (406) 1,148 254,372 - 257,7182013 1,053 2,111 4,756 90,243 1,127,287 1,225,450

Current estimate ofcumulative claims (8,229) (1,037) 5,051 344,615 1,127,287 1,467,687

Cumulative payments todate (2,733) (134) (14,043) (213,948) (475,794) (706,652)

Liability recognized in thestatement of financialposition (10,962) (1,171) (8,992) 130,667 651,493 761,035

Liability in respect of prior years (351,528)Total net liability included in the statement of financial position, excluding IBNR 409,507Provision for IBNR 19,400Reserve of outstanding losses 428,907

IBNR losses

The Company provides for estimated IBNR losses based on the average five-year historical experiencecovering claims filed during the first quarter of each year for losses incurred for the previous year.Total reserve for IBNR losses included in Reserve for outstanding losses as at December 31, 2014 and2013 amounts to P19.4 million.

Note 19 - Interest income

The details of the account for the years ended December 31 are as follows:

Notes 2014 2013Interest income from:

Held-to-maturity financial assets 8 77,938 85,203Available-for-sale financial assets 9 47,160 77,012Cash and cash equivalents 5 3,268 2,470Mortgage and other loans 10 1,572 1,834

129,938 166,519

Note 20 - Income taxes

The details of the account for the years ended December 31 follows:

2014 2013Final tax 29,339 34,961Current 139,180 149,565Deferred (13,095) (6,806)

155,424 177,720

(45)

The movements in deferred income tax assets and liabilities in 2014 are as follows:

AtJanuary 1

Credited(charged)to income

Credited(charged)

to OCI

AtDecember

31Deferred income tax assets

Excess of reserve for unearned premium perbooks over tax basis, net 79,324 22,722 - 102,046

Allowance for impairment 14,497 27 - 14,524Contingent profit commission 13,406 (3,139) - 10,267Accrued service fees 12,025 2,379 - 14,404Provision for IBNR 5,820 - - 5,820

125,072 21,989 - 147,061Deferred income tax liabilities

Deferred acquisition costs (12,903) (7,205) - (20,108)Retirement benefit asset (2,933) (145) (595) (3,673)Unrealized foreign exchange gain, net (1,055) (1,544) - (2,599)

(16,891) (8,894) (595) (26,380)Net deferred income tax assets 108,181 13,095 (595) 120,681

The movements in deferred income tax assets and liabilities in 2013 are as follows:

AtJanuary 1

Credited(charged)to income

Credited(charged)

to OCI

AtDecember

31Deferred income tax assets

Excess of reserve for unearned premium perbooks over tax basis, net 70,564 8,760 - 79,324

Allowance for impairment 19,828 (5,331) - 14,497Contingent profit commission 14,850 (1,444) - 13,406Accrued service fees 9,859 2,166 - 12,025Provision for IBNR 5,820 - - 5,820

120,921 4,151 - 125,072Deferred income tax liabilities

Deferred acquisition costs (19,562) 6,659 - (12,903)Retirement benefit asset (4,526) (864) 2,457 (2,933)Unrealized foreign exchange gain, net 2,085 (3,140) - (1,055)

(22,003) 2,655 2,457 (16,891)Net deferred income tax assets 98,918 6,806 2,457 108,181

The future tax benefits of deferred income tax assets are expected to be realized primarily uponrealization of excess of recorded reserve for unearned premiums over tax basis, payment of claims, servicefees and contingent profit commission and receivable write-off.

(46)

The analysis of the recoverability of deferred income tax assets and liabilities is as follows:

2014 2013Deferred tax assets

Deferred tax asset expected to be recovered within 12 months 147,061 125,072Deferred tax liabilities

Deferred tax liability expected to be settled within 12 months 22,707 13,958Deferred tax liability expected to be recovered after 12 months 3,673 2,933

26,380 16,891Deferred tax assets, net 120,681 108,181

The reconciliation between the provision for income tax computed at the statutory income tax rate andthe actual provision for income tax follows:

2014 2013Income before income tax 636,830 789,303Income tax at statutory tax rate of 30% 191,049 236,791

Income subject to lower final tax rate, net (13,797) (13,472)Tax-exempt income, net (24,518) (52,503)Non-deductible expenses 2,690 6,904

Provision for income tax 155,424 177,720

Note 21 - Share capital; Reserves; Dividends

The Company’s total authorized share capital consists of 3,550,000 shares with par value of P100 pershare, of which 3,500,000 shares are issued and outstanding as at December 31, 2014 and 2013.

The Company started declaring 100% of its net income as dividends in 2006. However, as atDecember 31, 2014 and 2013, the Company has excess retained earnings over its paid-up capital.

As approved by the Board of Directors on March 5, 2015, the Company plans to use the excess retainedearnings as follows:

1) As additional reserve for future contingencies, especially for catastrophe losses;2) Buffer to support growth as the Company projects to grow between 12% - 14% in the next 3 years;

and3) To comply with the more robust solvency and reserving requirements (Internationally Accepted

Solvency Frameworks) to be implemented by the Insurance Commission with the passing of the newInsurance Code in 2013.

(47)

Details of and movements in stock options reserve for the year ended December 31, 2014 follow:

AmountStock options reserve

At January 1 -Executive stock plan amortization 146At December 31 146

Details of and movements in Accumulated other comprehensive income for the years endedDecember 31 follow:

2014 2013Fair value reserve on available-for-sale financial assets

At January 1 (33,208) 82,998Changes in fair value of available-for-sale financial assets 21,146 (74,879)Fair value losses (gains) transferred to profit or loss 6,999 (41,327)Deferred income tax effect - -At December 31 (5,063) (33,208)

Actuarial gains (losses) on defined benefit plan, netAt January 1 7,181 12,915Actuarial gains (losses) for the year 1,983 (8,191)Deferred income tax effect (595) 2,457At December 31 8,569 7,181

3,506 (26,027)

The Company’s Board of Directors declared the following cash dividends in 2014 and 2013:

Declarationdate Record date Date paid IC Approval date Amount

Cashdividend/

shareMay 29, 2014 May 29, 2014 November 21, 2014 August 11, 2014 611,590 P174.74May 16, 2013 May 16, 2013 December 5, 2013 July 12, 2013 569,730 P162.78

(48)

Note 22 - Cash generated from operations

The details of cash generated from operations for the years ended December 31 follow:

Notes 2014 2013Income before income tax 636,830 789,303Adjustments for:

Depreciation and amortization 12,13 29,416 23,038Executive stock plan amortization 21 146 -Provision for (reversal of) impairment loss 10,14 90 (148)Amortization of premium, net 8,9 19,372 10,335Gain on sale of assets 9,14 (88,091) (158,383)Unrealized foreign exchange gain 3 (8,666) (3,518)

Interest expense 2,595 2,672Interest income 19 (129,938) (166,519)Dividend income 9 (9,061) (10,784)Operating income before changes in operating assets and

liabilities 452,693 485,996Changes in operating assets and liabilities

(Increase) decrease in:Insurance balances receivable, net (616,814) (386,052)Reinsurance recoverable on unpaid losses 404,613 (1,417,905)Deferred reinsurance premium 156,013 (236,867)Deferred acquisition cost, net (24,018) 22,197Other receivables, net 4,603 (22,320)Other assets 715 (12,606)

Increase (decrease) in:Reserve for outstanding losses (374,466) 1,516,291Reserve for unearned premiums 1,271 347,403Due to reinsurers and ceding companies 118,438 341,175Funds held for reinsurers 15,475 24,446Accounts payable and accrued expenses 25,577 124,885

Cash generated from operations 164,100 786,643

(49)

Note 23 - Related party transactions and balances

The table below summarizes the Company’s transactions and balances with its related parties.

As at and for the year ended December 31, 2014:

TransactionsOutstanding

balances Terms and conditionsCash in bank

Parent (1,375,122) 215,154 Bank deposits with Parent Companywhich can be withdrawn any time.

Treaty reinsurance transactions with an entity under common controlReinsurance

premiums ceded 850,573 38,565The outstanding balances are settled incash simultaneously and are due 105days after the end of each quarter. Thereceivables are unguaranteed andunsecured in nature and bear no interest.

Reinsurancecommissions 164,805 -

Reinsurancerecoveries fromlosses incurred 400,272 -

1,415,650 38,565

Service feeParent 77,865 34,171 Arises under a Service Agreement for

distributing non-life insurance products.Payable in cash within first quarter of thefollowing year.

Entity undercommon control 30,256 13,845

108,121 48,016

Staff costsKey management

personnel 29,150 -Payments to key management personnelinclude bonuses, payable in cash withinthe first quarter of the following calendaryear and remuneration, payable in cashwithin the year. Staff cost payments toParent Company include share ofcommon expenses on compensation andinternal audit reviews incurred by theParent Company.

Parent 11,738 -

40,888 -

Retirement benefitsKey management

personnel 1,689 -Refer to Note 17 - Post-employmentbenefit plan.

Occupancy and equipment-related expensesParent 4,751 - Arises under a lease agreement. Payable

in cash within 5 days after end of eachmonth.

Entity undercommon control 442 -

Associate of Parent 15,202 -20,395 -

Professional feesParent 12,219 - Share in common expenses with Parent

Company. Payable in cash 5 days beforeend of each month.

(Forward)

(50)


balances Terms and conditionsInterest income

Parent 3,027 - Interest income from bank deposits withParent Company which can be withdrawnany time.

Dividend incomeParent 67 - Collectible in cash within a year.Investor of Parent 1,603 -Entity under

common control 803 -2,473 -

Other expensesParent 7,201 - Arises under an Investment Management

and Custodianship Agreement pertainingto the Company’s investments. Payable incash on demand.

Entity undercommon control

112 - Arises under a Service Agreement forprocessing of mortgage and other loans.Payable in cash on demand.

7,313 -

As at and for the year ended December 31, 2013:


balances Terms and conditionsCash in bank

Parent 1,567,412 1,590,276 Bank deposits with Parent Companywhich can be withdrawn any time.

Treaty reinsurance transactions with an entity under common controlReinsurance

premiums ceded 610,653 456,937The outstanding balances are settled incash simultaneously and are due 105days after the end of each quarter. Thereceivables are unguaranteed andunsecured in nature and bear no interest.

Reinsurancecommissions 119,656 -

Reinsurancerecoveries fromlosses incurred 118,444 -

848,753 456,937

Service feeParent 61,983 30,045 Arises under a Service Agreement for

distributing non-life insurance products.Payable in cash within first quarter of thefollowing year.

Entity undercommon control 19,784 10,039

81,767 40,084

(Forward)

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balances Terms and conditionsStaff costs

Key managementpersonnel 28,001 -

Payments to key management personnelinclude bonuses, payable in cash withinthe first quarter of the following calendaryear and remuneration, payable in cashwithin the year. Staff cost payments toParent Company include share ofcommon expenses on compensation andinternal audit reviews incurred by theParent Company.

Parent 11,748 -

39,749 -

Retirement benefitsKey management

personnel 1,223 -Refer to Note 17 - Post-employmentbenefit plan.

Occupancy and equipment related expensesAssociate of Parent 14,577 - Arises under a lease agreement. Payable

in cash within 5 days after end of eachmonth.

Professional feesParent 10,685 - Share in common expenses with Parent

Company. Payable in cash 5 days beforeend of each month.

Interest incomeParent 2,359 - Interest income from bank deposits with

Parent Company which can be withdrawnany time.

Dividend incomeParent 474 - Collectible in cash within a year.Investor of Parent 382 -Entity under

common control 468 -1,324 -

Other expensesParent 6,224 - Arises under an Investment Management

and Custodianship Agreement pertainingto the Company’s investments. Payable incash on demand.

Entity undercommon control 1,470

- Arises under a Service Agreement forprocessing of mortgage and other loans.Payable in cash on demand.

7,694 -

No provisions were recognized against receivables from related parties in 2014 and 2013.

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Note 24 - Reconciliation of net income under PFRS and Statutory AccountingPractices (SAP)

PFRS varies in certain respects from SAP as prescribed by the IC. A reconciliation of net income underPFRS and the net income determined under SAP for the years ended December 31 is shown below:

2014 2013PFRS net income 481,406 611,583Add (deduct):

(Increase) decrease in deferred acquisition costs, net (24,018) 22,197Difference in change in reserve for unearned premiums, net 75,739 29,200Tax effect of above adjustments (12,014) (13,302)

Net income under SAP 521,113 649,678

Note 25 - Lease commitments

The Company has entered into various lease agreements covering its branches with terms ranging fromone to five years.

Rent expense charged to operations and included in occupancy and equipment related expensesamounts to P24 million in 2014 and 2013. As at December 31, the minimum aggregate rentalcommitments for future years are as follows:

2014 2013Within one year 27,261 23,272After one year but not more than five years 17,124 29,458

44,385 52,730

(53)

Note 26 - Additional information on the results of operation by line of business

Details of the results of operation by line of business follow:

TotalFire Motor Marine Casualty Bonds 2014 2013

Premiums, net of returns and unearned reserves 3,090,902 1,362,131 275,811 220,450 122,522 5,071,816 4,994,734Reinsurance premiums ceded (2,719,188) (68,708) (98,740) (123,173) (64,971) (3,074,780) (3,175,653)Reinsurance commission 246,071 2,667 12,787 13,364 31,165 306,054 254,625UNDERWRITING INCOME 617,785 1,296,090 189,858 110,641 88,716 2,303,090 2,073,706Gross claims incurred 554,154 725,351 (20,016) 24,396 11,653 1,295,538 2,724,604Reinsurance recoveries (448,804) (20,232) 46,216 (1,249) (2,311) (426,380) (2,025,626)Claims and losses, net 105,350 705,119 26,200 23,147 9,342 869,158 698,978Commissions 224,558 218,598 44,613 36,215 29,915 553,899 518,264UNDERWRITING EXPENSES 329,908 923,717 70,813 59,362 39,257 1,423,057 1,217,242NET UNDERWRITING INCOME 287,877 372,373 119,045 51,279 49,459 880,033 856,464GENERAL AND ADMINISTRATIVE EXPENSES 479,131 406,150OPERATING INCOME 400,902 450,314INVESTMENT AND OTHER INCOME 235,928 338,989INCOME BEFORE INCOME TAX 636,830 789,303PROVISION FOR INCOME TAX 155,424 177,720NET INCOME FOR THE YEAR 481,406 611,583

(54)

Note 27 - Supplementary information required by the Bureau of Internal Revenue (BIR)

The following information is presented for purposes of filing with the BIR and is not a required part ofthe basic financial statements.

Supplementary information required by Revenue Regulations No. 15-2010

(i) Output value-added tax (VAT)

Output VAT declared for the year ended December 31, 2014 consists of:

Gross amount ofrevenues Output VAT

Non-life premiumsSubject to 12% VAT 3,970,706 476,485Zero-rated 526,139 -Exempt 126,829 -Sale to Government 1,973 237

Total 4,625,647 476,722

Zero-rated premiums pertain to non-life premiums from PEZA-registered entities pursuant to BIRRevenue Regulations No. 16-2005, As Amended. Exempt premiums are sales of accident and healthpremiums, which are subject to premium tax, and sales of non-life premiums to VAT-exempt entities.Gross premiums above are based on actual collection of premiums, net of returns for tax purposes.

(ii) Input VAT

Details of input VAT for the year ended December 31, 2014 and their movements during the yearfollow:

AmountBeginning balance 5,618Add: Current year’s domestic purchases/payments for:

Capital goods subject to amortization 1,599Claims 47,056Commission 25,052Goods other than for resale 11,605Reinsurance 2,435

Ending balance 93,365

(iii) Documentary stamp tax

Documentary stamp taxes paid and accrued for the year ended December 31, 2014 consist of:

Paid Accrued TotalNon-life insurance policies 611,457 - 611,457

(55)

(iv) All other local and national taxes

All other local and national taxes paid and accrued for the year ended December 31, 2014 consist of:

Paid Accrued TotalLocal government taxes 13,294 12,992 26,286Premium tax (Life insurance) 1,366 239 1,605Municipal taxes 1,200 - 1,200Real property tax 519 - 519Mayor’s permit 48 - 48Community tax 21 - 21Others 934 - 934

17,382 13,231 30,613

The above local and national taxes are lodged under Taxes and licenses in general and administrativeexpenses except for local government taxes and premium taxes which are passed on to policyholdersand real property taxes which are deducted from investment income.

In May 2014, the Company paid P12 million to settle tax assessment liabilities for taxable year 2008.The assessment pertains to income tax, withholding tax, VAT and premium tax.

(v) Withholding taxes

Withholding taxes paid and accrued and/or withheld for the year ended December 31, 2014 consist of:

Paid Accrued TotalWithholding tax on compensation 46,772 3,984 50,756Expanded withholding tax 65,082 11,315 76,397Final withholding tax 89,878 2,651 92,529Fringe benefit tax 2,303 547 2,850VAT withholding 306 7 313

204,341 18,504 222,845

(vi) Tax assessments/ tax cases

Taxable years 2013, 2012 and 2011 are open tax years. The Company has not received any FinalAssessment Notice (FAN) as at December 31, 2014.

The Company has no outstanding tax cases under preliminary investigation, litigation and/orprosecution in courts or bodies outside the BIR as at December 31, 2014.

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