COVER SHEET 2 8 0 1 S.E.C. Registration Number B P I / M S I N S U R A N C E C O R P O R A T I 1 O N (Company’s Full Name) 1 1 T H F C E N T E R M A K A T L I O O R 6 A Y A L 8 1 1 C I T Y A A Y A L L A I F E - F G U A V E N U E (Business Address: No. Street City/Town/Province) Merlina P. Mendoza Contact Person 1 2 3 1 Month Day Fiscal Year 840-9000 Company Telephone Number A F S 0 FORM TYPE 5 C R M Dept. Requiring this Doc. Number/Section NO Amended Articles Total Amount of Borrowings NONE NONE Domestic Foreign To be accomplished by SEC Personnel concerned File Number Document I.D. STAMPS 0 Month Day Annual Meeting N/A Secondary License Type, If Applicable 11 Total No. of Stockholders 3 LCU Cashier BPI/MS Insurance Corporation Financial Statements As at and for the years ended December 31, 2012 and 2011 BPI/MS Insurance Corporation Statements of Financial Position December 31, 2012 and 2011 (In thousands of Philippine Peso) Notes 2012 2011 ASSETS CASH AND CASH EQUIVALENTS INSURANCE BALANCES RECEIVABLE, net 5 594,074 951,976 6,7 714,834 656,983 REINSURANCE RECOVERABLE ON UNPAID LOSSES 7 1,235,464 1,213,978 DEFERRED REINSURANCE PREMIUM 7 1,751,350 1,236,593 65,208 57,918 DEFERRED ACQUISITION COST, net HELD-TO-MATURITY FINANCIAL ASSETS 8 1,342,683 1,352,110 AVAILABLE-FOR-SALE FINANCIAL ASSETS, net 9 1,545,262 1,059,122 OTHER RECEIVABLES, net 10 38,234 85,231 INVESTMENT INCOME DUE AND ACCRUED 11 46,612 43,739 PROPERTY AND EQUIPMENT, net 12 80,423 97,813 SOFTWARE COSTS, net 13 311 1,014 DEFERRED INCOME TAX ASSETS, net 20 104,308 86,117 OTHER ASSETS, net Total assets 14 19,202 7,537,965 19,106 6,861,700 RESERVE FOR OUTSTANDING LOSSES 7,18 1,565,984 1,500,125 RESERVE FOR UNEARNED PREMIUMS 7 2,623,864 2,007,534 DUE TO REINSURERS AND CEDING COMPANIES 7 381,663 620,866 FUNDS HELD FOR REINSURERS 7 184,339 108,643 ACCOUNTS PAYABLE AND ACCRUED EXPENSES Total liabilities SHARE CAPITAL 15 447,667 5,203,517 350,000 405,395 4,642,563 350,000 425,972 425,972 LIABILITIES AND EQUITY 21 SHARE PREMIUM RETAINED EARNINGS 21 1,475,478 1,378,237 RESERVES Total equity Total liabilities and equity 21 82,998 2,334,448 7,537,965 64,928 2,219,137 6,861,700 (The notes on pages 1 to 58 are an integral part of these financial statements.) BPI/MS Insurance Corporation Statements of Income For the years ended December 31, 2012 and 2011 (In thousands of Philippine Peso) Notes UNDERWRITING INCOME Premiums written, net of returns Reinsurance premiums ceded Net premiums retained Increase in reserve for unearned premiums, net Premiums earned Reinsurance commissions GROSS UNDERWRITING INCOME UNDERWRITING EXPENSES Losses and claims, net of reinsurance Commission expense Total underwriting expenses NET UNDERWRITING INCOME GENERAL AND ADMINISTRATIVE EXPENSES Staff costs Occupancy and equipment related expenses Communication and postage Printing and supplies Professional fees Association and pool dues Entertainment Travel and transportation Advertising and promotion Taxes and licenses Training and development Interest expense (Reversal of) provision for impairment Other Total general and administrative expenses OPERATING INCOME INVESTMENT AND OTHER INCOME Interest income Dividend income Gain on sale of investments Other Net investment and other income INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME FOR THE YEAR 16 12,13,23,25 2012 2011 4,632,411 2,893,271 1,739,140 (101,573) 1,637,567 218,148 1,855,715 3,807,426 2,186,007 1,621,419 (31,581) 1,589,838 210,654 1,800,492 560,565 477,400 1,037,965 817,750 589,780 457,567 1,047,347 753,145 239,602 76,786 21,107 11,236 11,228 8,295 6,219 5,988 4,934 4,426 3,867 2,422 (5,002) 3,458 394,566 423,184 225,616 84,080 17,922 10,358 10,451 8,263 6,253 5,263 4,593 3,007 3,523 1,596 5,872 3,001 389,798 363,347 19 9 9 229,618 34,287 66,781 (21,901) 308,785 731,969 223,149 16,973 15,705 4,122 259,949 623,296 20 162,228 569,741 150,632 472,664 10 (The notes on pages 1 to 58 are an integral part of these financial statements.) BPI/MS Insurance Corporation Statements of Total Comprehensive Income For the years ended December 31, 2012 and 2011 (In thousands of Philippine Peso) Note NET INCOME FOR THE YEAR OTHER COMPREHENSIVE INCOME Changes in fair value of available-for-sale financial assets Fair value gains transferred to profit or loss Other comprehensive income TOTAL COMPREHENSIVE INCOME FOR THE YEAR 9 2012 569,741 2011 472,664 26,924 (8,854) 18,070 587,811 18,845 (15,705) 3,140 475,804 (The notes on pages 1 to 58 are an integral part of these financial statements.) BPI/MS Insurance Corporation Statements of Changes in Equity For the years ended December 31, 2012 and 2011 (In thousands of Philippine Peso) Balances at January 1, 2011 Comprehensive income Net income for the year Other comprehensive income Changes in fair value of available-for-sale financial assets Fair value gains transferred to profit or loss Total comprehensive income for the year Transactions with owners Exercise of stock options Cash dividends Total transactions with owners Balances at December 31, 2011 Comprehensive income Net income for the year Other comprehensive income Changes in fair value of available-for-sale financial assets Fair value gains transferred to profit or loss Total comprehensive income for the year Transactions with owners Cash dividends Total transactions with owners Balances at December 31, 2012 Share capital (Note 21) 350,000 Share premium 425,972 Retained earnings (Note 21) 1,263,308 Reserves (Note 21) 63,283 Total 2,102,563 - - 472,664 - 472,664 - - - 18,845 18,845 - - 472,664 (15,705) 3,140 (15,705) 475,804 350,000 425,972 (357,735) (357,735) 1,378,237 (1,495) (1,495) 64,928 (1,495) (357,735) (359,230) 2,219,137 - - 569,741 - 569,741 - - - 26,924 26,924 - - 569,741 (8,854) 18,070 (8,854) 587,811 350,000 425,972 (472,500) (472,500) 1,475,478 82,998 (The notes on pages 1 to 58 are an integral part of these financial statements.) (472,500) (472,500) 2,334,448 BPI/MS Insurance Corporation Statements of Cash Flows For the years ended December 31, 2012 and 2011 (In thousands of Philippine Peso) CASH FLOWS FROM OPERATING ACTIVITIES Cash generated from operations Interest received Interest paid Corporate income taxes paid Final income taxes paid Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Held-to-maturity financial assets Available-for-sale securities Property and equipment Software costs Proceeds from: Collection of loans and other receivables Maturities of held-to-maturity financial assets Disposals of available-for-sale financial assets Disposals of property and equipment Interest received Dividends received Final income taxes paid Net cash (used in) from investing activities CASH FLOW FROM FINANCING ACTIVITIES Payment of cash dividends EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS January 1 December 31 Notes 2012 2011 22 477,936 7,236 (2,422) (139,851) (1,406) 341,493 784,404 6,881 (1,596) (122,724) (1,420) 665,545 8 9 12 13 (2,892,759) (14,020) - (12,471) (1,303,518) (21,280) (4,832) 809 17,200 2,470,553 362 219,510 34,288 (39,163) (203,220) 5,298 9,335 1,393,612 763 218,758 16,973 (37,960) 264,678 (472,500) (357,735) (23,675) (1,195) 8 9 9 21 (357,902) 571,293 951,976 594,074 380,683 951,976 (The notes on pages 1 to 58 are an integral part of these financial statements.) BPI/MS Insurance Corporation Notes to Financial Statements As at and for the years ended December 31, 2012 and 2011 (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 Securities and 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), 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 corporation registered in Singapore. The Company’s registered office, which is also its principal place of business, is located at the 11th, 14th and 16th Floors of Ayala Life-FGU Center, 6811 Ayala Avenue, Makati City. The financial statements were approved and authorized for issuance by the Company’s Board of Directors on March 26, 2013. Note 2 - Summary of significant accounting policies The principal accounting policies applied in the preparation of the Company’s financial statements are set out below. 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 Financial Reporting Standards (PFRS). The term PFRS in general includes all applicable PFRS, Philippine Accounting Standards (PAS), and interpretations of the Philippine Interpretations Committee (PIC), Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) which have been approved by the Financial Reporting Standards Council (FRSC) and adopted by the SEC. These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets. The preparation of financial statements in conformity with PFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 4. Changes in accounting policy and disclosures (a) New and amended standards adopted by the Company There are no PFRS or IFRIC interpretations that are effective for the first time for the financial year beginning January 1, 2012 that have a material impact on the Company. (b) New standards, amendments and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2012, and have not been applied in preparing these financial statements. None of these are expected to have a significant effect on the financial statements, except the following as set out below: (2) PAS 1 (Amendment), Financial Statement Presentation - Other Comprehensive Income (effective July 1, 2012). The main change resulting from these amendments is a requirement for entities to group items presented in other comprehensive income on the basis of whether they can be potentially reclassified to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in other comprehensive income. The Company will apply the amendment beginning January 1, 2013. The adoption is not expected to have a significant impact on the financial statements but will result in changes in presentation in the Company’s statements of total comprehensive income. PAS 19 (Amendment), Employee Benefits (effective January 1, 2013). These amendments eliminate the corridor approach and calculate finance costs on a net funding basis. It would also require recognition of all actuarial gains and losses in other comprehensive income as they occur and of all past service costs in profit or loss. The amendments replace interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). As at December 31, 2012, the Company has unrecognized actuarial loss of P18 million (Note 17) which will be recognized in other comprehensive income upon adoption of the amendments. PFRS 9, Financial Instruments (effective January 1, 2015). This new standard addresses the classification, measurement and recognition of financial assets and financial liabilities. It replaces the parts of PAS 39 that relate to the classification and measurement of financial instruments. PFRS 9 requires financial assets to be classified into two measurement categories: those measured as at fair value and those measured at amortized cost. The determination is made at initial recognition. The classification depends on the entity’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains most of the PAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial liabilities, part of the fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than profit or loss, unless this creates an accounting mismatch. As at December 31, 2012, the Company recognized P65 million of fair value gains on available-for-sale debt securities in other comprehensive income. PFRS 9 only permits the recognition of fair value gains in other comprehensive income if they relate to equity investments that are not held for trading. The Company will consider the impact of the remaining phases of PFRS 9 when issued. PFRS 13, Fair Value Measurement (effective January 1, 2013). This new standard aims to improve consistency and reduce complexity by providing a clarified definition of fair value and a single source of fair value measurement and disclosure requirements for use across PFRS. The requirements, which are largely aligned with IFRS and US GAAP, do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within PFRS. The Company will adopt PFRS 13 effective January 1, 2013 but is not expected to have material impact on the Company’s financial statements as the current fair value measurement of its financial instruments carried at fair value is already consistent with the requirements of the new standard. There are no other PFRS or IFRIC interpretations that are not yet effective that are expected to have a material impact on the Company’s financial statements. 2.2 Cash and cash equivalents Cash and cash equivalents consist of cash on hand, deposits held at call with banks and other short-term highly liquid investments with maturities of three months or less from the date of acquisition and that are subject to insignificant risk of changes in value. 2.3 Financial assets 2.3.1 Classification The Company classifies its financial assets in the following categories: loans and receivables, held-to-maturity financial assets, and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments (i) that are not quoted in an active market, (ii) with no intention of trading, and (iii) that are not designated as available-for-sale. The Company’s loans and receivables comprise cash and cash equivalents, insurance balances receivable and other receivables. (b) Held-to-maturity financial assets Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity. If the Company were to sell other than an insignificant amount of held-to-maturity financial assets, the entire category would be tainted and reclassified as available-for-sale. (c) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. (3) 2.3.2 Recognition and measurement Regular-way purchases and sales of held-to-maturity and available-for-sale financial assets are recognized on trade-date, the date on which the Company commits to purchase or sell the asset. Loans and receivables are recognized upon origination when cash is advanced to the borrowers. Financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition 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 and held-to-maturity financial assets are subsequently carried at amortized cost using the effective interest method. Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognized directly in other comprehensive income, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in other comprehensive income should be recognized in profit or loss. Interest on available-for-sale financial assets calculated using the effective interest method is recognized in profit or loss as part of interest income. Dividends on available-for-sale equity instruments are recognized in profit or loss as part of dividend income when the Company’s right to receive payment is established. 2.3.3 Financial asset reclassification The Company may choose to reclassify financial assets that would meet the definition of loans and receivables out of the available-for-sale category if the Company has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. Reclassifications are made at fair value as at the reclassification date. Fair value becomes the new cost or amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made until the financial assets are sold or impaired. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust effective interest rates prospectively. Derecognition of financial assets Financial assets are derecognized when the contractual right to receive the cash flows from these assets has ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards have not been transferred, the Company tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). 2.4 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 asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or 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 financial assets that can be reliably estimated. (4) The criteria that the Company uses to determine that there is objective evidence of impairment include: 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 financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. The amount of loss is measured as the difference between the financial asset’s carrying amount and the present 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 of recoverable amount of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs of obtaining and selling the collateral, whether or not foreclosure is probable. If a loan or held-to-maturity financial asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Impairment loss is recognized in profit or loss and the carrying amount of the asset is reduced through the use of an allowance account. For purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Company’s grading process that considers asset 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 by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. Loans and receivables are written-off in the year determined to be uncollectible. Loans and receivables are determined to be uncollectible after exerting effort to collect the accounts and upon approval by the Company’s Board of Directors. If in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The amount of reversal is recognized in profit or loss. (5) (b) Assets classified as available-for-sale The Company assesses at each reporting date whether there is evidence that a debt security classified as available-for-sale is impaired. For an equity security classified as available-for-sale, a significant or prolonged decline in the fair value below cost is considered in determining whether the securities are impaired. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Company treats ‘significant’ generally as 20% or more and ‘prolonged’ greater than twelve (12) months. The cumulative loss (difference between the acquisition cost and the current fair value less any impairment loss on that financial asset previously recognized in profit or loss) is removed from other comprehensive 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 or loss. If in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through profit or loss. Reversal of impairment losses recognized previously on equity instruments is made directly to other comprehensive income. 2.5 Financial liabilities The Company classifies its financial liabilities as financial liabilities at amortized cost. Financial liabilities measured at amortized cost include cash collateral, accounts payable and accrued expenses (included in Accounts payable and accrued expenses in the statements of financial position), due to reinsurers and ceding companies, and funds held for reinsurers. Financial liabilities are initially measured at fair value plus transaction costs. It is subsequently measured at amortized cost using the effective interest method. Financial liabilities are derecognized when they have been redeemed or otherwise extinguished. 2.6 Offsetting of financial assets and liabilities Financial assets and liabilities are offset and the net amount reported in the statements of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.7 Determination of fair value of financial instruments The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Company establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models making maximum 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 and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If the above criteria are not met, the market is regarded as being inactive. Indications that a market is inactive are when there is a wide bid-offer spread or significant increase in the bid-offer spread or there are few recent transactions. For all other financial instruments, fair value is determined using valuation technique using observable market data. (6) In cases when the fair value of unlisted equity instruments cannot be determined reliably, the instruments are carried at cost less impairment. The fair value for loans and advances, as well as liabilities to customers, is determined using a present value model on the basis of contractually agreed cash flows, taking into account credit quality, liquidity and costs. 2.8 Investment in an associate An associate is an entity over which the Company has significant influence but not control, generally accompanying 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 is accounted for using the cost method. Under this method, investments are recognized at cost and income from investment is recognized in profit or loss. Investment in an associate is also subject to impairment. Investment in an associate is derecognized when the shareholding interest is sold. 2.9 Property and equipment Property and equipment are stated at historical cost less accumulated depreciation, amortization, and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged 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 the estimated useful lives of the assets, as follows: Condominium units EDP equipment Furniture, fixtures and office equipment Leasehold improvements Transportation equipment 25 years 5 years 5 years 5 years or lease term, whichever is shorter 5 years The asset’s residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher 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 benefits are expected to arise from the continued use of the asset. Any gain or loss arising from derecognition of the asset (calculated as the difference between net disposal proceeds and the carrying amount of the item) is included in profit or loss in the year the item is derecognized. (7) 2.10 Investment property Property that is held either to earn rental or for capital appreciation or for both and that is not significantly 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 measured initially at cost, including transaction costs. Subsequent to initial recognition, investment property is stated at cost less accumulated impairment losses, if any. Impairment test is conducted when there is an indication that the carrying amount of the asset may not be recovered. An impairment loss is recognized 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 withdrawn from use and no future benefit is expected from its disposal. Any gain or loss on the retirement or disposal of investment properties is recognized in profit or loss in the year of derecognition. 2.11 Software costs Software costs are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful life of five years. Costs associated with developing or maintaining computer software programs are recognized as expense when incurred. Development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Software costs are derecognized upon disposal or when no future economic benefits are expected from its use or disposal. 2.12 Impairment of non-financial assets Assets that have an indefinite useful life, for example land, are not subject to amortization and are tested annually for impairment. Assets that have definite useful lives are subject to depreciation or amortization and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets are grouped 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 of the impairment at each reporting date. 2.13 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 the possibility of having to pay benefits on the occurrence of an insured event. The Company may also transfer insurance risk in insurance contracts through its reinsurance arrangements, to hedge against a greater possibility of claims occurring than expected. As a general guideline, the Company defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the insured event did not occur. (8) Investment contracts are those contracts that transfer financial risk with no significant insurance risk. The Company has no outstanding investment contracts for the years 2012 and 2011. 2.14 Insurance contracts 2.14.1 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 earned over the period of cover in accordance with the incidence of risk using the 24th method. The portion of the gross premiums written that relates to the unexpired periods of the policies at year-end is referred to as reserve for unearned premiums in the liability section of the statements of financial position. (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 over the period of cover in accordance with the incidence of risk using the 24th method. The portion of the gross premiums written that relates to the unexpired periods of the policies at year-end is referred to as reserve for unearned premiums in the liability section of the statements of financial position. Claims and loss adjustment expenses are charged against profit or loss as incurred based on the estimated liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the reporting date even if they have not yet been reported to the Company. The Company does not discount its liabilities for unpaid claims. Liabilities for unpaid claim costs including those for incurred but not reported (IBNR) are estimated and accrued. The liabilities for unpaid claims are based on the estimated ultimate cost of settling the claims using the input of assessment for individual cases reported to the Company. The method of determining such estimates and establishing reserves is continually reviewed and updated. Changes in estimates of claims costs resulting from the continuous review process and differences between estimates and payments for claims are recognized in profit or loss in the year in which the estimates are changed or payments are made. Estimated recoveries on settled and unsettled claims are evaluated in terms of estimated realizable values of the salvage recoverable and deducted from the liability for unpaid claims. Outstanding claims and IBNR are presented in the liability section of the statements of financial position as part of reserve for outstanding losses. 2.14.2 Reinsurance commission Reinsurance commission is initially deferred upon acceptance of the premium cession by reinsurers and earned in proportion to premium revenue recognized. (9) 2.14.3 Acquisition costs Costs that vary with and are primarily related to the acquisition of new and renewal insurance contracts such as commissions are deferred and charged to expense in proportion to premium revenue recognized. Unamortized acquisition costs are shown in the statements of financial position as deferred acquisition cost (DAC). Reinsurance commissions are deferred and deducted from the applicable DAC, subject to the same amortization method as the related acquisition costs. 2.14.4 Liability adequacy test At each reporting date, liability adequacy tests are performed to ensure the adequacy of the contract liabilities net of related DAC. In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss initially by writing-off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired provision). Any DAC written off as a result of this test cannot be subsequently reinstated. 2.14.5 Reinsurance contracts held Contracts entered by the Company with reinsurers which compensate the Company for losses on one or more contracts issued and meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by the Company under which the contract holder is another insurer (inward reinsurance) are classified as insurance contracts. Contracts that do not meet these classification requirements are classified as financial assets. The benefits to which the Company is entitled under its reinsurance contracts held are recognized as reinsurance assets. These assets consist of due from reinsurers (classified within Insurance balances receivable) and reinsurers’ share in insurance liabilities. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognized as an expense upon recognition of related premiums. The Company assesses its reinsurance assets for impairment annually. If there is objective evidence that the reinsurance asset is impaired, the Company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognizes that impairment loss in profit or loss. The Company gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortized cost. The impairment loss is also calculated following the same method used for these financial assets. These processes are described in Note 2.4. 2.14.6 Receivables and payables related to insurance contracts Receivables and payables are recognized when the right to receive payment is established or when the obligation becomes due. These include amounts due to and from agents, brokers and insurance contract holders. (10) If there is objective evidence that the insurance receivable is impaired, the Company reduces the carrying amount of the insurance receivable accordingly and recognizes that impairment loss in profit or loss. The Company gathers the objective evidence that an insurance receivable is impaired using the same process adopted for loans and receivables. The impairment loss is also calculated under the same method used for these financial assets. These processes are described in Note 2.4. 2.15 Interest income and expense Interest income on loans and investments, and interest expense, are recognized in profit or loss for all interest-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 a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Company estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. 2.16 Dividend income Dividend income is recognized in profit or loss when the right to receive payment is established. 2.17 Foreign currency translation (a) Functional and presentation currency Items in the financial statements are measured using the currency of the primary economic environment in which the Company operates (the “functional currency”). The financial statements are presented 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 rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. Non-monetary items measured at historical cost denominated in a foreign currency are translated at the exchange rate as at the date of initial recognition. Non-monetary items in a foreign currency that are measured at fair value are translated using the exchange rate at the date when the fair value is determined. (11) Changes in the fair value of monetary securities denominated in foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security, and other changes in the carrying amount of the security. Translation differences are recognized in profit or loss, and other changes in carrying amount are recognized in other comprehensive income. Translation differences on non-monetary financial instruments, such as equities classified as available-for-sale, are included in other comprehensive income. 2.18 Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects the current market assessment of the time value of money and the risk specific to the obligation. The increase in the provision due to the passage of time is recognized as interest expense. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. 2.19 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 for the year except to the extent that the current tax is related to items (for example, current tax on available-for-sale financial assets) that are charged or credited in other comprehensive income or directly to equity. Interest income from cash in banks and investments are subject to final withholding tax. Such income is 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, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the reporting date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. (12) Deferred income tax assets are recognized for all deductible temporary differences, carry-forward of unused tax losses (net operating loss carryover or NOLCO) and unused tax credits (excess minimum corporate income tax or MCIT) to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. Deferred income tax liabilities are recognized in full for all taxable temporary differences. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority where there is an intention to settle the balances on a net basis. The Company reassesses at each reporting date the need to recognize a previously unrecognized deferred income tax asset. Deferred income tax expense or credit included in Provision for income tax is recognized for the changes during the year in the deferred income tax assets and liabilities. 2.20 Employee benefits (a) Pension obligations The Company has a trustee-administered, noncontributory defined benefit plan covering all qualified officers and employees. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the statements of financial position in respect of defined benefit pension plan is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality government bonds that are denominated in the currency in which the benefits will be paid and have terms to maturity that approximate the terms of the related pension liability. Cumulative actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to profit or loss over the employees’ expected average remaining working lives. Past-service costs are recognized immediately in profit or loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. Where the calculation results in a benefit to the Company, the recognized asset is limited to the net total of any unrecognized actuarial losses and past service costs, and the present value of any reductions in future contributions to the plan. (13) (b) Profit-sharing and bonus plans The Company recognizes a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (c) Share-based compensation The Company’s management awards high-performing employees bonuses in the form of options to purchase BPI’s common shares, from time to time, on a discretionary basis. The options are subject to certain service vesting condition, and their fair value is recognized as an employee benefits expense with a corresponding increase in reserves over the vesting period. 2.21 Share capital; Share premium Common shares are classified as share capital. Share premium includes any premiums on consideration received in excess of par value on the issuance of share capital. 2.22 Cash and stock dividends Cash and stock dividends are recorded in the period in which they are approved by the Company’s Board of Directors and the Insurance Commission (IC). 2.23 Leases (Company as a lessee) Leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Refundable deposits paid to the lessor are carried at the present value of the future cash flows using an appropriate discount rate. The difference between the carrying amount and the actual consideration paid is treated as additional rental incentive which is amortized on a straight-line basis over the term of the lease. 2.24 General and administrative expenses General and administrative expenses are recorded when incurred. 2.25 Related party relationships and transactions Related party relationships exist when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationships also exist between and/or among entities which are under common control with the reporting enterprise, or between and/or among the reporting enterprise and its key management personnel, directors, or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. (14) 2.26 Subsequent events (or Events after reporting date) Post year-end events that provide additional information about the Company’s financial position at reporting date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to financial statements when material. Note 3 - Insurance and Financial Risk Management Objectives and Policies and Capital Management The Company issues contracts that transfer insurance risk or financial risk or both. This section summarizes 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 of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable. For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Company faces under its insurance contracts is that the actual claim payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims is greater than estimated. Insurance events are random and the actual number and amount of claims will vary from year to year from the estimate established using statistical techniques. 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 less than standard. In excess of its retention, the Company arranges reinsurance with reputable and financially sound insurance/reinsurance companies. For event losses like earthquake that can involve several retained amounts, the Company is secured by a reinsurance protection based on the Company’s estimated maximum loss exposure. The same adheres to the IC's minimum catastrophe cover requirements. Severity can be managed by loss prevention programs; frequency by correct pricing. (15) Summarized below are the aggregate exposures (gross and net of reinsurance) to earthquake, typhoon and flood by the Company arising from the insurance contracts as at December 31 are as follows: 2012 Zones 1 2 3 4 5 6 7 8 9 10 Zones 1 2 3 4 5 6 7 8 9 10 Earthquake Gross Retention 3,131,076 2,207,464 25,260,327 12,282,522 64,895 64,895 73,571,398 43,404,274 245,883,878 29,901,264 82,977,488 12,638,234 9,497,725 4,397,296 5,349,244 2,446,426 54,709,526 1,164,212 500,445,557 108,506,587 Earthquake Gross Retention 2,860,701 1,912,541 19,268,049 10,107,665 1,000 1,000 49,895 49,895 69,209,404 33,293,969 166,048,809 21,683,774 60,451,858 9,031,932 5,839,503 2,589,605 3,197,052 2,163,107 105,020,186 904,715 431,946,457 81,738,203 Typhoon Gross Retention 11,109,735 5,112,522 86,407,043 12,624,546 144,073,706 49,067,991 249,953,768 31,205,090 2,181,053 1,345,323 962,676 840,795 494,687,981 100,196,267 2011 Typhoon Gross Retention 6,200,734 3,029,280 63,615,293 9,763,621 185,294,215 36,901,409 171,860,371 23,328,593 1,590,932 970,623 645,099 597,408 429,206,644 74,590,934 Flood Gross Retention 10,958,260 4,963,489 85,283,269 11,900,021 140,853,658 46,052,891 247,405,912 29,061,297 2,123,810 1,288,079 800,854 710,970 487,425,763 93,976,747 Flood Gross Retention 6,091,026 2,919,572 62,744,911 9,143,273 182,011,784 33,755,934 169,586,648 21,386,262 1,489,378 869,069 494,422 481,728 422,418,169 68,555,838 Zones pertain to geographical locations set internally by the Company. 3.2 Financial risk The Company is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance and reinsurance liabilities. In particular, the key financial risk is that the proceeds from 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. (16) The Company maintains a high level of liquid assets for the adequate and prompt servicing of its insurance liabilities. The Company's investible funds are managed by BPI's Asset & Management Trust Group (AMTG). The investments are governed by the investment guidelines approved by the Board of Directors and in compliance with the guidelines of the IC. The funds are generally in medium and longterm instruments, balancing the market risks against the desired yields, with provision for liquidity as defined by the Company. The working capital funds are invested in short-term instruments with BPI. The Company's senior management approves the credit terms to be extended to intermediaries and reinsurance clients, evaluates the quality of receivables and the level of impairment, and decides the cancellation rules and credit and collection policies. Internal controls are well-defined and compliance 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 of changes in foreign exchange rates. The insurance business of the Company is mostly denominated in local currency. Currency exposures arise from the holding of monetary assets and liabilities denominated in foreign currencies, mainly debt securities, bank balances and deposits with financial institutions. The Company minimizes its exposure to any significant foreign exchange rate risk by generally investing in assets denominated in the same currency as insurance and reinsurance liabilities. The details of the Company’s foreign currency denominated assets and liabilities as at December 31 are as follows: 2012 Japanese US Dollar Yen Assets Cash and cash equivalents Cash in banks Time deposits Available-for-sale financial assets Liabilities Due to reinsurers and ceding companies Net assets (liabilities) (in thousands) Peso equivalent (in thousands) (17) 2011 Japanese US Dollar Yen 1,991 610 503 3,104 15,485 15,485 7,351 2,786 502 10,639 32,180 32,180 4,378 (1,274) (52,290) 900 14,585 6,937 9,450 1,189 52,126 429 31,751 17,914 The exchange rates of US Dollar 1.00 and Yen 1.00 into Philippine peso as at December 31 are as follows: 2012 41.050 0.4756 US dollar Japanese yen 2011 43.840 0.5642 Unrealized foreign exchange gain charged to profit or loss amounts to P7 million (2011 – P1 million). The table below presents the impact of possible movements of Philippine Peso against the US dollar and Japanese Yen, with all other variables held constant, on the Company’s net income after tax. There is no impact on the Company’s equity other than those already affecting net income after tax. At December 31, 2012 US dollar US dollar Japanese Yen Japanese Yen Change in exchange rate +5% -5% +9% -9% Impact on income after tax 1,917 (1,917) 460 (460) At December 31, 2011 US dollar US dollar Japanese Yen Japanese Yen Change in exchange rate +9% -9% +14% -14% Impact on income after tax 4,691 (4,691) 2,508 (2,508) The reasonably possible movement in foreign currency exchange rates is based on projection by the Company’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 of changes in market interest rate. Interest rate risk is managed by targeting a desired return, which is reviewed periodically, based on the Company’s long-term view on interest rates. Strict investment guidelines, as approved by the AMTG and the IC, are in place and reviewed regularly to provide the general 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 classified as available-for-sale. (18) On the assumption that the interest rate had increased/decreased by 100 basis points at December 31, 2012 and 2011, fair value reserve is expected to increase/decrease by P15 million (2011 - P4 million) as a result of changes in the fair value of available-for-sale debt financial assets. The assumptions are based on the reasonable possible shift of interest rate as determined by management based on historical year-on-year movements of similar instruments. To minimize the interest rate risk, the Company does not pre-terminate its investments before their due date. It manages its working capital to ensure that funds are available when a liability becomes due. 3.2.3 Price risk The Company is exposed to price risk because of equity investments held by the Company and classified in the statements of financial position as available-for-sale. To minimize the price risk exposure in equity securities, the Company has put in place a policy to dispose any single holding of equities which has an unrealized loss on investment of more than 30%, unless otherwise approved by the Company’s Board of Directors. The analysis below presents the impact of reasonable possible movements in the Philippine Stock Exchange Index (PSEi) and the net asset value per share (NAVps) of existing investments in mutual funds on the Company’s fair value reserve. At December 31, 2012 PSEi PSEi NAVps of Mutual funds NAVps of Mutual funds Assumed volatility +15% -15% +22% -22% Impact on equity 25 (25) 37 (37) At December 31, 2011 PSEi PSEi NAVps of Mutual funds NAVps of Mutual funds Assumed volatility +18% -18% +18% -18% Impact on equity 1,843 (1,843) 1,890 (1,890) The assumed volatility in the PSEi is based on the historical year-on-year movements of the PSEi. The assumed volatility in NAVps on existing investments in mutual funds is based on the projected movement in the first quarter of the succeeding year. The assumed volatilities are consistent with the assumption that all the variables are held constant and all the Company’s listed equity instruments and investments in mutual funds moved according to the historical correlation with the stock index and NAVps, respectively. 3.2.4 Credit risk Credit risk represents the loss that would be recognized if counterparties to reinsurance, investment in available-for-sale and held-to-maturity debt securities and insurance and reinsurance transactions are unable or unwilling to fulfill their obligations. (19) (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’s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Company remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered on an annual 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 into master netting arrangements with counterparties. Master netting arrangements do not generally result in 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 master netting arrangement to the extent that if a default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Company accredits its reinsurers and sets a limit as to what can be reinsured with such reinsurance company. Minimum rating allowed is Standard & Poor’s (S&P) A- rating. The reinsurance treaties and the accreditation of reinsurers require board approval. The credit risk arising from insurance operations is closely monitored by the Collections Unit of Finance 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 by mitigating the credit risk which is the risk of loss due to failure of the issuer to make good on its obligation when maturity becomes due. This is mitigated by investing in safe securities and diversifying its investment portfolio so that the failure of any one issuer would not materially affect the cash flow of the Company. Within the guidelines provided by the IC, the AMTG ensures that the Company invests in allowable categories of investment instruments and provided limitation as to the percentage of the portfolio which can be invested in a certain category. Presently, the Company has substantial investments in government securities. For time deposits and debt securities, external ratings such as those provided by Philippine Rating Services Corporation (Philratings) and S&P or their equivalent are used by the Company for managing credit risk exposures. Investments in these deposits and securities are viewed as a way to gain better credit quality mix and at the same time, maintain a readily available source to meet funding requirements. (c) Mortgage loans In measuring credit risk of mortgage loans, the Company considers three components: (i) the probability of default by the borrower on its contractual obligations; (ii) current exposures to the borrower and its likely future development; and (iii) the likely recovery ratio on the defaulted obligations. (20) The Company structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a regular basis and subject to an annual or more frequent review, when considered necessary. Limits on large exposures and credit concentration are approved by the Board of Directors. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. The Company also accepts collateral type of loans in order to mitigate credit risk and require security from its borrowers. (d) Other receivables The Company’s other receivables consist primarily of employees’ car loan as well as receivable from agents. Exposure to credit risk is low considering that the employees’ car loan is amortized monthly through salary deduction while agents’ accounts are deducted from the commissions due them. (ii) Maximum exposure to credit risk Credit risk exposures relating to financial assets are as follows: Cash and cash equivalents, excluding cash on hand Insurance balances receivable Held-to-maturity financial assets Available-for-sale financial assets, excluding equity securities and mutual funds Other receivables Mortgage loan Accounts receivable - non-trade Accounts receivable - trade Investment income due and accrued 2012 593,935 761,467 1,342,683 2011 951,837 703,616 1,352,110 1,033,550 856,593 6,184 14,024 1,731 46,612 3,800,186 5,928 36,525 1,932 43,739 3,952,280 Allowance for impairment on available for sale financial assets, insurance balance receivable, and other receivables amounts to P17 million, P47 million, and P2 million, respectively (2011 – nil, P47 million and P8 million). (21) (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 credit risk exposure. Amount deposited in these banks as at December 31 are as follows: Universal banks Commercial banks Thrift banks 2012 556,973 34,904 2,058 593,935 2011 804,834 145,316 1,687 951,837 S&P BB+ 1,342,683 Total 1,342,683 882,527 20,648 2,245,858 1,012,902 20,648 2,376,233 S&P BB+ 1,352,110 Total 1,352,110 721,674 22,019 2,095,803 834,574 22,019 2,208,703 The table below presents the ratings of debt securities at December 31: 2012 Held-to-maturity Available-for-sale Fixed-term debt securities US dollar Treasury bonds 2011 Held-to-maturity Available-for-sale Fixed-term debt securities US dollar Treasury bonds (22) Philratings AAA A+ to A- 130,375 130,375 - Philratings AAA A+ to A112,900 112,900 - (iv) Other receivables and Investment income due and accrued Loans and receivables and investment income due and accrued are summarized as follows: 2012 Insurance balances receivable Mortgage loans Non-employees Employees Accounts receivable - non-trade Accounts receivable - trade Investment income due and accrued 2011 Insurance balances receivable Mortgage loans Non-employees Employees Accounts receivable - non-trade Accounts receivable - trade Investment income due and accrued Neither past due nor impaired 656,328 5,174 14,024 904 46,612 723,042 Neither past due nor impaired 578,068 4,603 25,533 525 43,739 652,468 Past due in the following periods but not impaired More 91-180 181-360 than 360 days days days 47,308 11,198 47,308 11,198 - Past due in the following periods but not impaired More 91-180 181-360 than 360 days days days 57,363 21,552 57,363 2,187 93 23,832 3,309 3,309 Impaired 46,633 Gross carrying amount 761,467 1,010 827 48,470 1,010 5,174 14,024 1,731 46,612 830,018 Impaired 46,633 Gross carrying amount 703,616 1,325 5,496 1,314 54,768 1,325 4,603 36,525 1,932 43,739 791,740 The Company maintains a normal credit term of 90 days for insurance balances receivable and considers past due as those outstanding beyond 90 days. The details of allowance for impairment are as follows: Insurance balances receivable Mortgage loans - non-employees Accounts receivable - non-trade Accounts receivable - trade 2012 46,633 1,010 827 48,470 2011 46,633 1,325 5,496 1,314 54,768 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 arising from mortgage loans is not significant as this is covered by collateral. For accounts receivable -nontrade, this will be deducted by the Company from the salary of the employees. Majority of investment income due and accrued came from government securities issued and guaranteed by the Philippine Government. (23) (v) Repossessed or foreclosed As at December 31, 2012 and 2011, the Company has possession of collaterals held as security for mortgage and other loans with carrying amount of P16 million (2011 – P16 million). The related foreclosed collaterals have aggregate fair value of P23 million (2011 - P23 million). Repossessed properties are sold as soon as practicable and are classified as assets held-for-sale included in Other assets in the statements of financial position. (vi) Concentrations of risks of financial assets with credit risk exposure The Company’s main credit exposure at their carrying amounts, as categorized by industry sectors follow: At December 31, 2012 Cash and cash equivalents, excluding cash on hand Insurance balances receivable, net Held-to-maturity financial assets Available-for-sale financial assets, excluding equity securities and mutual funds Other receivables Mortgage loans Non-employees Employees Accounts receivable - non-trade Accounts receivable - trade Investment income due and accrued At December 31, 2011 Cash and cash equivalents, excluding cash on hand Insurance balances receivable, net Held-to-maturity financial assets Available-for-sale financial assets, excluding equity securities and mutual funds Other receivables Mortgage loans Non-employees Employees Accounts receivable - non-trade Accounts receivable - trade Investment income due and accrued (24) Financial institutions Real estate Others Less allowance Total 593,935 694,959 1,342,683 - 66,508 - 46,633 - 593,935 714,834 1,342,683 45,000 - 988,550 - 1,033,550 12,512 597 1,068,167 1,010 827 48,470 5,174 14,024 904 46,612 3,751,716 Others Less allowance Total 46,633 - 951,837 656,983 1,352,110 1,405 1,134 46,612 2,725,728 Financial institutions 1,010 5,174 107 6,291 Real estate 951,837 631,923 - - 71,693 1,352,110 55,172 - 801,421 24,102 1,844 43,739 1,708,617 1,325 4,603 11 5,939 12,412 88 2,237,724 - 1,325 5,496 1,314 54,768 856,593 4,603 31,029 618 43,739 3,897,512 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 its liquidity by close monitoring of cash flows to ensure that the operation maintains optimum levels of liquidity at all times sufficient to meet contractual obligations as and when they 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 meet anticipated liquidity needs. Selection of investment maturities is consistent with the cash requirements in order to avoid the forced sale of securities prior to maturity. Net insurance claim liabilities as detailed on Note 7 and 18 are expected to be settled within the succeeding year. Due to reinsurer and ceding companies are settled within the premium warranty period as stipulated in the insurance contract which normally covers one year. Accounts payable and accrued expenses are expected to be settled within one year. Cash collateral covers construction bonds expected to be completed within one year. The table below analyzes the financial liabilities of the Company. Amounts disclosed in the table are the expected undiscounted cash flows of financial liabilities which are all due within one year. Balances due within one year equal their carrying balances as the impact of discounting is not significant. Due to reinsurer and ceding companies Accounts payable and accrued expenses Accounts payable Accrued expenses Cash collateral Funds held for reinsurers 2012 381,663 2011 620,866 69,338 102,084 73,088 184,339 810,512 38,781 107,692 80,259 108,643 956,241 The maturity analyses of financial assets are individually shown in their respective notes to financial statements. (25) 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 and liabilities not presented in the statement of financial position at fair value. Carrying value 2012 2011 Financial assets Cash and cash equivalents Insurance balances receivable, net Held-to-maturity financial assets Other receivables, net (excluding prepayments, advance rentals and creditable withholding taxes) Investment income due and accrued Financial liabilities Due to reinsurers and ceding Companies Funds held for reinsurers Cash collateral, accounts payable and accrued expenses Fair value 2012 2011 594,074 714,834 1,342,683 951,976 656,983 1,352,110 594,074 714,834 1,504,083 951,976 656,983 1,551,123 20,102 46,612 2,718,305 36,250 43,739 3,041,058 20,102 46,612 2,879,705 36,250 43,739 3,240,071 381,663 184,339 620,866 108,643 381,663 184,339 620,866 108,643 244,510 810,512 226,732 956,241 244,510 810,512 226,732 956,241 (a) Held-to-maturity financial assets Fair value of held-to-maturity financial assets is based on market prices or broker/dealer price quotations. Where this information is not available, fair value is estimated using quoted market prices for 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 cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. (c) Other financial assets and financial liabilities The carrying values of other financial assets and financial liabilities approximate their respective fair values at reporting date due to their short-term nature. (26) (ii) Fair value hierarchy PFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Philippine Stock Exchange, Inc., Philippine Dealing and Exchange Corp., etc.). Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). The primary source of input parameters is Bloomberg. 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 significant unobservable components. This hierarchy requires the use of observable market data when available. The Company considers relevant and observable market prices in its valuations where possible. The following table presents the Company’s assets that are measured at fair value at December 31: Level 1 Available-for-sale financial assets Debt securities Equity securities (excluding unlisted shares), net Investment in mutual funds December 31, 2012 903,175 437,544 163 1,340,882 Level 1 Available-for-sale financial assets Debt securities Equity securities (excluding unlisted shares), net Investment in mutual funds December 31, 2011 698,693 119,964 10,172 828,829 Level 2 130,375 130,375 Level 2 157,900 157,900 Total 1,033,550 437,544 163 1,471,257 Total 856,593 119,964 10,172 986,729 The Company has no financial instruments that fall under the Level 3 category as at December 31, 2012 and 2011. Unlisted available-for-sale equity securities are carried at cost less impairment. (27) 3.3 Capital management The Company’s objectives when managing capital (total equity as shown in the statements of financial position) 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 Company maintains a certain level of capital to ensure that solvency margins are in excess of regulatory requirements which, in turn, protect its policyholders. The level of MOS is monitored by the Company’s management, employing the procedures based on the guidelines developed by the IC. Under the Insurance Code, a non-life insurance company doing business in the Philippines shall maintain at all times an MOS equal to P500 thousand or 10% of the total amount of its net premiums written during the preceding year, whichever is higher. The MOS shall be the excess of the value of its admitted assets (as defined under the Insurance Code), exclusive of its paid-up capital over the amount of its liabilities, reserve for unearned premiums and reinsurance reserves. Reserve for unearned premiums determined in accordance with the same Code for purposes of MOS amounts to P655 million (2011 - P591 million). In the accompanying financial statements, the PFRS net reserve for unearned premiums at December 31 follows: Reserve for unearned premiums Deferred reinsurance premiums (28) 2012 2,623,864 1,751,350 872,514 2011 2,007,534 1,236,593 770,941 The MOS computations of the Company at December 31 follow: Total assets Non-admitted assets Due from agents and brokers Deferred reinsurance premium Deferred acquisition cost, net Investments Other receivables Property and equipment, net Deferred income tax assets, net Other assets Total admitted assets Total liabilities and share capital Reserve for unearned premiums Other liabilities Paid-up capital Available for MOS Minimum MOS Excess MOS 2012 7,537,965 2011 6,861,700 214,710 1,751,350 65,208 82,998 2,538 8,347 104,308 12,543 2,242,002 5,295,963 43,030 1,236,593 57,918 64,928 19,235 20,742 86,117 19,781 1,548,344 5,313,356 654,621 2,579,653 350,000 3,584,274 1,711,689 162,142 1,549,547 590,893 2,635,028 350,000 3,575,921 1,737,435 146,356 1,591,079 The final amounts of the MOS can be determined only after the accounts of the Company have been examined by the IC, specifically as to admitted and non-admitted assets as defined in the Insurance Code. The Company also manages its capital through its compliance with the following regulatory requirements: Fixed capitalization In September 2006, the Department of Finance issued Department Order 27-06 increasing the capitalization requirements for insurance and reinsurance companies on a staggered basis for the five years ended December 31, 2006 up to 2011. Depending on the level of foreign ownership in the insurance company, the minimum statutory net worth and minimum paid-up capital requirements vary. The statutory net worth shall include the Company’s paid-up capital, capital in excess of par value, contingency surplus, retained earnings and revaluation increments as may be approved by the IC. The minimum paid-up capital is pegged at 50% of the minimum statutory net worth. On October 29, 2009, the IC issued Circular Letter No. 26-08 deferring the scheduled increase due December 31, 2008 to December 31, 2009. (29) On November 11, 2010, the IC issued an advisory regarding the implementation of Department Order 27-2006. Based on the advisory, the Company, being an insurance company with at least 40% equity but less than 60% foreign equity, is required to maintain a minimum statutory net worth and minimum paid-up capital as at December 31, 2012 of P700 million and P350 million, respectively. As at December 31, 2012 and 2011, the Company is fully compliant with these requirements. Risk-based capital In October 2006, the IC issued Insurance Memorandum Circular No. 7-2006 adopting the risk-based capital framework for non-life insurance industry to establish the required amounts of capital to be maintained by insurance companies in relation to their investment and insurance risks. Every non-life insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the trend test. The insurance company will be subjected to the corresponding regulatory intervention upon its failure to meet the minimum RBC ratio. The Company calculates and is compliant with the RBC ratio based on the requirements of the Circular. Limitation on dividend declaration The Code provides that the Company shall declare or distribute dividends on its outstanding stock only from profits remaining on hand after retaining unimpaired: the entire paid-up capital stock; the margin of solvency required; the legal reserve fund required; and, a sum sufficient to pay all net losses reported or in the course of settlement and all liabilities for expenses and taxes. The Company is required to report such dividend declaration or distribution to the IC within thirty 30 days from the date of such declaration (Note 21). Note 4 - Critical accounting estimates, assumptions and judgments in applying accounting policies The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. It is reasonably possible that the outcomes within the next financial year could differ from assumptions made at reporting date and could result in the adjustment to the carrying amount of affected 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 the Company’s most critical accounting estimate. There are several sources of uncertainty that need to be considered in the estimate of the liability that the Company will ultimately pay for such claims. The major uncertainties are the frequency of claims due to the contingencies covered and the timing of benefit payments. (30) The Company considers that it is impracticable to discuss with sufficient reliability the possible effects of sensitivities surrounding the ultimate liability arising from claims made under insurance contracts as the major uncertainties may differ significantly. With this, it is reasonably possible, based on existing knowledge, that the outcomes within the next financial year are different from assumptions and could require a material adjustment to the carrying amount of the asset or liability affected including reserve for outstanding losses and related reinsurance balances. The carrying value of reserve for outstanding losses as at December 31, 2012 and 2011 amounts to P1,566 million and P1,500 million, respectively. B. Critical accounting judgments (a) Held-to-maturity financial assets (Note 8) The Company follows the guidance of PAS 39 in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgment. In making this judgment, the Company evaluates its intention and ability to hold such investments to maturity. If the Company fails to keep these investments to maturity other than for the specific circumstances - for example, selling an insignificant amount close to maturity - it will be required to reclassify the entire class to available-for-sale financial assets. The investments will therefore 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 by P161 million (2011 - P199 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 is impaired. 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’ 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 its cost; and the financial health and near-term business outlook of the issuer, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. The allowance for impairment recognized for available-for-sale financial assets as at December 31, 2012 amounts to P17 million (2011 - nil). (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 for impairment should be recorded in profit or loss. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. The amount and timing of recorded expenses for any period would differ if the Company made different judgment. An increase in allowance for impairment losses would increase recorded expenses and decrease net income. Other financial assets consist of insurance balances receivable, held-to-maturity financial assets, other receivables and investment income due and accrued. (31) The allowance for impairment recognized for other financial assets as at December 31 follows: Insurance balances receivable Other receivables At December 31 2012 46,633 1,837 48,470 2011 46,633 8,135 54,768 (d) Income taxes (Note 20) Management reviews at each reporting date the carrying amounts of deferred tax assets. The carrying amount of deferred tax assets is reduced to the extent that the related tax assets cannot be utilized due to insufficient taxable profit against which the deferred tax losses will be applied. Management believes that sufficient taxable profit will be generated to allow all or part of the deferred income tax assets to be utilized. Note 5 - Cash and cash equivalents The details of the account at December 31 follow: Cash on hand Cash in banks Philippine peso US dollar Japanese yen Time deposits Philippine peso US dollar 2012 139 2011 139 198,073 81,743 7,365 287,181 163,045 322,823 18,156 504,024 281,702 25,052 306,754 594,074 325,678 122,135 447,813 951,976 The Philippine peso and US dollar time deposits have maturities of 90 days or less. The Philippine peso time deposits have annual interest rates ranging from 1.0% to 3.75% (2011 - 1.25% to 2.5%). The US dollar time deposits bear interest rates ranging from 0.4625% to 1.375% (2011 - 0.925% to 1.85%). Interest income earned on cash and cash equivalents amounts to P7 million (2011 – P7 million) (see Note 19). (32) Note 6 - Insurance balances receivable, net The details of the account at December 31 follow: Due from agents and brokers Due from ceding companies and reinsurers Funds held by ceding companies Allowance for impairment 2012 663,663 86,881 10,923 761,467 (46,633) 714,834 2011 599,305 91,916 12,395 703,616 (46,633) 656,983 All insurance receivables are due within one year. There are no movements in allowance for impairment during 2012 and 2011. Note 7 - Reinsurance balances The Company utilizes reinsurance agreements to minimize its exposure to large losses in all aspects of its insurance business. Reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The details of reinsurance balances at December 31 are as follows: 2012 761,467 2011 703,616 (381,663) (184,339) 195,465 (620,866) (108,643) (25,893) Reserve for outstanding losses Less Reinsurance recoverable on unpaid losses Balance, net of reinsurance 1,565,984 (1,235,464) 330,520 1,500,125 (1,213,978) 286,147 Reserve for unearned premiums Less Deferred reinsurance premium Balance, net of reinsurance 2,623,864 (1,751,350) 872,514 2,007,534 (1,236,593) 770,941 Insurance balances receivable, gross Less reinsurance balances Due to reinsurers and ceding companies Funds held for reinsurers Balance, net of reinsurance Note 8 - Held-to-maturity financial assets The account consists of peso-denominated fixed-term Treasury notes with interest rates ranging from 4.7% to 9.9% (2011 - 4.7% to 13%). Current Non-current (33) 2012 1,342,683 1,342,683 2011 17,200 1,334,910 1,352,110 Movements in the account follow: At January 1 Additions Maturities Amortization of discount, net At December 31 2012 1,352,110 (17,200) 7,773 1,342,683 2011 1,341,820 12,471 (9,335) 7,154 1,352,110 Securities amounting to P88 million (2011 - P88 million) are deposited with the IC in accordance with the provisions of the Insurance Code of the Philippines (Insurance Code) for the benefit of policyholders and creditors of the Company. The fair value of the held-to-maturity financial assets at December 31, 2012 amounts to P1,504 million (2011 - P1,551 million). Interest income earned from held-to-maturity securities amount to P133 million (2011 - P133 million) (see Note 19). Note 9 - Available-for-sale financial assets Available-for-sale financial assets at December 31 consist of: Equity securities Listed shares Unlisted shares Debt securities Fixed-term Treasury notes US dollar Treasury bonds Investment in mutual funds Allowance for impairment on unlisted shares Current Non-current (34) 2012 2011 455,005 74,005 119,964 72,393 1,012,902 20,648 163 1,562,723 (17,461) 1,545,262 834,574 22,019 10,172 1,059,122 1,059,122 2012 359,970 1,185,292 1,545,262 2011 61,280 997,842 1,059,122 Movements in the account follow: At January 1 Additions Disposals Amortization of premium, net Net fair value gain Provision for impairment Exchange differences At December 31 2012 1,059,122 2,892,759 (2,403,772) (2,177) 18,070 (17,461) (1,279) 1,545,262 2011 1,131,686 1,303,518 (1,377,907) (1,730) 3,140 415 1,059,122 Movements in allowance for impairment are as follows: At January 1 Provision for impairment At December 31 2012 17,461 17,461 2011 - Listed equity securities include common shares of BPI Parent and other related parties (see Note 23). Dividend income earned from listed securities and unlisted equity securities as of December 31, 2012 amounts to P10 million and P24 million, respectively (2011 - P4 million and P13 million, respectively). Debt securities have interest rates ranging from 4.7% to 9.9% (2011 - 5.1% to 9.9%). The Company has an Investment Management and Custodianship Agreement with BPI (see Note 23). Interest income earned on available-for-sale financial assets amounts to P88 million (2011 - P81 million) (see Note 19). The Company sold certain available-for-sale securities which resulted in a gain of P67 million and P16 million for the years ended December 31, 2012 and 2011, respectively. Proceeds from disposals of available-for-sale securities amount to P2,471 million and P1,394 million for the years ended December 31, 2012 and 2011, respectively. (35) Note 10 - Other receivables, net The details of the account at December 31 follow: Mortgage loans Non-employees Employees Accounts receivable - trade Accounts receivable - non-trade Prepayments Advance rentals Creditable withholding taxes Allowance for impairment Current Non-current 2012 2011 1,010 5,174 1,731 14,024 7,053 5,490 5,589 40,071 (1,837) 38,234 1,325 4,603 1,932 36,525 14,734 5,047 29,200 93,366 (8,135) 85,231 2012 15,662 22,572 38,234 2011 46,674 38,557 85,231 Movements in allowance for impairment follow: At January 1 (Reversal of) provision for impairment Write-off At December 31 2012 8,135 (5,002) (1,296) 1,837 2011 2,713 5,872 (450) 8,135 2012 1,010 827 1,837 2011 1,325 6,810 8,135 Breakdown of the allowance for impairment follows: Mortgage loans Accounts receivable - trade The Company’s mortgage loans - non-employees pertain to participation on a without recourse basis in the 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), a related party, for the processing, servicing and administration of the Company’s mortgage and other loans (see Note 23). Interest income on mortgage and other loans amount to P2 million (2011 - P2 million) (see Note 19). Accounts receivable - non-trade consists mainly of employee salary and car facility loans while accounts receivable - trade represents receivable from agents for unremitted premium collections. (36) Note 11 - Investment income due and accrued The account at December 31 represents income earned but not yet received from the following: 2012 Cash in bank Time deposits Financial assets Held-to-maturity financial assets Available-for-sale financial assets 2011 77 323 14,654 31,881 46,612 31,902 11,514 43,739 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: Furniture, fixtures and Condominium EDP office Leasehold Transportation units equipment equipment improvements equipment 66,242 Total Year ended December 31, 2012 Opening net book value 15,935 6,575 5,991 3,070 97,813 - 5,449 2,592 3,128 2,851 14,020 Reclassification - 173 (173) - Disposals - (99) (136) - Additions - - (127) (362) Depreciation charge (5,064) (14,472) (3,061) (5,502) (2,949) (31,048) Closing net book value 61,178 6,986 5,797 3,617 2,845 80,423 At December 31, 2012 Cost 126,687 67,211 15,748 21,905 10,692 242,243 Accumulated depreciation (65,509) (60,225) (9,951) (18,288) (7,847) (161,820) 61,178 6,986 5,797 3,617 2,845 80,423 71,306 25,091 3,772 7,060 1,092 108,321 7,760 5,359 4,367 3,794 21,280 Net book value Year ended December 31, 2011 Opening net book value Additions - Disposals - (314) - (283) (166) (763) Depreciation charge (5,064) (16,602) (2,556) (5,153) (1,650) (31,025) Closing net book value 66,242 15,935 6,575 5,991 3,070 97,813 At December 31, 2011 Cost 139,462 63,545 13,942 18,777 10,240 245,966 Accumulated depreciation (73,220) (47,610) (7,367) (12,786) (7,170) (148,153) 66,242 15,935 6,575 5,991 3,070 97,813 Net book value Depreciation charge is included in Occupancy and equipment-related expenses in the statements of income. (37) Note 13 - Software costs, net The details of the account at December 31 follow: Opening net book value Additions Amortization charge Closing net book value 2012 1,014 (703) 311 2011 5,477 4,832 (9,295) 1,014 Amortization charge is included in Occupancy and equipment-related expenses in the statements of income. Note 14 - Other assets, net The details of the account at December 31 are as follows: 2012 Current Certificate of Cover (COC) revolving fund (a) Non-current Investment property (b) Investment in an associate (c) Assets held-for-sale, net (d) Security fund (e) Other properties 2011 325 228 15,390 2,605 843 21 18 18,877 19,202 15,390 2,605 844 21 18 18,878 19,106 (a) COC Revolving Fund COC revolving fund is a seed fund maintained at third-party service providers which covers the documentary stamp taxes (DST) and value added taxes (VAT) for certificates of cover issued on outstanding policies. (b) Investment property Investment property consists of a residential real estate property held for undetermined future use. The Company received the property in 2005 in settlement of a loan receivable. The fair value of the investment property in 2012 and 2011, based on appraised value determined by BPI Family Bank Appraisal Unit, amounts to P18 million. The appraised value is determined using market data approach. (c) Investment in an associate Investment in an associate at December 31, 2012 and 2011 consist of the acquisition cost of the 49% ownership in FCS Insurance Agency and Consultants, Inc., net of allowance for impairment of P2 million. (38) (d) Assets held-for-sale Assets held-for-sale as at December 31, 2012 and 2011 is net of allowance for impairment of P160 thousand. (e) Security fund Security fund is maintained in compliance with Sections 365 and 367 of the Insurance Code. The amount of security fund is determined by and deposited with the IC to pay valid claims against insolvent insurance companies. Note 15 - Accounts payable and accrued expenses The details of the account at December 31 are as follows: Note Taxes payable Accrued expenses Retirement benefit obligation Accounts payable Cash collateral 17 2012 200,641 102,084 2,516 69,338 73,088 447,667 2011 178,663 107,692 38,781 80,259 405,395 Cash collateral pertains to cash deposits posted primarily by building contractors as security for the bond issued by the Company. Accrued expenses include contingent profit commission amounting to P50 million (2011 - P60 million). The contingent profit commission pertains to bonuses to intermediaries in relation to insurance premiums generated during the year. Accounts payable and accrued expenses as at December 31, 2012 and 2011 are due within one year and considered as current, except for retirement benefit obligation. Note 16 - Staff costs The details of the account for the years ended December 31 are as follows: Note Salaries and wages Pension costs Social security costs Other employee benefits 17 The Company has 354 employees as at December 31, 2012 (2011 - 336). (39) 2012 200,113 12,915 5,671 20,903 239,602 2011 190,689 10,299 5,464 19,164 225,616 Note 17 - Post-employment benefit plan The Company has a trusteed defined benefit plan. Under the plan, the normal retirement age is 60 years or the employee should have completed at least 10 years of service, whichever is earlier. The normal retirement benefit is equal to 150% of the final basic monthly salary for each year of service for below 10 years and 175% of the final basic monthly salary for each year of service for 10 years and above. The amounts recognized in the statements of financial position at December 31 are determined as follows: Present value of obligation 2012 154,175 2011 143,410 2010 133,587 2009 117,593 2008 100,730 Fair value of plan assets (Surplus) Deficit Unrecognized actuarial loss Retirement benefit obligation 169,626 (15,451) 17,967 2,516 156,065 (12,655) 12,655 - 148,999 (15,412) 15,412 - 127,062 (9,469) 9,469 - 99,249 1,481 940 2,421 The movements in the present value of defined benefit obligation are as follows: At January 1 Interest cost Current service cost Benefits paid Actuarial loss on obligation At December 31 2012 143,410 9,967 13,279 (7,654) (4,827) 154,175 2011 133,587 9,792 12,427 (12,121) (275) 143,410 2012 156,065 10,331 10,399 (7,654) 485 169,626 2011 148,999 11,920 10,299 (12,121) (3,032) 156,065 The movements in the fair value of plan assets are as follows: At January 1 Expected return on plan assets Contributions Benefits paid Actuarial gain (loss) on plan assets At December 31 The carrying value of plan assets as at December 31, 2012 and 2011 is the same as its fair value. These assets, which are held in trust and governed by local regulations and practices in the Philippines, are as follows: Government securities Fixed income funds (including accrued interest) Equity securities (40) 2012 Amount % 118,086 69.62% 28,786 16.97% 22,754 13.41% 169,626 100.00 2011 Amount % 123,304 79.01 15,803 10.13 16,958 10.87 156,065 100.00 Experience adjustments on pension liabilities and plan assets follow: Experience adjustments on pension liabilities Experience adjustments on plan assets 2012 2011 2010 3,691 485 (2,204) (3,032) (3,331) 9,546 2009 3,380 11,244 2008 2,888 (16,771) Expense recognized in the statements of income follows: Interest cost Current service cost Expected return on plan assets 2012 9,967 13,279 (10,331) 12,915 2011 9,792 12,427 (11,920) 10,299 2012 10,331 485 10,816 2011 11,920 (3,032) 8,888 The actual return on plan assets is as follows: Expected return Actuarial gain (loss) Actual return The principal actuarial assumptions used are as follows: Discount rate Expected return on plan assets Salary increase rate 2012 6.66% 5.66% 4.00% 2011 6.95% 6.62% 6.50% Mortality rate is based on the 1983 US Group Annuity Mortality Table, male and female. The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the reporting date. Expected returns on equity investments reflect long-term real rates of return experienced in the market. The Company has no other transactions with fund other than the contributions and reimbursement of benefit payments presented above as at December 31, 2012 and 2011. The expected contribution to the retirement fund in 2013 amounts to P12 million. (41) 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 insurance companies are required to set-up provisional loss reserve, a physical inspection is done on the damaged property to ensure a more accurate estimate on the amount of loss. For property and engineering insurance, services of a professional adjustment firm are sought to do the inspection, investigation and data gathering while marine surveyors are contacted to do loss surveys for marine losses. Motor car losses are handled by the Company’s motor car damage evaluators. (b) Changes in assumptions and sensitivity analysis There were no changes in assumptions made in reserves for outstanding losses net of reinsurance claims in 2012 and 2011. Majority of the Company’s claims are from motor car insurance which account for about 83% (2011 – 81%) of the total number of claims received. Since motor car line is fully retained, it is important to underwrite this line using the proper rates, terms and conditions. Proper claims control should 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 period of time on a gross and net of reinsurance basis. i. Gross of reinsurance As at December 31, 2012 Accident year Year of payment 2008 2009 2010 2011 2012 2008 14,362 2009 295 36,358 2010 385 121,850 22,110 2011 194 5,629 (5,284) 810,948 2012 235 14,536 4,107 141,955 1,653,662 Current estimate of cumulative claims 15,471 178,373 20,933 952,903 1,653,662 Cumulative payments to date (12,963) (170,570) (34,552) (678,503) (446,658) Liability recognized in the statements of financial position 2,508 7,803 (13,619) 274,400 1,207,004 Liability in respect of prior years Total gross liability included in the statement of financial position, excluding IBNR Provision for IBNR Reserve for outstanding losses (42) Total 14,362 36,653 144,345 811,487 1,814,495 2,821,342 (1,343,246) 1,478,096 68,488 1,546,584 19,400 1,565,984 As at December 31, 2011 Accident year Year of payment 2007 2008 2009 2010 2011 2007 (584) 2008 674 48,061 2009 (34,837) 162,891 2010 (2) (69) (247,324) 267,358 2011 17 136 10,651 112,344 1,904,596 Current estimate of cumulative claims 105 13,291 (73,782) 379,702 1,904,596 Cumulative payments to date (674) (37,599) (204,582) (302,448) (431,659) Liability recognized in the statements of financial position (569) (24,308) (278,364) 77,254 1,472,937 Liability in respect of prior years Total gross liability included in the statements of financial position, excluding IBNR Provision for IBNR Reserve for outstanding losses Total (584) 48,735 128,054 19,963 2,027,744 2,223,912 (976,962) 1,246,950 233,775 1,480,725 19,400 1,500,125 ii. Net of reinsurance As at December 31, 2012 Accident year Year of payment Total 2008 2009 2010 2011 2012 2008 5,506 5,506 2009 172 3,085 3,257 2010 372 1,665 18,058 20,095 2011 191 309 10,735 100,449 111,684 2012 70 10,868 3,576 75,663 903,824 994,001 Current estimate of cumulative claims 6,311 15,927 32,369 176,112 903,824 1,134,543 Cumulative payments to date (3,694) (4,864) (24,879) (183,331) (367,121) (583,889) Liability recognized in the statements of financial position 2,617 11,063 7,490 (7,219) 536,703 550,654 Liability in respect of prior years (239,534) Total net liability included in the statements of financial position, excluding IBNR 311,120 Provision for IBNR 19,400 Reserve for outstanding losses 330,520 (43) As at December 31, 2011 Year of Accident year payment 2007 2008 2009 2010 2007 (120) 2008 667 7,149 2009 (3,322) (2,848) 2010 (91) (627) 237,416 2011 17 131 3,516 81,132 Current estimate of cumulative claims 564 3,867 41 318,548 Cumulative payments to date (287) (3,501) (6,549) (224,073) Liability recognized in the statements of financial position 277 366 (6,508) 94,475 Liability in respect of prior years Total net liability included in the statements of financial position, excluding IBNR Provision for IBNR Reserve for outstanding losses 2011 965,035 Total (120) 7,816 (6,170) 236,698 1,049,831 965,035 1,288,055 (409,527) (643,937) 555,508 644,118 (377,371) 266,747 19,400 286,147 IBNR losses The Company provides for estimated IBNR losses based on the average five-year historical experience covering 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, 2012 and 2011 amounts to P19 million. Note 19 - Interest income The details of the account for the years ended December 31 are as follows: Interest income from: Held-to-maturity financial assets Available-for-sale financial assets Cash and cash equivalents Mortgage and other loans (44) Notes 2012 2011 8 9 5 10 132,917 87,884 6,990 1,827 229,618 132,959 81,435 6,981 1,774 223,149 Note 20 - Income taxes The details of the account for the years ended December 31 follows: 2012 40,569 139,850 (18,191) 162,228 Final tax Provision for income tax - current Benefit from income tax - deferred 2011 39,380 116,347 (5,095) 150,632 The movements in deferred income tax assets and liabilities in 2012 are as follows: At January 1 Deferred income tax assets Excess of reserve for unearned premium per books over tax basis, net Provision for IBNR Allowance for impairment Retirement benefit obligation Unamortized past service cost Accrued service fees Contingent profit commission Unrealized foreign exchange loss, net Deferred income tax liabilities Deferred acquisition costs Unrealized foreign exchange gain, net Net deferred income tax assets (45) Credited (charged) to income At December 31 54,014 5,820 16,479 146 9,397 17,953 103,809 16,550 3,349 755 (37) 462 (3,102) 2,084 20,061 70,564 5,820 19,828 755 109 9,859 14,851 2,084 123,870 (17,375) (317) (17,692) 86,117 (2,187) 317 (1,870) 18,191 (19,562) (19,562) 104,308 The movements in deferred income tax assets and liabilities in 2011 are as follows: Deferred income tax assets Excess of reserve for unearned premium per books over tax basis, net Provision for IBNR Allowance for impairment Unamortized past service cost Accrued service fees Contingent profit commission Deferred income tax liabilities Deferred acquisition costs Unrealized foreign exchange gain, net Net deferred income tax assets At January 1 Credited (charged) to income At December 31 64,656 5,820 14,852 182 9,869 95,379 (10,642) 1,627 (36) 9,397 8,084 8,430 54,014 5,820 16,479 146 9,397 17,953 103,809 (14,125) (232) (14,357) 81,022 (3,250) (85) (3,335) 5,095 (17,375) (317) (17,692) 86,117 The future tax benefits of deferred income tax assets are expected to be realized primarily upon realization of excess of recorded reserve for unearned premiums over tax basis, payment of claims and contingent profit commission and receivable write-off. The analysis of the recoverability of deferred income tax assets and liabilities is as follows: Deferred tax assets Deferred tax asset expected to be recovered within 12 months Deferred tax asset expected to be recovered after 12 months Deferred tax liabilities Deferred tax liability expected to be settled within 12 months Deferred tax assets, net 2012 2011 103,215 20,655 123,870 87,330 16,479 103,809 19,562 104,308 17,692 86,117 The reconciliation between the provision for income tax computed at the statutory income tax rate and the actual provision for income tax follows: Income before income tax Income tax at statutory tax rate of 30% Income subject to lower final tax rate, net Tax-exempt income, net Non-deductible expenses Provision for income tax (46) 2012 731,969 219,591 (27,768) (30,322) 727 162,228 2011 623,296 186,989 (27,032) (9,803) 478 150,632 Note 21 - Share capital; Reserves; Dividends The Company’s total authorized share capital consists of 3,550,000 shares with a par value of P100 per share, of which 3,500,000 shares are issued and outstanding as at December 31, 2012 and 2011. The Company intends to use its retained earnings as an additional reserve for losses and claims from policyholders (Note 3). The movement in reserves for the years ended December 31 follow: Fair value reserve on available-for-sale financial assets Balance, January 1 Net fair value gain Balance, December 31 Stock option scheme Balance, January 1 Exercise of options Balance, December 31 Notes 2012 2011 9 64,928 18,070 82,998 61,788 3,140 64,928 82,998 1,495 (1,495) 64,928 The Company’s Board of Directors declared the following cash dividends in 2012 and 2011: Declaration date May 31, 2012 May 27, 2011 (47) Record date May 31, 2012 May 27, 2011 Date paid December 19, 2012 September 14, 2011 IC Approval date August 10, 2012 July 8, 2011 Amount 472,500 357,735 Cash dividend/ share P135.00 P102.21 Note 22 - Cash generated from operations The details of cash generated from operations for the years ended December 31 follow: Income before income tax Adjustments for: Depreciation and amortization (Reversal of) provision for impairment Impairment loss on available-for-sale financial assets Amortization of premium/discount, net Gain on sale of available-for-sale financial assets Unrealized foreign exchange gain Interest expense Interest income Dividend income Operating income before changes in operating assets and liabilities Changes in operating assets and liabilities (Increase) decrease in: Insurance balances receivable, net Reinsurance recoverable on unpaid losses Deferred reinsurance premium Deferred acquisition cost, net Other receivables, net Other assets Increase (decrease) in: Reserve for outstanding losses Reserve for unearned premiums Due to reinsurers and ceding companies Funds held for reinsurers Accounts payable and accrued expenses Cash generated from operations (48) Notes 2012 731,969 2011 623,296 12,13 10 9 8,9 9 3 31,751 (5,002) 17,461 (5,596) (66,781) 6,948 2,421 (229,618) (34,287) 40,320 5,872 (5,424) (15,705) (1,054) 1,596 (223,149) (16,973) 449,266 408,779 (42,857) (21,486) (514,757) (7,290) 54,657 (97) 108,764 (306,113) (144,266) (10,835) (53,182) 297 65,859 616,331 (239,203) 75,695 41,818 477,936 313,133 175,847 234,153 (15,229) 73,056 784,404 19 9 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, 2012: Outstanding Transactions balances Treaty reinsurance transactions with an entity under common control Reinsurance premiums ceded 496,109 156,971 Reinsurance commissions 99,561 Reinsurance recoveries from losses incurred 203,696 799,366 156,971 Dividend income Parent 1,294 Investor of Parent 238 Entity under common control 395 1,927 Cash in bank Parent 377,490 550,822 Interest income Parent Terms and conditions The outstanding balances are settled simultaneously and are due 105 days after the end of each quarter. The receivables are unsecured in nature and bear no interest. Receivable within a year. Bank deposits with Parent Company can be withdrawn any time. 6,822 - Other investment income and expenses Entity under common control 5,221 - Occupancy and equipment related expenses Associate of Parent 13,833 - Arises under a lease agreement. Payable within 5 days after end of each month. Professional fees Parent 22,041 - Share in common expenses with Parent Company. Payable 5 days before end of each month. 1,404 - Retirement benefits Key management personnel (Forward) (49) Interest income from bank deposits with Parent Company can be withdrawn any time Arises under a Service Agreement for processing of mortgage and other loans. Payable within first week after end of each quarter. Refer to Note 17 – Post-employment benefit plan Transactions Staff costs Key management personnel Parent Outstanding balances 26,057 10,267 - 36,324 - Terms and conditions Payments to key management personnel include bonuses, payable within the first quarter of the following calendar year and remunerations, payable within the year. Staff cost payments to Parent Company includes share of common expenses on compensation and internal audit reviews incurred by Parent. As at and for the year ended December 31, 2011: Outstanding Transactions balances Treaty reinsurance transactions with an entity under common control Reinsurance premiums ceded 418,443 226,373 Reinsurance commissions 81,178 Reinsurance recoveries from losses incurred 33,545 533,166 226,373 Dividend income Parent 399 Investor of Parent 237 Entity under common control 167 803 Cash in bank Parent 440,360 802,832 Interest income Parent Terms and conditions The outstanding balances are settled simultaneously and are due 105 days after the end of each quarter. The receivables are unsecured in nature and bear no interest. Receivable within a year. Bank deposits with Parent Company can be withdrawn any time. 5,879 - Other investment income and expenses Entity under common control 7,867 - Occupancy and equipment related expenses Associate of Parent 12,376 - Arises under a lease agreement. Payable within 5 days after end of each month. Professional fees Parent - Share in common expenses with Parent Company. Payable 5 days before end of each month. (Forward) (50) 18,952 Interest income from bank deposits with Parent Company can be withdrawn any time. Arises under a Service Agreement for processing of mortgage and other loans. Payable within first week after end of each quarter. Transactions Retirement benefits Key management personnel Staff costs Key management personnel Parent Outstanding balances Terms and conditions 1,042 - Refer to Note 17 - Post-employment benefit plan 22,819 - 9,887 - Payments to key management personnel include bonuses, payable within the first quarter of the following calendar year and remunerations, payable within the year. Staff cost payments to Parent Company includes share of common expenses on compensation and internal audit reviews incurred by Parent. 32,706 - No provisions were recognized against receivables from related parties. No additional provision was recognized during the 2012 and 2011. Note 24 - Reconciliation of net income under PFRS and statutory accounting practices (SAP) PFRS varies in certain respects from SAP as prescribed by the IC. A reconciliation of net income under PFRS and the net income determined under SAP at December 31 is shown below: PFRS net income Add (deduct): Increase in deferred acquisition costs, net Difference in change in reserve for unearned premiums, net Tax effect of above adjustments Net income under SAP 2012 569,741 2011 472,664 (7,290) 55,165 (14,878) 602,738 (10,835) (35,472) (3,505) 422,852 Note 25 - Lease commitments The Company has entered into various lease agreements covering its branches with terms ranging from one to five years. Rent expense charged to operations and included in occupancy and equipment related expenses amounts to P22 million and P20 million in 2012 and 2011, respectively. As at December 31, 2012 and 2011, the minimum aggregate rental commitments for future years are as follows: Within one year After one year but not more than five years (51) 2012 19,758 45,034 64,792 2011 22,063 63,234 85,297 Note 26 - Additional information on the results of operation by line of business Details of the results of operation by line of business follow: Total Premiums, net of returns and unearned reserves Reinsurance premiums ceded Reinsurance commission UNDERWRITING INCOME Gross claims incurred Reinsurance recoveries Claims and losses, net Commissions UNDERWRITING EXPENSES NET UNDERWRITING INCOME GENERAL AND OPERATING EXPENSES OPERATING INCOME INVESTMENT AND OTHER INCOME INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME FOR THE YEAR (52) Fire 2,947,758 (2,660,314) 172,427 459,871 (729,388) 658,084 (71,304) (185,610) (256,914) 202,957 Motor 1,083,995 (18,180) 4,742 1,070,557 (500,237) 63,903 (436,334) (200,872) (637,206) 433,351 Marine 237,606 (70,639) 13,290 180,257 (52,894) 18,639 (34,255) (44,740) (78,995) 101,262 Casualty 170,787 (100,739) 11,960 82,008 (20,142) 4,903 (15,239) (25,293) (40,532) 41,476 Bonds 90,692 (43,399) 15,729 63,022 (12,270) 8,837 (3,433) (20,885) (24,318) 38,704 2012 4,530,838 (2,893,271) 218,148 1,855,715 (1,314,931) 754,366 (560,565) (477,400) (1,037,965) 817,750 394,566 423,184 2011 3,775,845 (2,186,007) 210,654 1,800,492 (1,194,223) 604,443 (589,780) (457,567) (1,047,347) 753,145 (389,798) 363,347 308,785 731,969 (162,228) 569,741 259,949 623,296 (150,632) 472,664 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 of the basic financial statements. (a) Supplementary information required by Revenue Regulations No. 15-2010 On December 28, 2010, RR No. 15-2010 became effective and amended certain provisions of RR No. 21-2002 prescribing the manner of compliance with any documentary and/or procedural requirements in connection with the preparation and submission of financial statements and income tax returns. Section 2 of RR No. 21-2002 was further amended to include in the Notes to Financial Statements information on taxes, duties and license fees paid or accrued during the year in addition to what is mandated by PFRS. (i) Output value-added tax (VAT) Output VAT declared for the years ended December 31, 2012 consists of: Non-life premiums Subject to 12% VAT Zero-rated Exempt Total Gross amount of revenues Output VAT 3,894,843 531,240 30,545 4,456,628 467,381 467,381 Zero-rated premiums are sales of non-life premiums to PEZA-registered entities pursuant to BIR Revenue Regulations No. 16-2005, As Amended. Exempt premiums are sales of accident and health premiums, 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 years ended December 31, 2012 and their movements during the year follow: Beginning balance Add: Current year’s domestic purchases/payments for: Capital goods subject to amortization Claims Commission Goods other than for resale Reinsurance Ending balance (53) Amount 4,445 1,586 29,635 17,135 10,189 1,728 64,718 (iii) Documentary stamp tax Documentary stamp taxes paid and accrued for the years ended December 31, 2012 consist of: Non-life insurance policies Paid 536,611 Accrued 16,208 Total 552,819 Accrued documentary stamp taxes as at December 31, 2012 are included under Accounts payable and accrued expenses in the statements of financial position. (iv) All other local and national taxes All other local and national taxes paid and accrued for the years ended December 31, 2012 consist of: Local government taxes Premium tax (Life insurance) Municipal taxes Real property tax Mayor’s permit Community tax Others Paid 10,299 624 749 1,138 44 22 2,471 13,172 Accrued 11,482 220 11,702 Total 21,781 844 749 1,138 44 22 2,471 24,874 The above local and national taxes are lodged under Taxes and licenses in general and administrative expenses except for local government taxes and premium taxes which are passed on to policyholders. (v) Withholding taxes Withholding taxes paid and accrued and/or withheld for the years ended December 31, 2012 consist of: Withholding tax on compensation Expanded withholding tax Final withholding tax Fringe benefit tax VAT withholding (vi) Paid 31,550 45,548 4,049 2,115 152 83,414 Accrued 3,565 5,186 34,861 591 10 44,213 Total 35,115 50,734 38,910 2,706 162 127,627 Tax assessments/ tax cases Taxable years 2011, 2010 and 2009 are open tax years. The Company has not received any Final Assessment Notice (FAN) as at December 31, 2012. The Company has no outstanding tax cases under preliminary investigation, litigation and/or prosecution in courts or bodies outside the BIR as at December 31, 2012 and 2011. (54) (b) Supplementary information required by Revenue Regulations No. 19-2011 RR No. 19-2011 prescribes the new BIR forms that should be used for income tax filing covering and starting with the calendar year 2011 and modifies Revenue Memorandum Circular No. 57-2011. In the Guidelines and Instructions Section of the new BIR Form 1702 (version November 2011), a required attachment to the income tax returns is an Account Information Form and/or Financial Statements that include in the Notes to Financial Statements schedules of sales/receipts/fees, cost of sales/services, non-operating and taxable other income, itemized deductions (if the taxpayer did not avail of the Optional Standard Deduction or OSD), taxes and licenses and other information prescribed to be disclosed in the Notes to Financial statements. The Company’s schedules for the year ended December 31, 2012 follow: (i) Receipts Receipts Creditable tax withheld 88,399 Taxable amount 1,910,880 The Company’s receipts are subject to the regular tax rate of 30%. None of the receipts are subject to special rates. A reconciliation of the gross underwriting income in the statement of income to the above receipts follows: Gross underwriting income Excess of reserve for unexpired risk per books over tax basis Receipts Amount 1,855,715 55,165 1,910,880 (ii) Cost of services Salaries, wages and benefits Losses and claims, net of reinsurance Commission expense Amount 81,675 560,565 493,492 1,135,732 The Company’s direct charges are subject to the regular tax rate of 30%. None of the direct charges have been subjected to special rates. (55) (iii) Non-operating and taxable other income Settlement fee Interest on fixed income Realized foreign exchange gain Interest income on treaties Miscellaneous income Amount 5,636 1,313 1,054 514 6,302 14,819 The Company’s other non-operating and taxable other income includes interest on local bank deposits, trust funds and deposit substitutes (including short-term deposits and investments) and interest on foreign currency bank deposits which are subject to 20% and 7.5% final income tax, respectively and dividend income and gain on sale of investments which are tax exempt. No creditable withholding tax from non-operating and taxable other income was withheld in 2012. A reconciliation of miscellaneous investment and other income in the statement of income to the above non-operating and taxable other income follows: Miscellaneous investment and other income (expense) Temporary differences arising from Provision in impairment Foreign exchange gains and losses Taxable other income included in interest income Interest income on treaties Interest income on fixed income Miscellaneous investment and other income included in itemized deductions Investment fees Other investment expenses Non-credit write off (56) Amount (21,901) 17,461 8,003 514 1,313 5,285 1,138 3,006 14,819 (iv) Itemized deductions Nature of expense Salaries and allowances Communication, postage, light and water Depreciation Rental Printing and office supplies Professional fees Repairs and maintenance - computer equipment Representation and entertainment Transportation and travel SSS, GSIS, Philhealth, HDMF and other contributions Advertising Taxes and licenses Janitorial and messengerial services Fringe benefits Other outside services Security services Insurance Amortization of intangibles Director’s fees Repairs and maintenance - building, leasehold and furniture and equipment Repairs and maintenance - others Bad debts Others Total Amount 141,245 31,523 31,047 22,063 11,236 11,228 6,807 6,219 5,988 5,671 4,934 4,426 4,155 2,706 2,298 1,268 1,018 703 408 168 157 808 27,724 323,800 The above itemized deductions are subject to the regular tax rate of 30%. None of the itemized deductions have been subjected to special rates. (57) A reconciliation of the underwriting and general and administrative expenses in statement of income to the total expenses shown in cost of services and itemized deductions above follows: Cost of services Itemized deductions Total deductible expenses Temporary differences arising from: Accrual of BPI service fees Accrual of contingent profit commission Provision for impairment Interest expense limitation Provision for retirement benefit obligation Amortization of past service cost Excess of deferred acquisition costs per books over tax basis Total temporary differences Expenses included in investment and other income, net Investment fees Other investment expenses Non-credit write off (v) Taxes and licenses The details of the Company’s taxes and licenses are presented in section (a) of this note. (vi) Other information All other information prescribed to be disclosed by the BIR has been included in this note. (58) Amount 1,135,732 323,800 1,459,532 1,541 (10,342) (6,297) 2,421 2,516 (121) (7,290) (17,572) 1,441,960 5,285 1,138 3,006 9,429 1,432,531 BPI/MS Insurance Corporation Reconciliation of Retained Earnings As at December 31, 2012 (In thousands of Philippine Peso) Items Unappropriated Retained Earnings, December 31, 2011 Adjustments: Unappropriated Retained Earnings, as adjusted, beginning Net Income based on the face of audited financial statements Less: Non-actual/unrealized income net of tax • Equity in net income of associate/joint venture • Unrealized foreign exchange gain - net (except those attributable to Cash and Cash Equivalents) • Unrealized actuarial gain • Fair value adjustment (M2M gains) • Fair value adjustment of Investment Property resulting to gain Adjustment due to deviation from PFRS/GAAP - gain • Other unrealized gains or adjustments to the retained earnings as a result of certain transactions accounted for under the PFRS Add: Non-actual losses • Depreciation on revaluation increment (after tax) • Adjustment due to deviation from PFRS/GAAP - loss • Loss on fair value adjustment of investment property (after tax) Net Income Actual/Realized Less: Dividend declarations during the period Unappropriated Retained Earnings, as adjusted, ending Amount 1,378,237 1,378,237 569,741 16,735 553,006 (472,500) 1,458,743 BPI/MS Insurance Corporation Philippine Financial Reporting Standards and Interpretations Effective as at December 31, 2012 Adopted Framework for the Preparation and Presentation of Financial Statements Conceptual Framework Phase A: Objectives and qualitative characteristics PFRSs Practice Statement Management Commentary Not Adopted Not Applicable Philippine Financial Reporting Standards PFRS 1 (Revised) PFRS 2 First-time Adoption of Philippine Financial Reporting Standards Amendments to PFRS 1 and PAS 27: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate Amendments to PFRS 1: Additional Exemptions for First-time Adopters Amendment to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time Adopters Amendments to PFRS 1: Government Loans Share-based Payment Amendments to PFRS 2: Vesting Conditions and Cancellations Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions PFRS 3 (Revised) Business Combinations PFRS 4 Insurance Contracts Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts PFRS 5 Non-current Assets Held for Sale and Discontinued Operations PFRS 6 Exploration for and Evaluation of Mineral Resources PFRS 7 Financial Instruments: Disclosures Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets - Effective Date and Transition BPI/MS Insurance Corporation Philippine Financial Reporting Standards and Interpretations Effective as at December 31, 2012 Page 2 Adopted Amendments to PFRS 7: Improving Disclosures about Financial Instruments Not Adopted Amendments to PFRS 7: Disclosures - Transfers of Financial Assets Amendments to PFRS 7: Disclosures – Offsetting Financial Assets and Financial Liabilities Not Applicable Amendments to PFRS 7: Mandatory Effective Date of PFRS 9 and Transition Disclosures PFRS 8 Operating Segments PFRS 9* Financial Instruments Amendments to PFRS 9: Mandatory Effective Date of PFRS 9 and Transition Disclosures PFRS 10* Consolidated Financial Statements PFRS 11* Joint Arrangements PFRS 12* Disclosure of Interests in Other Entities PFRS 13* Fair Value Measurement Philippine Accounting Standards PAS 1 (Revised) Presentation of Financial Statements Amendment to PAS 1: Capital Disclosures Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendments to PAS 1: Presentation of Items of Other Comprehensive Income PAS 2 Inventories PAS 7 Statement of Cash Flows PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors PAS 10 Events after the Balance Sheet Date PAS 11 Construction Contracts PAS 12 Income Taxes Amendment to PAS 12 - Deferred Tax: Recovery of Underlying Assets Property, Plant and Equipment PAS 16 BPI/MS Insurance Corporation Philippine Financial Reporting Standards and Interpretations Effective as at December 31, 2012 Page 3 Adopted PAS 17 Leases PAS 18 Revenue PAS 19 Employee Benefits Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures PAS 19 Employee Benefits (Amended)* PAS 20 PAS 21 Not Adopted Accounting for Government Grants and Disclosure of Government Assistance The Effects of Changes in Foreign Exchange Rates Amendment: Net Investment in a Foreign Operation PAS 23 (Revised) Borrowing Costs PAS 24 (Revised) Related Party Disclosures PAS 26 Accounting and Reporting by Retirement Benefit Plans PAS 27 (Amended) Separate Financial Statements Not Applicable PAS 28 Investments in Associates and Joint Ventures (Amended)* PAS 29 Financial Reporting in Hyperinflationary Economies PAS 31 Interests in Joint Ventures PAS 32 Financial Instruments: Disclosure and Presentation Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising on Liquidation Amendment to PAS 32: Classification of Rights Issues Amendments to PAS 32: Offsetting Financial Assets and Financial Liabilities PAS 33 Earnings per Share PAS 34 Interim Financial Reporting PAS 36 Impairment of Assets PAS 37 Provisions, Contingent Liabilities and Contingent Assets PAS 38 Intangible Assets BPI/MS Insurance Corporation Philippine Financial Reporting Standards and Interpretations Effective as at December 31, 2012 Page 4 Adopted PAS 39 Financial Instruments: Recognition and Measurement Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities Not Adopted Not Applicable Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions Amendments to PAS 39: The Fair Value Option Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets Amendments to PAS 39 and PFRS 7: Reclassification of Financial Assets – Effective Date and Transition Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives Amendment to PAS 39: Eligible Hedged Items PAS 40 Investment Property PAS 41 Agriculture Philippine Interpretations IFRIC 1 IFRIC 2 Changes in Existing Decommissioning, Restoration and Similar Liabilities Members' Share in Co-operative Entities and Similar Instruments IFRIC 4 Determining Whether an Arrangement Contains a Lease IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment Applying the Restatement Approach under PAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of PFRS 2 IFRIC 9 Reassessment of Embedded Derivatives Amendments to Philippine Interpretation IFRIC–9 and PAS 39: Embedded Derivatives Interim Financial Reporting and Impairment IFRIC 6 IFRIC 7 IFRIC 10 BPI/MS Insurance Corporation Philippine Financial Reporting Standards and Interpretations Effective as at December 31, 2012 Page 5 Adopted Not Adopted Not Applicable IFRIC 11 PFRS 2- Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements IFRIC 13 Customer Loyalty Programmes IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Amendments to Philippine Interpretations IFRIC- 14, Prepayments of a Minimum Funding Requirement IFRIC 16 Hedges of a Net Investment in a Foreign Operation IFRIC 17 Distributions of Non-cash Assets to Owners IFRIC 18 Transfers of Assets from Customers IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine SIC-7 Introduction of the Euro SIC-10 Government Assistance - No Specific Relation to Operating Activities Consolidation - Special Purpose Entities Amendment to SIC - 12: Scope of SIC 12 Jointly Controlled Entities - Non-Monetary Contributions by Venturers SIC-12 SIC-13 SIC-15 Operating Leases - Incentives SIC-25 Income Taxes - Changes in the Tax Status of an Entity or its Shareholders SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease SIC-29 Service Concession Arrangements: Disclosures. SIC-31 Revenue - Barter Transactions Involving Advertising Services SIC-32 Intangible Assets - Web Site Costs * The standards, interpretations and amendments to existing standards that have been issued but not yet effective as at December 31, 2012 are ticked as not adopted while the standards, interpretations and amendments to existing standards that are not currently applicable are ticked as not applicable.
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