RELIANCE SURETY & INSURANCE CO., INC. (A wholly...

RELIANCE SURETY & INSURANCE CO., INC. (A wholly-owned subsidiary of Reliance Ventures and Resources, Inc.)

PARENT NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016 AND 2015

1. Corporate Information

Reliance Surety & Insurance Co., Inc., (the Company or the Parent) was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) on August 13, 1952 and has extended its corporate life for another 50 years on April 18, 2002 pursuant to its amended Articles of Incorporation. Its primary purpose is to engage in insuring real and personal properties against loss or damage by fire, storm, earthquake, accident or otherwise, including insurance against marine risk. The company acquired its license to operate from the Insurance Commission on August 21, 1952. As of December 31, 2016 and 2015, the Company is 100% owned by Reliance Ventures and Resources, Inc. (RVR), its ultimate parent. RVR is domiciled and incorporated in the Philippines. The registered office of the Company is located on the 8

th Floor of Union Bank Centre

Manila, 208 Dasmariñas cor. Quintin Paredes St., Binondo, Manila. It maintains branches in Cebu and Davao. The financial statements of the Company as of and for the year ended December 31, 2016 (including the comparative figures as of and for the year ended December 31, 2015) were authorized for issue by the Board of Directors on April 10, 2017.

2. Basis of Financial Statement Preparation and Presentation

Statement of Compliance The financial statements of the Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS) issued by the Philippine Financial Reporting Standards Council. Basis of Financial Statement Preparation The accompanying financial statements have been prepared on a historical cost basis except for available-for-sale financial assets which are carried at their fair values. In the preparing the accompanying financial statements, the Company is availing of the exemption from preparation of consolidated financial statements as allowed by Philippine Accounting Standard (PAS) 27, Separate Financial Statements. The financial statements of the Company and its subsidiary will be included in the consolidated financial statements of RVR, prepared in accordance with PFRS 10, Consolidated Financial Statements. The registered office of RVR is located on the 8

th Floor of Union Bank Centre Manila, 208

Dasmariñas cor. Quintin Paredes St., Binondo, Manila. Basis of Financial Statement Presentation The financial statements are presented in Philippine Peso and all values represent absolute amount except as otherwise indicated. The Company presents its statements of financial position broadly in order of liquidity. An analysis regarding recovery or settlement of assets and liabilities within twelve months after the end of the reporting period (current) is presented in the Note 33.

RELIANCE SURETY & INSURANCE CO., INC. Parent Notes to Financial Statements December 31, 2016 and 2015 Page - 2 -

3. Summary of Significant Accounting Policies

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied for all the years presented, unless otherwise stated.

Cash and Cash Equivalents Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. Financial Instruments

Initial recognition

Financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of financial assets, except for financial assets at fair value through profit or loss. Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized (regular way trades) on the trade date, i.e., the date that the Company commits to purchase or sell the asset. Determination of fair value The fair value for instruments traded in active market at the end of the reporting period is based in their quoted market price. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate techniques or comparison to similar instruments for which market observable prices exists. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instruments or based on a valuation technique, the Company recognizes the difference between the transaction price and fair value in the statement of comprehensive income unless it qualifies for recognition as some other type of asset.

Classification of financial instruments The Company classifies financial instruments into the following categories, (i) financial assets at fair value through profit or loss (FVPL), (ii) Available-for-sale financial assets, (iii) Held-to-maturity financial assets (iv) Loans and receivable and (v) Other financial liabilities. The classification is dependent on the purpose for which the instrument is acquired at the time of acquisition and re-evaluates such recognition on a regular basis.

(i) Financial assets at FVPL Financial assets are classified as a FVPL where the financial asset is either held for trading or it is designated as FVPL. A financial asset is classified as held for trading if:

It has been acquired principally for the purpose of selling in the near future; or

It is part of an identified portfolio of financial instruments that the Company manages together and has recent actual pattern of short-term profit-taking; or

It is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVPL upon initial recognition if:

Such designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on a different basis; or


The financial asset forms part of a group of financial assets which is managed and its performance is evaluated on a fair value basis.

It forms part of a contract containing one or more embedded derivatives.

After initial recognition, financial assets at FVPL are measured at fair value, any resulting gain or loss is recognized in the profit or loss. Fair value is determined in the manner described in Note 6. Included under this category is investment in treasury bills. (ii) Available-for-sale (AFS) AFS are non-derivative financial assets that are either designated on this category or not classified in any of the other categories. Subsequent to initial recognition, AFS assets are carried at fair value in the statement of financial position. Changes in the fair value are recognized directly in equity account as “Reserve for fluctuation of AFS investments”. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognized in equity is included in profit or loss for the period.

Included under this category are investments in equity securities.

(iii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of trading the receivables. After initial measurement, loans and receivables are subsequently measured at amortized cost using the effective interest method less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and transaction costs that are integral parts of effective interest rate. Included under this category are the company’s cash and cash equivalents, insurance and reinsurance receivables, security and deposits, and other receivables. (iv) Held-to-maturity (HTM) HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturities wherein the Company has the positive intention and ability to hold the investment until its maturity. After initial measurement, HTM assets are carried at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on acquisition and transaction costs that are integral parts of effective interest rate. Any changes to the carrying amount of the investment are recognized in profit or loss. Included under this category are investments in debt instruments. (v) Other financial liabilities Issued financial instruments or their components, which are not designated as at FVPL are classified as other financial liabilities where the substance of the contractual arrangement results in the Company having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.


After initial measurement, other financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are integral parts of the effective interest rate. Any effects of restatement of foreign currency-denominated liabilities are recognized in the statement of comprehensive income. Included under this category are accounts payable, accrued expenses reinsurance liabilities and insurance claims payable. Reclassification of financial assets A financial asset is reclassified out of the FVPL category when the following conditions are met (i) the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and (ii) there is a rare situation.

A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in the statement of comprehensive income is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. Impairment of financial assets The Company assesses at each end of the reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired.

(i) Assets carried at amortized cost

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The amount of the loss is recognized in the profit and loss accounts.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed.

Any subsequent reversal of an impairment loss is recognized in the profit and loss accounts, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

(ii) Assets carried at cost

If there is objective evidence that an impairment loss on an unquoted equity instrument that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed in subsequent periods.

(iii) Available-for-sale financial assets Available-for-sale financial assets are subject to impairment review at each end of the reporting period. Impairment loss is recognized when there is objective evidence such as significant financial difficulty of the issuer/obligor, significant or prolonged decline in market prices and adverse economic indicators that the recoverable amount of an asset is below its carrying amount.


Derecognition of financial instruments

Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized where:

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

the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party.

the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred the control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in profit or loss. Accounting Policies for Insurance and Reinsurance Contracts Insurance contract Insurance contract is an agreement under which one party (the insurer), accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured events) adversely affects the policyholder.

Contract classification The Company issues short-term insurance contracts categorized as (i) Casualty, (ii) Property, (iii) guaranty and (iv) short-duration life accident insurance. Casualty insurance contracts protect the assured against the risk of causing them harm to third parties as a result of their legitimate activities. Damages covered include both contractual and non-contractual events. Property insurance contracts mainly compensate the Company’s assured for damages suffered to their properties or for the value of property lost. Short-duration accident insurance protects the assured from the consequences of events such as death or disability. An insurance contract remains in force at the inception date of policy until its maturity regardless of number of claims reported and for as long as the coverage is sufficient.

Insurance receivables These include amounts due from agents, brokers and insurance contract holders which comprise the balance of uncollected policy premiums and reinsurance premiums from reinsurers arising from reinsurance contracts measured at amortized cost, using the effective interest method.


Reinsurance assets The Company assumes and cedes (treaty and facultative) insurance risk in the normal course of business. Reinsurance assets primarily included balances due from both insurance and reinsurance companies for ceded insurance liabilities. Premiums on reinsurance assumed are recognized as revenue in the same manner as they would be if the reinsurance were considered as direct business, taking into account the product classification of the reinsured business. Amounts recoverable from reinsurers that relate to paid and unpaid claims and claim adjustment expenses are classified as assets. Reinsurance receivables and the related liabilities are reported separately.

An impairment review is performed on all reinsurance assets when an indication of impairment occurs. Reinsurance assets are impaired only if there is objective evidence that the Company may not receive the amounts due to it under the terms of the contract and that it can be measured reliably.

Reinsurance assets and liabilities are derecognized when the contractual rights is extinguished or expired. Deferred acquisition costs Commissions and other expenses directly attributable to the production and renewal of insurance contracts are deferred in proportion to premium revenue recognized. Deferred acquisition costs are amortized over the life of the policy in which it was incurred. Deferred acquisition costs are reviewed at each reporting date and the carrying value is written down to the recoverable amount.

Reserve for unearned premiums and reinsurance premiums

Reserve for unearned premiums is calculated on the following basis:

(i) Reserve for unearned premiums is calculated using the 24th method based on

gross premiums written. Under the 24th method, it is assumed that the average

date of issue of all policies written during any one month is the middle of that

month.

(ii) Reserve for unearned premiums on inward treaties is taken up based on the dates the statement is received

Reserve for reinsurance premium represents the portion of reinsurance cession computed in the same manner as the reserve for unearned premiums.

The changes in reserves for unearned premiums and reinsurance premiums are reported in the statements of comprehensive income. Claim cost recognition Liabilities for unpaid claim costs and claim adjustment expenses relating to insurance contracts are accrued when insured events occur.

The liabilities for unpaid claims are based on the estimated ultimate cost of settling the claims. The method of determining such estimates and establishing reserves are continually reviewed and updated. Changes in estimates of claim cost resulting from continuous review process and differences between estimates and payments for claims are recognized as income or expense of the period in which the estimates are changed or payments are made. Some insurance contracts permit the Company to sell (usually damaged) property acquired in settling a claim. The Company may also have the right to pursue third parties for payment of some or all costs.


Estimates of salvage recoveries are included as a reduction in the measurement of the insurance liability for claims, and salvage property is recognized in other assets when the liability is settled. The allowance is the amount that can reasonably be recovered from the disposal of the property.

Subrogation reimbursements are also considered as deduction in the measurement of the insurance liability for claims and are recognized in other assets when the liability is settled. The allowance is the assessment of the amount that can be recovered from the action against the liable third party. Share in recoveries on claims are evaluated in terms of the estimated realizable values of the salvage recoverable. Recoveries on claims are recognized in profit or loss in the period the recoveries are determined. Recoverable amounts are presented as part of Reinsurance assets.

Options and guarantees Options and guarantees within insurance are treated as derivative financial instruments which are closely related to the host insurance contracts and are therefore not separated subsequently. Investment in a Subsidiary Subsidiary is an entity in which the Parent Company, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or exercises control over the operation and management of the subsidiary. Control is achieve when the Parent is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, control is achieved if and only if the a parent company has all the following;

(i) Power over the investee; (ii) Exposure rights, to variable returns from its involvement with the

subsidiary; and (iii) The ability to use its power over the investee to affect the amount of

the parent company’s returns. The Parent reassesses whether or not it controls a subsidiary or facts and circumstances indicates that there are changes to one or more of the three elements of control. Investment in a subsidiary is carried in the statement of financial position at cost net of impairment loss, if any. Property and Equipment

Property and equipment are initially recognized at cost including the costs to get the property ready for its intended use. Subsequent to initial recognition, property and equipment are carried at cost less accumulated depreciation and impairment losses, if any. Depreciation is computed on a straight-line method over the estimated useful lives of the depreciable assets as follows:

Condominium unit 50 years

Electronic data processing machines 5 years

Furniture & fixtures 10 years

Transportation equipment 5 years

Leasehold improvements 10 years or lease term

whichever is shorter An asset’s residual value, useful life and depreciation method are reviewed periodically to ensure that the period, residual value and method of depreciation are consistent with the expected pattern of economic benefits from items of property and equipment.


Expenditures for additions, major improvements and renewals are capitalized while minor repairs and maintenance are charged to expense as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation and impairment losses are removed from the accounts and any resulting gain or loss is reflected in the statements of income for the period. When the carrying amount of an asset is greater than its estimated recoverable amount, the cost is written down immediately to its recoverable amount. Fully depreciated assets are retained in the accounts until they are no longer in use. Investment Properties Investment properties are measured initially at acquisition cost. The cost of the investment property comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Subsequently, investment properties are carried at cost less accumulated depreciation and any impairment in value. Depreciation of investment properties is computed using the straight-line method over the estimated useful life of 50 years. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense when incurred. Transfers are made to or from investment property only when there is a change in use, evidenced by the end of owner-occupation, commencement of an operating lease to another party or completion of construction or development. For a transfer from investment property to owner occupied property, the deemed cost for subsequent accounting is the carrying value at the date of change in use. If owner occupied property becomes an investment property, the Company accounts for such property in accordance with the policy stated under property and equipment up to the date of the change in use. Investment property is derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the statements of income in the year of retirement or disposal.

Equity Share capital is determined at par value of shares that have been issued. Retained earnings include all current and prior period results as disclosed in the statement of income. Other comprehensive income Other comprehensive income comprises items of income and expenses that are not recognized in the statement of income for the year in accordance with PFRS. Dividends Dividends are recognized in the financial statements when approved by the BOD. In accordance with Section 201 of the Insurance Code, dividend declaration or distribution from accumulated profits remaining on hand can only be made if it has met the minimum paid-up capital and net worth requirements and after retaining unimpaired the following:

The entire paid-up share capital;

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.


Revenue Recognition Revenue is recognized to the extent it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured.

Premiums Premiums from short duration insurance contracts are recognized as revenue over the period of the contracts using the 24

th method.

The portion of the premiums written that relate to the unexpired periods of the policies at end of the reporting periods are accounted for as “Reserve for Unearned Premiums” and presented in the liability section of the statement of financial position. The reinsurance premiums ceded that pertains to the unexpired period as at reporting dates are accounted for as “Reserve for reinsurance premiums”, lodge under “Reinsurance Assets” and shown in the asset section of the statements of financial position. The net changes in these accounts between reporting dates are credited or charged against income for the year. Commission Reinsurance commissions are recognized as revenue over the period of the contracts. The portion of commissions that relates to the unexpired periods of the policies at the reporting date is accounted for as “Deferred commission income” in the liability section of the statement of financial position. Interest income

Interest income from bank deposits, special savings account and held-to-maturity investment is recognized as interest accrues taking into account the effective yield on the related asset. Dividend income Dividend income is recognized when the right to receive dividends is established. Rental income Rental income is recognized on a straight-line basis over the term of the lease. Realized Gains and Losses Realized gains and losses on the sale of property and equipment are calculated as the difference between net sales proceeds and the net book value. Realized gains and losses on the sale of AFS investments are calculated as the difference between net sales proceeds and the original cost net of accumulated impairment losses. Realized gains and losses are recognized in profit or loss when the sale transaction occurred.

Cost and Expense recognition

Claims Liabilities for claims and claims adjustments expenses relating to insurance

contracts are accrued when insured events occur. The liabilities for claims (including those incurred but not reported) are based on

the estimated ultimate cost of settling these claims. The method of determining such estimates and establishing reserve are continually reviewed and updated. Changes in estimates of claims cost resulting from the continuous review process and differences between estimates and payments for claims are recognized as income or expense in the period the estimates are made.

Share in recoveries in claims are evaluated in terms of the estimated realizable

values of the salvage or recoveries. Recoveries on settled claims are recognized in profit or loss in the period the recoveries are determined. Recoveries on the


unsettled claims are recorded as reinsurance recoverable on losses shown as part of reinsurance assets.

Acquisition cost Cost that vary with and primarily related to the acquisition of new and renewal

insurance contracts such as commissions, certain underwriting, and policy issue cost and inspection fees are deferred and charged to expense in proportion to the premium revenue recognized. Unamortized acquisition costs are shown in the statement of financial position as deferred acquisition cost.

Reinsurance commission

Commissions paid to cedants are deferred and are included in deferred acquisition cost, subject to the same amortization method.

Administrative expenses Administrative expenses are recognized when incurred.

Income Taxes Current tax liabilities are measured at the amount expected to be paid to the tax authority. The tax rates and tax laws used to compute the amount are those that have been enacted or substantively enacted as at the end of the reporting period. Deferred tax assets and liabilities are recognized using the balance sheet liability method on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognized for all deductible temporary differences and the carry-forward of unused tax losses to the extent that it is probable that taxable profit will be available against which the deferred tax asset can be utilized. Deferred tax liabilities are recognized for all taxable differences between the tax basis of the liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates expected to apply to the periods when the asset is realized or the liability is settled. The carrying amount of deferred tax asset is reviewed at each end of the reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in the statement of comprehensive income. Only changes in deferred tax assets or liabilities that relate to a change in value of asset or liabilities are charged or credited directly to equity.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax relate to the same taxable entity and the same taxation authority. Impairment of Non-financial Assets The Company’s property and equipment and investment properties are subject to impairment testing. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level.


An impairment loss is recognized for the amount by which the asset or cash-generating unit’s carrying amount exceeds its carrying amount. The recoverable amount is the higher of fair value, reflecting market conditions less cost to sell and value in use, based on an internal discounted cash flow evaluation. Impairment loss is charged pro-rata to the other assets in the cash generating unit. All assets are subsequently reassessed for indication that an impairment loss previously recognized may no longer exists and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss. Employee Benefits The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit (PUC) method.

Defined benefit costs comprise the following:

service cost;

net interest on the net defined benefit liability or asset; and

Re-measurements of net defined benefit liability or asset.

Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs.Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on high quality corporate bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss. Re-measurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in OCI in the period in which they arise. Re-measurements are not reclassified to profit or loss in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Company, nor can they be paid directly to the Company. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations).

Foreign Currency Transactions and Translations Items included in the financial statements of the Company are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Philippine Peso, the Company’s functional and presentation currency Foreign currency transactions are translated into the functional currency at exchange rates prevailing at the time of transaction. Foreign currency gains and losses resulting from settlement of such transaction and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.


Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating lease. Operating lease payments are recognized as expense on a straight line basis over the lease term. Finance lease, which transfer to the company substantially all the risks and benefits incidental to the ownership of the leased asset, are capitalized at the lower of fair value of the leased asset or the present value of the minimum lease payments at the inception of the lease. Lease payments are apportioned between the finance charges and reduction of the lease liability. Finance charges are recognized in the statement of comprehensive income.

Related Party Transactions Parties are considered related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. The related party transactions are recognized based on transfer of resources or obligations between related parties, regardless of whether a price is charged. Provisions Provisions are recognized when present obligation will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example legal disputes for onerous contract. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at end of the reporting period, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognized, if virtually certain, as a separate asset at an amount not exceeding the balance of the related provision. 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 obligation as a whole. In addition, long term provisions are discounted at their present values, where time value of money is material. Provisions are reviewed at each end of the reporting period and adjusted to reflect the current best estimate. In those cases, where the possible outflow of economic resources as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Probable inflows of economic benefits that do not yet meet the recognition criteria of an asset are considered contingent asset, hence, are not recognized in the financial statements. Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but disclosed when an inflow of economic benefits is probable.

Events after End of the reporting period Post year-end events that provide additional information about the Company’s position at the end of the reporting period (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the financial statements when material.


4. Changes in Accounting Standards and Disclosures

New Accounting Standards and Amendments to Existing Standards Effective as of January 1, 2016 The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following amendments to PFRS effective beginning January 1, 2016.

Amendments to PAS 1, Presentation of Financial Statements – Disclosure Initiative The amendments are intended to assist entities in applying judgment when meeting the presentation and disclosure requirements in PFRS. They clarify the following:

That entities shall not reduce the understandability of their financial statements by either obscuring material information with immaterial information; or aggregating material items that have different natures or functions

That specific line items in the statement of income and OCI and the balance sheet may be disaggregated

That entities have flexibility as to the order in which they present the notes to financial statements

That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss. These amendments do not have any impact on the Parent Company.

Amendments to PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets -

Clarification of Acceptable Methods of Depreciation and Amortization

The amendments clarify the principle in PAS 16 and PAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue-based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortize intangible assets. The amendments are effective prospectively for annual periods beginning on or after January 1, 2016, with early adoption permitted. The amendments do not have any impact on the Parent Company’s financial position or performance. Amendments to PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants The amendments change the accounting requirements for biological assets that meet the definition of bearer plants. Under the amendments, biological assets that meet the definition of bearer plants will no longer be within the scope of PAS 41. Instead, PAS 16 will apply. After initial recognition, bearer plants will be measured under PAS 16 at accumulated cost (before maturity) and using either the cost model or revaluation model (after maturity). The amendments also require that produce that grows on bearer plants will remain in the scope of PAS 41 measured at fair value less costs to sell. For government grants related to bearer plants, PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, will apply. The amendments are retrospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments do not have any impact to the Parent Company as the Parent Company does not have any bearer plants. Amendments to PAS 27, Separate Financial Statements - Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying PFRS and electing to change to the equity method in its separate financial statements will have to apply that change retrospectively. For first-time adopters


of PFRS electing to use the equity method in its separate financial statements, they will be required to apply this method from the date of transition to PFRS. The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. The Parent Company elected to use the cost method in accounting for its subsidiary. Amendments to PFRS 10, Consolidated Financial Statements, PFRS 12, Disclosure of Interests in Other Entities, and PAS 28, Investments in Associates and Joint Ventures - Investment Entities: Applying the Consolidation Exception. These amendments clarify that the exemption in PFRS 10 from presenting consolidated financial statements applies to a parent entity that is a subsidiary of an investment entity, when it measures all of its subsidiaries at fair value. They also clarify that only a subsidiary of an investment entity that is not an investment entity itself and that provides support services to the investment entity parent is consolidated. The amendments also allow an investor (that is not an investment entity and has an investment entity associate or joint venture) to retain the fair value measurement applied by the investment entity associate or joint venture to its interests in subsidiaries when applying the equity method. These amendments are not applicable to the consolidated financial statements. The amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments do not have any impact on the Parent Company’s financial statements. Amendments to PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests in Joint Operations The amendments to PFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business must apply the relevant PFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to PFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. The amendment does not have any impact on the Parent Company’s financial position or performance. PFRS 14, Regulatory Deferral Accounts PFRS 14 is an optional standard that allows an entity, whose activities are subject to rate regulation, to continue applying most of its existing accounting policies for regulatory deferral account balances upon its first-time adoption of PFRS. Entities that adopt PFRS 14 must present the regulatory deferral accounts as separate line items in the statement of comprehensive income. The standard requires disclosure of the nature of, and risks associated with, the entity’s rate-regulation and the effects of that rate-regulation on its financial statements. PFRS 14 is effective for annual periods beginning on or after January 1, 2016. This standard does not have any impact on the Parent Company’s financial position or performance. Annual Improvements to PFRSs (2012-2014 cycle) The Annual Improvements to PFRSs (2012-2014 cycle) are effective for annual periods beginning on or after January 1, 2016 and do not have any material impact to the Parent Company’s financial statements. They include:

PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - Changes in Methods of Disposal


The amendment is applied prospectively and clarifies that changing from a disposal through sale to a disposal through distribution to owners and vice-versa should not be considered to be a new plan of disposal, rather it is a continuation of the original plan. There is, therefore, no interruption of the application of the requirements in PFRS 5. The amendment also clarifies that changing the disposal method does not change the date of classification.

PFRS 7, Financial Instruments: Disclosures - Servicing Contracts PFRS 7 requires an entity to provide disclosures for any continuing involvement in a transferred asset that is derecognized in its entirety. The amendment clarifies that a servicing contract that includes a fee can constitute continuing involvement in a financial asset. An entity must assess the nature of the fee and arrangement against the guidance in PFRS 7 in order to assess whether the disclosures are required. The amendment is to be applied such that the assessment of which servicing contracts constitute continuing involvement will need to be done retrospectively. However, comparative disclosures are not required to be provided for any period beginning before the annual period in which the entity first applies the amendments.

PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial Statements This amendment is applied retrospectively and clarifies that the disclosures on offsetting of financial assets and financial liabilities are not required in the condensed interim financial report unless they provide a significant update to the information reported in the most recent annual report.

PAS 19, Employee Benefits - Regional Market Issue Regarding Discount Rate This amendment is applied prospectively and clarifies that market depth of high quality corporate bonds is assessed based on the currency in which the obligation is denominated, rather than the country where the obligation is located. When there is no deep market for high quality corporate bonds in that currency, government bond rates must be used.

PAS 34, Interim Financial Reporting - Disclosure of Information ‘Elsewhere in the Interim Financial Report’ The amendment is applied retrospectively and clarifies that the required interim disclosures must either be in the interim financial statements or incorporated by cross-reference between the interim financial statements and wherever they are included within the greater interim financial report (e.g., in the management commentary or risk report). New Accounting Standard, Amendments to Existing Standards and Interpretations Effective Subsequent to December 31, 2016 The standards, amendments and interpretations which have been issued but not yet effective as at December 31, 2016 are disclosed below. Except as otherwise indicated, the Parent Company does not expect the adoption of the applicable new and amended PFRS to have a significant impact on its financial position or performance. Effective 2017 Amendments to PAS 7, Statement of Cash Flows The amendments to PAS 7 require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendments, entities are not required to provide comparative information for preceding periods. They are effective for annual periods beginning on or after January 1, 2017, with earlier application being permitted.


Amendments to PAS 12, Income taxes – Recognition of Deferred Tax Assets for Unrealized Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. Early application of the amendments is permitted. These amendments are not expected to have any impact on the Parent Company. Effective 2018 Amendments to PAS 40, Investment Property – Transfers of Investment Property The amendments clarify when an entity should transfer property, including property under construction or development, into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. . The amendments are effective for annual periods beginning on or after July 1, 2018. Retrospective application is only permitted if that is possible without the use of hindsight. The amendments are not expected to have any impact on the Parent Company. Philippine IFRIC Interpretation 22, Foreign Currency Transactions and Advance Consideration The interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a nonmonetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the nonmonetary asset or nonmonetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. Entities may apply the interpretation on a fully retrospective basis. Alternatively, an entity may apply the interpretation prospectively to all assets, expenses and income in its scope that are initially recognized on or after the beginning of the reporting period in which the entity first applies the interpretation or the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation. The Parent Company does not expect the adoption of this interpretation to have any significant impact on the financial statements. Amendments to PFRS 2, Share-based Payment – Classification and Measurement of Share-based Payment Transactions

The amendments are intended to clarify following:

Accounting for cash-settled share-based payment transactions that include a performance condition;

Classification of share-based payment transactions with net settlement features; and


Accounting for modifications of share-based payment transactions from cash-settled to equity settled

They are effective for annual periods beginning on or after January 1, 2018. On adoption,

entities are required to apply the amendments without restating prior periods, but

retrospective application is permitted if elected for all three amendments and other criteria

are met. Early application of the amendment is permitted.

Amendments to PFRS 4, Insurance Contracts – Applying PFRS 9 ‘Financial Instrument’ with PFRS 4 ‘Insurance Contracts’

The amendments address concerns arising from implementing PFRS 9, the new financial

instruments standard, before implementing the forthcoming insurance contracts standard.

They allow entities to choose between the overlay approach and the deferral approach to

deal with the transitional challenges. The overlay approach gives all entities that issue

insurance contracts the option to recognize in other comprehensive income, rather than

profit or loss, the volatility that could arise when PFRS 9 is applied before the new

insurance contracts standard is issued. On the other hand, the deferral approach gives

entities whose activities are predominantly connected with insurance an optional

temporary exemption from applying PFRS 9 until the earlier of application of the

forthcoming insurance contracts standard or January 1, 2021. The overlay approach and

the deferral approach will only be available to an entity if it has not previously applied

PFRS 9. The amendment does not have any significant impact on the Parent Company’s

financial position or performance.

PFRS 9, Financial Instruments (2014)

PFRS 9 (2014) replaces PAS 39, Financial Instruments: Recognition and Measurement, and supersedes the previously published versions of PFRS 9 that introduced new classifications and measurement requirements (in 2009 and 2010) and a new hedge accounting model (in 2013). PFRS 9 includes revised guidance on the classification and measurement of financial assets, including a new expected credit loss model for calculating impairment, guidance on own credit risk on financial liabilities measured at fair value and supplements the new general hedge accounting requirements published in 2013. PFRS 9 incorporates new hedge accounting requirements that represent a major overhaul of hedge accounting and introduces significant improvements by aligning the accounting more closely with risk management. The new standard is to be applied retrospectively for annual periods beginning on or after January 1, 2018, with early adoption permitted. The Parent Company is still assessing the potential impact on its financial statements resulting from the application of PFRS 9. PFRS 15, Revenue from Contracts with Customers

PFRS 15 replaces PAS 11, Construction Contracts, PAS 18, Revenue, IFRIC 13,

Customer Loyalty Programmes, IFRIC 18, Transfer of Assets from Customers and SIC-31,

Revenue - Barter Transactions Involving Advertising Services. The new standard

introduces a new revenue recognition model for contracts with customers which specifies

that revenue should be recognized when (or as) a company transfers control of goods or

services to a customer at the amount to which the company expects to be entitled.

Depending on whether certain criteria are met, revenue is recognized over time, in a

manner that best reflects the company’s performance, or at a point in time, when control of

the goods or services is transferred to the customer. The standard does not apply to

insurance contracts, financial instruments or lease contracts, which fall in the scope of

other PFRSs. It also does not apply if two companies in the same line of business

exchange nonmonetary assets to facilitate sales to other parties. Furthermore, if a contract

with a customer is partly in the scope of another IFRS, then the guidance on separation

and measurement contained in the other PFRS takes precedence.


The new standard is effective for annual periods beginning on or after January 1, 2018,

with early adoption permitted. This standard will not affect the Parent Company’s financial

position or performance.

Annual Improvements to PFRSs (2014-2016 cycle) The Annual Improvements to PFRSs (2012-2014 cycle) are effective for annual periods beginning on or after January 1, 2018 and will not have any material impact to the Parent Company’s financial statements. They include: PFRS 1, First-time Adoption of Philippine Financial Reporting Standards The amendment deleted the short-term exemptions in paragraphs E3-E7 of PFRS 1, because they have now served their intended purpose. PFRS 12, Disclosure of Interests in Other Entities The amendment clarified the scope of the standard by specifying that the disclosure requirements in the standard, except for those in paragraphs B10-B16, apply to an entity’s interests listed in paragraph 5 that are classified as held for sale, as held for distribution or as discontinued operations in accordance with PFRS 5, Non-current Assets Held for Sale and Discontinued Operations. PAS 28, Investments in Associates and Joint Ventures The amendment clarified that the election to measure at fair value through profit or loss an investment in associate or a joint venture that is held by an entity that is a venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition. Effective 2019 PFRS 16, Leases On January 13, 2016, the IASB issued its new standard, PFRS 16, Leases, which replaces PAS 17, the current leases standard, and the related Interpretations. Under the new standard, lessees will no longer classify their leases as either operating lease or finance leases in accordance with PAS 17. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their statement of financial position, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements. The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is not permitted until the FRSC has adopted the new revenue recognition standard. When adopting PFRS 16, an entity is permitted to use either a full retrospective or a modified retrospective application, with options to use certain transition reliefs. Deferred

PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint Ventures - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture These amendments address an acknowledged inconsistency between the requirements in PFRS 10 and those in PAS 28 in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary


or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. These amendments are originally effective from annual periods beginning on or after January 1, 2016. This mandatory adoption date was later on deferred indefinitely pending the final outcome of the IASB’s research project on International Accounting Standards 28. Adoption of these amendments when they become effective does not have any impact on the Parent’s financial statements.

5. Summary of Significant Accounting Judgments and Estimates

The Company makes estimates and assumptions that affect the reported amounts of the assets and liabilities within the next financial year. 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.

Judgments The following judgments were applied which have the most significant effect on the amounts recognized in the financial statements.

Determination of functional currency The Company has determined that its functional currency is the Philippine peso which is the currency of the primary economic environment in which the Company operates.

Classification of Investments In classifying its financial assets, the Company follows the guidance of PAS 39. In making the judgment, the Company evaluates its intention, marketability of the instrument and its ability to hold the investments until maturity. For non-derivative financial assets with fixed determinable payments and fixed maturity as held-to-maturity which requires significant judgments, the Company evaluates its intention and ability to hold its investments in bonds up to maturity as well as the requirement of the regulatory agency. If the company fails to keep these investments to maturity other than for specific circumstances explained in PAS 39 it will be required to reclassify the whole class as available-for-sale. The Investments would therefore be measured at fair value, not amortized cost.

Investments classification is as follows:

2016 2015

Fair value through profit or loss 210,000,000P 90,000,000P

Available-for-sale 286,285,557 111,456,432

Held-to-maturity 63,679,090 64,027,263 Impairment of financial assets The Company follows the guidance of PAS 39 on determining when the investment is other than temporarily impaired. This determination requires significant judgment. In making this judgment, the Company evaluates, among other factors, the duration and extent to which the fair value of investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. Determination of control Control is presumed to exist when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee


As of December 31, 2016 and 2015, the Company has 92% equity interest in a subsidiary where the control over the Company exists. Distinction between Investment properties and owner-occupied properties The Company determines whether a property qualifies as investment property or owner-occupied property. If an insignificant portion is leased out under the operating lease, the property is treated as property and equipment. If the property is not occupied and is held to earn it is treated as Investment property. As at December 31, 2016 and 2015, investment properties amounted to P18.5 million and P18.9 million, respectively. Determination of Lease Arrangements

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Leases where the lessor retains substantially all the risks and benefits of ownership are classified as operating leases. Rent income on investment properties amounted to P415,808 in 2016 and P397,485 in 2015. (See Note 14) Rent expense charged to operations amounted to P 958,153 in 2016 and P399,888 in 2015. (See Note 28) Determination of fair value of available-for-sale financial assets The Company measures fair value of financial instruments using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Level 1 Included in the Level 1 category are financial assets and liabilities that are measured in whole or in part by reference to published quotes in an active market. 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.

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). Level 3 Inputs for the asset or liability that are not based on observable market data (that is unobservable inputs).


The table below analyzes financial instruments measured at fair value at the end of the reporting period, by the level in the fair value hierarchy into which the fair value measurement is categorized.

Level 1 Level 2 Level 3

Available-for-sale 2016 274,584,765P -P 11,700,792P

2015 99,755,640 - 11,700,792

Impairment of non-financial assets The Company assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Several factors are considered which could trigger that impairment has occurred. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have material adverse effect on the results of operations. As at December 31, 2016 and 2015, management believes that its non-financial assets have not been impaired. Non-financial assets subject to impairment are as follows:

2016 2015

Investment in a subsidiary 304,999,634P 304,999,634P

Property and equipment- net 30,096,821 27,719,118

Investment properties 18,538,144 18,907,002

Estimates

The key assumptions concerning the future and other key sources of estimation of uncertainty at end of the reporting period that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Estimating Allowance for impairment of receivable The Company maintains allowance for probable losses at a level considered adequate to provide for potential uncollectible insurance receivables. The level of allowance for probable losses is evaluated by management on the basis of factors affecting collectability of the receivables. In addition, a review of the accounts designed to identify accounts to be provided with allowance, is made on a continuing basis.

Allowance for impairment losses on insurance and reinsurance receivable are as follows:

2016 2015

Insurance balances receivable 2,473,837P 3,971,376P

Reinsurance balances receivable 1,183,880 796,721

Changes in allowance for impairment of receivable are disclosed in Note 12. Estimated Useful Lives of Property and Equipment The Company reviews annually the estimated useful lives of property and equipment, based on the period on which the assets are expected to be available for use. It is possible that future results of operation could be materially affected by changes in these estimates. A reduction in the estimated useful lives of property and equipment would increase recorded depreciation and decrease the related asset account.


The carrying value of property and equipment as at December 31, 2016 and 2015 amounted to P30.1 million and P27.7 million, respectively.

Recoverability of Deferred Tax Assets The Company reviews the carrying amounts of deferred tax asset at the end of each reporting period and reduces the deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. However, there is no assurance that the Company will generate sufficient taxable profit to allow all or part of the deferred tax asset to be utilized. The Company’s deferred tax assets are as follows:

2016 2015

Recognized in the financial statements 3,795,508P 3,453,037P

Not recognized in the financial statements 8,614,798 10,614,860

The breakdown of deferred tax assets and liabilities are presented in Note 30. Estimating Retirement Benefits The determination of the Company’s obligation and cost for retirement and other retirement benefits is dependent on selection of certain assumptions used by actuaries in computing such amounts. The assumptions as discussed in Note 29 are believed to be reasonable and appropriate for the Company although actual experience or significant changes in assumption may affect retirement benefits and asset/obligation.

Details of retirement benefits recognized in the financial statements are as follows:

2016 2015

Present value of the obligation 12,933,613P 12,106,488P

Fair value of plan assets 9,563,417 9,867,698

Liability for Insurance Claims Estimates have to be made both of expected ultimate cost of claims reported at the end of the reporting period and for the expected ultimate cost of the claims incurred but not yet reported at the end of the reporting period. It can take a significant period of time before the ultimate claim cost can be established with certainty and for some type of policies, unreported claims significantly comprise the claims payable presented in the statement of financial position. At each reporting date, prior year claims estimates are assessed for adequacy and changes made are charged to statement of income at a non-discounted amount for the time value of money. Insurance claims payable gross and net of reinsurance as at December 31, 2016 and 2015 are as follows:

Share of

Gross reinsurer Net

2016 96,127,780P 52,624,686P 43,503,094P

2015 53,717,622 18,212,022 35,505,600 The analysis of changes in insurance claims payable and the share of reinsurer is presented in Note 19.


6. Fair Value Measurement

The fair value for instruments traded in active market at the reporting date is based on their quoted market price. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate techniques or comparison to similar instruments for which market observable price exists. Where the transaction price in a non-active market is different from the fair value of other observable current market transactions in the same instruments or based on a valuation technique, the Company recognizes the difference between the transaction price and the fair value in the statements of income unless it qualifies for recognition as some other type of asset Comparative carrying amounts and fair values of financial instruments as at December 31, 2016 and December 31, 2015 are shown below:

Carrying Fair Carrying Fair

amounts value amounts value

Cash and cash equivalents 51,089,973P 51,089,973P 46,021,877P 46,021,877P

Financial assets

Fair value through profit or loss 210,000,000 210,000,000 90,000,000 90,000,000

Available-for-sale

Quoted 274,584,765 274,584,765 99,755,640 99,755,640

Unquoted 11,700,792 11,700,792 11,700,792 11,700,792

Held-to-maturity

Government securities 63,679,090 65,030,831 64,027,263 60,124,236

2016 2015

Fair values were determined as follows:

Cash and cash equivalents, short-term investments, FVPL financial assets, receivables, deposits and other financial liabilities – the fair values are equivalent to the carrying amounts at initial recognition due to their short-term nature.

Quoted AFS investments (debt and equity securities) – the fair values were determined from the published references from Philippine Stock Exchange, recommended values of IC or third party information.

Non-quoted AFS investments – valuation technique using significant observable inputs. Where valuation technique is not representative of fair values, the acquisition cost is used as fair value.

HTM investment – fair value was determined from quoted yield rates provided by Philippine Dealing System.

7. Management of Insurance Risk, Financial Risk and Capital

Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. 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 claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated.


Insurance events are random and the actual number and amount of claims and benefits will differ from year to year from the estimate established using statistical techniques. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. Factors that aggravate insurance risk include lack of risk diversification in terms of type and amount of risk, geographical location and type of industry covered.

Apart from the Company’s risk management function, regulators also play a vital role in the insurance industry in ensuring that policy holders and creditors are assured of any claims that may arise within the term of the policy. The Insurance Commission (IC) imposes (i) Risk-based capital framework that will effectively manage the equity requirement of the Company (ii) A mandatory reserve of highly-liquid debt instruments to answer the claims of policyholders and creditors (iii) and minimum paid up capital to streamline the operation of insurance industry. Internally, the Company manages its risks through its underwriting strategy and reinsurance arrangements.

The underwriting strategy is intended to ensure that the risks underwritten are well diversified in terms of type of risk and the level of insured events. Reinsurance facilities in force include surplus treaties, catastrophe cover and facultative reinsurance.

The Company’s exposure to insurance risk as at December 31, 2016 and 2015 is as follows:

2016 2015

Gross claims (see Note19) 96,127,780P 53,717,622P

Share of reinsurer (see Note 11 and 19 ) (52,624,686) (18,212,022)

Net exposure 43,503,094P 35,505,600P

Claims development table Loss development table for the last underwriting year gross of reinsurer share is presented below:

2012 and

Accident year prior 2013 2014 2015 2016 Total

Estimate of claims costs

at the end of

accident year 474,045,978P 69,369,012P 75,706,551P 18,041,980P 80,698,609P 80,698,609P

One year later 240,765,145 55,799,993 71,320,948 17,831,148 - 17,831,148

Two years later 240,618,559 55,819,613 70,209,120 - - 70,209,120

Three years later 240,611,011 53,068,102 - - - 53,068,102

Four years later 217,427,038 - - - - 217,427,038

Current estimate of 217,427,038 53,068,102 70,209,120 17,831,148 80,698,609 439,234,017

cumulative claims

Cumulative payments

to date (173,901,370) (52,818,429) (70,139,574) (17,598,233) (28,648,631) (343,106,237)

Liability recognized in

the statements of

financial position 43,525,668P 249,673P 69,546P 232,915P 52,049,978P 96,127,780P

Gross Losses and Claims Payable for 2016


2011 and



at the end of


One year later 191,733,208 51,784,865 55,799,993 71,320,948 - 71,320,948

Two years later 188,980,280 51,784,865 55,819,613 - - 55,819,613


Four years later 188,826,146 - - - - 188,826,146


cumulative claimscumulative claims

Cumulative payments

to dateto date (147,851,099) (51,461,183) (55,310,304) (64,245,051) (13,208,293) (332,075,929)


the statements of

financial position 40,975,047P 323,682P 509,309P 7,075,897P 4,833,687P 53,717,622P

Gross Losses and Claims Payable for 2015

Details of the last underwriting year net of reinsurer share are presented below:

2012 and



at the end of


One year later 57,590,601 4,089,065 7,918,959 4,491,796 - 4,491,796

Two years later 57,471,708 4,093,970 6,865,535 - - 6,865,535


Four years later 54,125,460 - - - - 54,125,460


cumulative claims

Cumulative payments

to date (18,631,617) (3,246,419) (6,800,453) (4,304,631) (11,219,695) (44,202,815)


the statements of

financial position 35,493,843P 234,958P 65,082P 187,165P 7,522,046P 43,503,094P

Net Losses and Claims Payable for 2016


2011 and



at the end of


One year later 44,589,493 13,653,626 4,089,065 7,918,959 - 7,918,959

Two years later 43,936,975 13,653,626 4,093,970 - - 4,093,970


Four years later 43,824,522 - - - - 43,824,522


cumulative claimscumulative claims

Cumulative payments

to dateto date (16,323,568) (13,553,626) (4,071,855) (1,844,878) (5,063,626) (40,857,553)


the statements of

financial position 27,500,954P 100,000P 22,115P 6,074,081P 1,808,450P 35,505,600P

Net Losses and Claims Payable for 2015

The concentration of insurance claims gross and net of reinsurers’ share as at December 31, 2016 and 2015 follows:

Share of Net Share of Net

Gross Reinsurer Liability % Gross Reinsurer Liability %

Fire 89,608,898P 52,608,097P 37,000,801P 85% 48,810,751P 15,882,121P 32,928,630P 93%

Motor car 6,489,881 - 6,489,881 14% 2,366,226 42,213 2,324,013 6%

Marine cargo - - - 0% 2,508,768 2,272,980 235,788 1%

Other lines 29,001 16,589 12,412 1% 31,877 14,708 17,169 0%

96,127,780P 52,624,686P 43,503,094P 100% 53,717,622P 18,212,022P 35,505,600P 100%

2016 2015

Financial Risk The Company is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance contracts. The most important components of this financial risk are credit risk, liquidity risk and market risk.

These risks arise from open positions in interest rate, currency and equity products, all of which are exposed to general and specific market movements. The risk that the Company primarily faces due to the nature of its investments and liabilities is interest rate and currency risk. Credit Risk Credit risk is risk due to uncertainly in a counterparty’s (also called an obligor) ability to meet its obligation. Credit risk limit is also used to manage credit exposure which specifies exposure credit limit for each intermediary depending on the size of its portfolio and its ability to meet its obligation based on past experience. Key areas where the Company is exposed to credit risk are:

Reinsurers’ share of insurance liabilities,

Amounts due from reinsurers in respect of claims already paid,

Amounts due from insurance contract holders, and

Amounts due from insurance intermediaries.


The Company structures the level of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparty, and to geographical and industry segments. Such risks are subject to an annual or more frequent review.

Limits on the level of credit risk by category and territory are approved quarterly by the reinsurance department. Reinsurance is used to manage insurance risk. 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 table below shows the gross maximum exposure to credit risk of the Company as at December 31, 2016 and December 31, 2015:

2016 2015

Cash and cash equivalents * 49,399,327P 45,211,831P

Financial assets

Fair value through profit and loss 210,000,000 90,000,000

AFS investments 286,285,557 111,456,432

HTM investments 63,679,090 64,027,263

Insurance balances receivable

Direct and assumed accounts 46,686,380 34,557,862

Reinsurance accounts 63,045,486 31,803,509

Deposits and others 1,561,723 1,257,263

720,657,563P 378,314,160P

*excludes cash on hand of P1,690,646 and P810,046 in 2016 and 2015, respectively

Credit Risk Mitigation policies

Cash in banks and short-term investments are deposited and placed with reputable commercial and universal banks in the Philippines. The deposits are automatically covered up to a certain amount from Philippine Deposit Insurance Corporation.

Debt instruments classified as FVPL and HTM are issued and guaranteed by the Philippine government which are considered risk free. These investments are lodge under the Registry of Scriptless Securities of the Bureau of Treasury. Furthermore, prior approval from IC is sought before the Company can invest on these securities.

The bulk of Company’s acquisition of AFS investments are mostly stocks listed in the Philippine Stock Exchange Index (PSEi) with regular trading transaction in the Philippine Stock Exchange.

Insurance balances of brokers and agents have a maximum age of 90 days. Commissions are released only upon full remittance of premiums. Reinsurance arrangements are placed only with reputable reinsurers at industry acceptable terms.

Deposits made for utility services and leasing arrangements are expected to be refunded upon termination of services provided to the Company.


Credit quality of the Company’s assets as at December 31, 2016 and December 31, 2015 follows:

Past due

High Standard but not Past due

2016 grade grade impaired and impaired Total

Cash and cash equivalents 48,004,014P 1,395,313P -P -P 49,399,327P

Financial assets -

FVPL 210,000,000 - - - 210,000,000

AFS - 286,285,557 - - 286,285,557

HTM 63,679,090 - - - 63,679,090


Direct and assumed accounts - 14,070,614 30,141,929 2,473,837 46,686,380

Reinsurance accounts - 37,950,532 23,911,074 1,183,880 63,045,486

Deposits and others - 1,561,723 - - 1,561,723

321,683,104P 341,263,739P 54,053,003P 3,657,717P 720,657,563P

Neither past due nor impaired

Past due

High Standard but not Past due

2015 grade grade impaired and impaired Total

Cash and cash equivalents 43,829,619P 1,382,212P -P -P 45,211,831P

Financial assets -

FVPL 90,000,000 90,000,000

AFS 111,456,432 - - 111,456,432

HTM 64,027,263 - - - 64,027,263


Direct and assumed accounts - 11,524,040 19,062,446 3,971,376 34,557,862

Reinsurance accounts - 5,372,919 25,633,869 796,721 31,803,509

Deposits and others - 1,257,263 - - 1,257,263

197,856,882P 130,992,866P 44,696,315P 4,768,097P 378,314,160P

Neither past due nor impaired

Financial assets were graded as follows:

High grade cash and cash equivalents are short-term placements and working cash fund placed, invested, or deposited in banks belonging to the top banks in the Philippines in terms of resources and profitability. High grade AFS investments are equity securities belonging to Philippine Stock Exchange Index with regular trading transactions. Standard grade accounts are equity securities not within the scope of high grade accounts. High grade FVPL and HTM investments are securities issued and guaranteed by the Philippine government.

Other high grade financial assets are accounts considered to be of high value. The counterparties have a very remote likelihood of default and have consistently exhibited good paying habits. Standard grade accounts are active accounts with propensity of deteriorating to mid-range age buckets. These accounts are typically not impaired as the counterparties generally respond to credit actions and update their payments accordingly.


The analysis of age of financial assets that are past due but not impaired is as follows:

Due from Due from Funds held

assured,agents ceding by ceding

2016 & brokers companies companies Total Paid Unpaid Total

30 days past due 1,937,165P 1,969,431P -P 3,906,596P 380,446P 4,466,875P 4,847,321P

60 days past due 1,453,169 2,624,166 - 4,077,335 8,048,698 - 8,048,698

over 60 days 10,403,482 8,466,552 3,287,964 22,157,998 1,768,643 9,246,412 11,015,055

13,793,816P 13,060,149P 3,287,964P 30,141,929P 10,197,787P 13,713,287P 23,911,074P

Direct and assumed accounts

Reinsurance loss recoverable

Due from Due from Funds held

assured,agents ceding by ceding

2015 & brokers companies companies Total Paid Unpaid Total

30 days past due 1,676,754P 161,476P -P 1,838,230P -P 82,244P 82,244P

60 days past due 761,476 1,745,239 - 2,506,715 3,026,085 - 3,026,085

over 60 days 8,069,692 2,949,340 3,698,469 14,717,501 10,484,240 12,041,300 22,525,540

10,507,922P 4,856,055P 3,698,469P 19,062,446P 13,510,325P 12,123,544P 25,633,869P

Direct and assumed accounts

Reinsurance loss recoverable

Liquidity Risk

Liquidity or funding risk is the risk that an entity will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk may result from either the inability to sell financial assets quickly at their fair values; or counterparty failing on repayment of a contractual obligation; or insurance liability falling due for payment earlier than expected; or inability to generate cash inflows as anticipated. Liquidity risk is a risk due to uncertain liquidity. An institution may suffer liquidity problem when its credit rating falls. The Company is also exposed to liquidity risk if markets on which it depends on are subject to loss of liquidity. The table below summarizes the maturity profile of the Company’s financial liabilities as at

December 31, 2016 and December 31, 2015, based on undiscounted contractual payments:

On > 1 month & > 3 months &

2016 demand < 3months < 1 year > 1 year Total

Accounts payable and

accrued expenses 12,233,384P 1,398,132P 2,613,260P 3,993,190P 20,237,966P

Insurance claims payable 46,837,596 3,258,427 4,462,832 41,568,925 96,127,780

Reinsurance liabilities 3,375,017 2,541,638 18,256,984 12,458,632 36,632,271

62,445,997P 7,198,197P 25,333,076P 58,020,747P 152,998,017P

On > 1 month & >3 months &

2015 demand < 3months < 1 year > 1 year Total

Accounts payable and

accrued expenses 10,467,980P 1,170,197P 2,564,925P 7,182,092P 21,385,194P

Insurance claims payable 8,022,429 1,263,328 1,944,439 42,487,426 53,717,622

Reinsurance liabilities 5,609,716 605,030 19,720,780 11,138,517 37,074,043

24,100,125P 3,038,555P 24,230,144P 60,808,035P 112,176,859P


Market Risk Market risk is the risk of change in fair value of financial instruments from fluctuation in foreign exchange rates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether such change in price is caused by factors specific to the individual instrument or its issuer or factors affecting all instruments traded in the market. Market risk is the risk to an institution’s financial condition from volatility in the price movements of the assets contained in a portfolio. Market risk represents what the Company would lose from price volatilities. Market risk can be measured as the potential gain or loss in a position or portfolio that is associated with a price movement of a given probability over a specified time horizon. The Company manages market risk by evenly distributing capital among investment instruments, sectors and geographical areas. The Company structures levels of market risk it accepts through a sound market risk policy based on specific guidelines. This policy constitutes certain limits on exposure of investments mostly with top-rated banks, which are selected on the basis of the bank’s credit ratings, capitalization and quality of service being rendered to the Company. Also, the said policy includes diversification benchmarks of investment portfolio to different investment types duly approved by the IC, asset allocation reporting and portfolio limit structure. Moreover, control of relevant market risks can be addressed through compliance reporting of market risk exposures to the IC, regular monitoring and review of the Company’s investment performance and upcoming investment opportunities for pertinence and changing environment. Sensitivity analysis of market risk exposure follows: i. Currency risk Foreign currency accounts exposed to currency risk represents US $ cash and short-term banks deposits. To mitigate this risk, movements in exchange rates and cash flows are monitored on a regular basis. Exposure to currency risk represents cash equivalents amounting to P8,806,739 (US$176,796) in 2016 and P11,869,656 (US$251,657) in 2015. The following table demonstrates the sensitivity to a reasonable change in the US$ exchange rate, with all other variables held constant, the Company’s income before tax for the year ended December 31, 2016 and 2015:

Increase/Decrease in Peso to US Dollar Rate 2016 2015

+P2.00 428,453P 529,895P

- P2.00 (428,453) (529,895)

Effect on income before tax

There is no other impact on the Company’s equity other than those affecting the profit and loss. ii. Interest rate risk Interest rate risk is the risk that the value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Floating rate instruments expose the Company to cash flow interest risk, whereas fixed interest rate instruments expose the Company to fair value interest risk. The Company’s interest risk policy requires it to manage interest rate risk by maintaining an appropriate mix of fixed and variable rate instruments. The policy also requires it to manage the maturities of interest bearing financial assets. Interest on fixed interest rate instruments is priced at inception of the financial instrument and is fixed until maturity.


The Company has no significant concentration of interest rate risk. Exposures to interest rate risk comprise the following:

Interest

2016 rate 1 year 2-5 years beyond 5 years Total

Financial assets that are :

Cash equivalents 0.25-3.0% 49,399,327P -P -P 49,399,327P

FVPL 2.5% 210,000,000 - - 210,000,000

Held-to-maturity 2.125-7.375% 6,261,220 28,378,184 29,039,686 63,679,090

Funds held by ceding companies 3% 3,287,964 - - 3,287,964

Due in

Interest

2015 rate 1 year 2-5 years beyond 5 years Total

Financial assets that are :

Cash equivalents 0.25-2.5% 45,211,831P -P -P 45,211,831P

FVPL 2.5% 90,000,000 - - 90,000,000

Held-to-maturity 2.5-7.5% 19,397,509 7,555,470 37,074,284 64,027,263

Funds held by ceding companies 3% 3,698,469 - - 3,698,469

Due in

The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company’s profit before tax.

Increase/ Effect on

decrease income before

in basis points income tax

2016 +100 3,263,664P

-100 (3,263,664)

2015 +100 2,029,376

-100 (2,029,376)

There is no other impact on the Company’s equity other than those already affecting the profit and loss. iii. Price risk The Company’s price risk exposure at year end relates to financial assets whose values will fluctuate as a result of changes in market price, principally, equity investments. Observed volatility rates of the fair values of Company’s investments held at fair value and their impact on the Company’s net income and equity as at December 31, 2016 and December 31, 2015 is shown below:

% change in market values 2016 2015

+2% 5,491,695P 1,995,113P

-2% (5,491,695) (1,995,113)

Impact on equity

Changes in fair value of Available for sale investment are charged to equity and therefore do not affect profit and loss.

iv. Operational risk Operational risk is the risk of loss from system failure, human error, fraud or external events. When controls fail to perform, operational risk can cause damage to reputation, have legal or regulatory implications or can lead to financial loss. The Company cannot


expect to eliminate all operational risk but initiating a rigorous control framework and by monitoring and responding to potential risks, the Company is able to manage the risks. Controls include effective segregation of duties, access controls, authorization and reconciliation procedures, staff education and assessment processes. Business risk such as changes in environment, technology and industry are monitored through the Company’s strategic planning and budgeting processes.

Capital management The Company manages its capital requirements by assessing shortfalls between reported and required capital levels on a regular basis. Adjustments to current capital levels are made in light of changes in economic conditions and risk characteristics of the Company’s activities and externally imposed capital requirements. The company regards the following as the capital it manages as at December 31, 2016 and 2015.

2016 2015

Share capital 300,000,000P 300,000,000P

Retained earnings 216,181,199 276,650,782

516,181,199P 576,650,782P

Networth Requirement Externally imposed capital requirements are set and regulated by the Insurance Commission (IC). The requirements are put in place to ensure sufficient solvency margins. Further objectives are set by the Company to maintain a strong credit rating and healthy capital ratios in order to support its business objectives and maximize shareholders value. Pursuant to IC Circular No. 2015-02-A, dated January 13, 2015 issued on the basis of Republic Act 10607 known as the Revised Insurance code, domestic insurance companies under the supervision of IC must have a networth of at least P250 million by December 31, 2013. The minimum networth of a particular company shall remain unimpaired at all times and shall increase to the amounts as follows:

Minimum Networth Compliance date

550,000,000P December 31, 2016

900,000,000 December 31, 2019

1,300,000,000 December 31, 2022 Insurance Memorandum Circular 22-2008 further clarified that the paid-up capital should remain intact and unimpaired at all times, the statements of financial position should show that the networth is at least equal to the actual paid up capital. As at December 31, 2016 and 2015, the Company is in compliance with the required minimum paid-up capital. The statutory net worth is based on Regulatory Accounting Policies and may be determined only after the accounts of the Company have been examined by the IC. Risk-based Capital Requirement Insurance Memorandum Circular (IMC) 7-2006 provides for the risk-based capital (RBC) framework for the non-life insurance industry to establish the required amounts of capital to be maintained by the companies in relation to their investment and insurance risk. Every non-life insurance companies are annually required to maintain a minimum RBC ratio of 100% and not fail the trend test. Failure to meet the minimum RBC ratio shall subject the Company to the corresponding regulatory intervention which has been defined at various levels. The RBC ratio is calculated as Net worth divided by the RBC requirement. Net worth shall include the (i) paid-up capital, (ii) other capital surplus and (iii) Special surplus funds to the extent authorized by IC.


Internal calculations of RBC ratio as at December 31, 2016 and 2015 revealed the following:

2016 2015

Networth 163,059,593P 615,258,648P

RBC requirement 50,874,992 175,648,360

RBC ratio 320.51% 350.28%

Companies not meeting the required RBC ratio will subjected to an Action Event depending on level the RBC ratio as follows:

Regulatory Action Event – the RBC is less than 75% but not below 50%, the Company will be required an RBC plan within 45 days;

Authorized Control Event –the RBC is less than 50% but not below 35%, the IC will be authorized to place the Company under regulatory control

Mandatory Control Event – the RBC is less than 35%, the IC is required to place Company under regulatory control The computation of RBC is based on the regulatory accounting policy in accordance the Philippine Insurance Code. The RBC can be determined only after the accounts of the Company have been examined by the IC.

8. Cash and Cash Equivalents

This account consists of:

2016 2015

Cash on hand and in banks 50,005,031P 33,079,170P

Short-term investments 1,084,942 12,942,707

51,089,973P 46,021,877P

Cash in bank and short-term investments earn interest at prevailing bank interest rates ranging from 0.25% to 3.0% in 2016 and 0.25% to 2.5% in 2015, respectively. Short-term investments have a maximum maturity of one year.

9. Investments The reconciliation of the carrying amounts of financial assets at the beginning and end of the year is as follows:

FVPL AFS HTM Total

Balance, January 1 90,000,000P 111,456,432P 64,027,263P 265,483,695P

Additions 210,000,000 249,620,916 19,561,345 479,182,261

Disposals (90,000,000) (63,808,938) (19,250,000) (173,058,938)

Changes in fair value - (10,982,853) - (10,982,853)

Amortization of premium/discount - - (659,518) (659,518)

Balance, December 31 210,000,000P 286,285,557P 63,679,090P 559,964,647P

December 31, 2016


FVPL AFS HTM Total

Balance, January 1 -P 579,220,792P 64,285,790P 643,506,582P

Additions 90,000,000 223,119,250 7,390,391 320,509,641

Disposals - (650,846,940) (7,375,000) (658,221,940)

Changes in fair value - (40,036,670) - (40,036,670)

Amortization of premium/discount - - (273,918) (273,918)


December 31, 2015

Fair value through Profit or Loss (FVPL) Investments

Investments that are designated as FVPL represents Treasury Bills (TBills) issued by the Philippine Government and earn interest at the rate of 2.5%. TBills comprise a portfolio of financial instruments that are manage together for which there is an evidence of recent actual pattern of short-term profit-taking. The face value of TBills as of December 31, 2016 and 2015 amounted to P210.26 and P90.96 million and is due in less than 12 months. Due to its relatively short-term nature, the carrying value amounting to P210 million and P90 million approximates the fair value at year-end.

Available for sale Available-for-sale financial assets represent equity instruments with quoted and unquoted market values. The breakdown of this account is as follows:

2016 2015

Acquisition cost:

Quoted in the stock exchange 316,409,943P 132,422,459P

Not quoted in the stock exchange 11,700,792 11,700,792

328,110,735 144,123,251

Changes in fair values

Quoted in the stock exchange (41,825,178) (32,666,819)

Fair values 286,285,557P 111,456,432P

Significant portion of quoted equity securities in 2014 represents shares of stock issued by SM Prime Holdings, Inc.(SMPH) amounting to P428.6 million . In 2015, the whole block of SMPH share was sold for which the Company realized P81 million in gains reported in the statements of income. Unquoted AFS investment includes 11% equity interest in Equitable Insurance Corporation (EIC), a non-life insurance company. EIC is in the process of liquidation since 2011. As of December 31, 2016 and 2015 investment in EIC amounted to P11.6 million in both years. Management believes that investment in EIC is fully recoverable. The fair value of AFS investments at year end was determined in a manner described in Note 6.

Held-to-maturity Held-to-maturity financial assets represent debt instruments issued by the Philippine government. The term of the issues range from 2 to 10 years and earn an annual coupon rate of 2.125% to 7.375% and 2.5% to 7.5% in 2016 and 2015, respectively.


The maturity profile of this account is presented below:

2016 2015

Due in:

< 1 Year 6,261,220P 19,397,509P

> 1 Year but < 5 years 28,378,184 7,555,470

Over 5 years 29,039,686 37,074,284

63,679,090P 64,027,263P

In accordance with the provisions of the Insurance Code, government securities with face value of P263 million as of December 31, 2016 and P62.5 million as of December 31, 2015 are deposited with the Insurance Commission as security for the benefit of policyholders and creditors of the Company.

10. Insurance Balances Receivables - net

The breakdown of this account follows:

2016 2015

Due from brokers and agents 41,674,845P 26,469,779P

Due from ceding companies 1,723,571 4,389,614

Funds held by ceding companies 3,287,964 3,698,469

46,686,380 34,557,862

Allowance for probable losses 2,473,837 3,971,376

44,212,543P 30,586,486P

Due from agents and brokers are usually settled in a 30-90 days term. Due from ceding companies represents balances as a result of treaty and facultative acceptances which are settled for a period less than 12 months. Funds held by ceding companies represents portion of the premium withheld by ceding companies in accordance with reinsurance contracts and earn interest at the rate of 3% per annum. There is no concentration of credit risk with respect to insurance receivables, as the Company has a diverse base of agents, brokers, and reinsurers.

As of December 31, 2016 and 2015, management believes that the carrying value disclosed above is a reasonable approximates of their fair values.

11. Reinsurance Assets This account consists of:

2016 2015

Reserve for reinsurance premium ( see Note 18) 29,978,128P 25,675,161P

Reinsurers' share on:

paid losses 10,420,800 13,591,487

unpaid losses (see Note 19) 52,624,686 18,212,022

93,023,614 57,478,670

Allowance for probable losses 1,183,880 796,721

91,839,734P 56,681,949P

As of December 31, 2016 and 2015, management believes that the carrying amount of

reinsurers’ share on losses is a reasonable approximation of their fair values.


The reconciliation of reinsurers’ share on paid losses is as follows:

2016 2015

Beginning balances 13,591,487P 17,611,542P

Reinsurer's share of losses paid 24,235,484 2,363,327

Collection and other adjustments (27,406,171) (6,383,382)

Ending Balances 10,420,800P 13,591,487P

12. Allowance for Probable Losses

The movements of this account as of December 31, is as follows:

Direct Reinsurance Direct Reinsurance

business business Total business business Total

Beginning Balance 3,971,376P 796,721P 4,768,097P 4,080,955P -P 4,080,955P

Provisions - 387,159 387,159 75,940 796,721 872,661

Write-offs/Recoveries (1,497,539) - (1,497,539) (185,519) - (185,519)

Ending Balances 2,473,837P 1,183,880P 3,657,717P 3,971,376P 796,721P 4,768,097P

2016 2015

Past due accounts are monitored on a regular basis. Accounts reaching a specified age are provided with allowance for probable losses and charged to operations.

13. Investment in a Subsidiary

On December 15, 2015, the Company entered into a Deed of Absolute Sale of Shares with the various stockholders for the acquisition of 92% of Northwest Insurance and Surety Company, Inc. (NISCO). Total consideration paid for such transaction amounted to P304,999,634.

NISCO is a non-life insurance company licensed to do business by the Insurance Commission. The financial information of NISCO as at December 31, 2016 and 2015 is as follows:

2016 2015

Assets

Current assets 87,161,617P 407,179,829P

Non-current assets 275,382,233 3,130,628

Liabilities

Current liabilities 18,430,694 72,640,992

Non-current liabilitis 1,191,503 6,702,980

Revenues 74,768,754 105,446,176

Claims, losses and adjsutment expenses 5,050,797 33,059,618

Cost and expenses 16,650,331 35,028,807

Net income 54,770,310 35,189,802

As of December 31, 2016, dividends received from NISCO amounted to P27,573,496.


14. Investment Properties

Investment properties represent land and building located in Davao City. The breakdown is as follows:

Land Building Total

Cost 5,850,000P 17,920,664P 23,770,664P

Accumulated depreciation

Balance, January 1 - 4,863,662 4,863,662

Provision for depreciation - 368,858 368,858

Balance, December 31 - 5,232,520 5,232,520

Net book value 5,850,000P 12,688,144P 18,538,144P

December 31, 2016

Land Building Total

Cost 5,850,000P 17,920,664P 23,770,664P


Balance, January 1 - 4,494,802 4,494,802

Provision for depreciation - 368,860 368,860

Balance, December 31 - 4,863,662 4,863,662

Net book value 5,850,000P 13,057,002P 18,907,002P

December 31, 2015

Investment properties are also leased out to third parties at terms and conditions mutually agreed upon by both parties. Rental income earned amounted to P415,808 in 2016 and P397,485 in 2015. Lease agreements range between 1 and 3 years renewable at the option of both parties. Depreciation of investment properties charged to operations amounted to P368,858 in 2016 and P368,860 in 2015. The fair value of Land and building determined by a licensed property appraiser amounted to P15,896,880 valued using the replacement cost approach. Replacement cost approach reflects the amount that would be required currently to replace the service capacity of an asset. Accordingly, the Company categorized these land and building under Level 2 of the fair value hierarchy. Management believes that there are no present material factors that would significantly increase or decrease the fair value of these properties as of December 31, 2016.


15. Property and Equipment Property and equipment consist of:

Condominium Furniture & EDP Transportation Leasehold Construction-in

Unit fixtures Machines equipment Improvements Progress Total

Cost

At January 1 32,710,840P 5,756,364P 8,005,159P 3,909,211P 4,013,336P -P 54,394,910P

Additions - 919,150 342,816 75,988 - 2,869,578 4,207,532

At December 31 32,710,840 6,675,514 8,347,975 3,985,199 4,013,336 2,869,578 58,602,442


Balance, January 1 9,790,535 4,552,099 5,934,379 3,751,508 2,647,271 - 26,675,792

Provision 654,217 273,793 653,197 60,608 188,014 - 1,829,829

Balance, December 31 10,444,752 4,825,892 6,587,576 3,812,116 2,835,285 - 28,505,621

Net book value 22,266,088P 1,849,622P 1,760,399P 173,083P 1,178,051P 2,869,578P 30,096,821P

December 31, 2016

Condominium Furniture & EDP Transportation Leasehold

Unit fixtures Machines equipment Improvements Total

Cost

At January 1 32,710,840P 5,560,080P 6,807,641P 3,903,694P 2,699,837P 51,682,092P

Additions - 196,284 1,197,518 5,517 1,313,499 2,712,818

At December 31 32,710,840 5,756,364 8,005,159 3,909,211 4,013,336 54,394,910


Balance, January 1 9,136,320 4,308,502 5,268,927 3,490,079 2,419,855 24,623,683

Provision 654,215 243,597 665,452 261,429 227,416 2,052,109

Balance, December 31 9,790,535 4,552,099 5,934,379 3,751,508 2,647,271 26,675,792

Net book value 22,920,305P 1,204,265P 2,070,780P 157,703P 1,366,065P 27,719,118P

December 31, 2015

As of December 31, 2016, the Company incurred P2,869,578 for the renovation of its office in Binondo, Manila. The same will be reclassified to appropriate account in the property and equipment upon completion. These costs were initially lodged to Construction-in-Progress account. Construction-in-progress is not depreciated until the asset is completed and ready for use. Depreciation of property and equipment charged to operations amounted to P1,829,829 and P2,052,109 in 2016 and 2015, respectively. Management believes that fair values of property and equipment do not differ materially from their carrying values.


16. Deferred Acquisition Costs (DAC) and Deferred Commission Income Account movements as of December 31, 2016 and 2015 are as follows:

Commission Commission

expense income Net DAC

Balance, January 1 16,276,794P 6,742,026P 9,534,768P

Net change in acquisition cost 4,490,574 2,251,927 2,238,647

Balance, December 31 20,767,368P 8,993,953P 11,773,415P

December 31, 2016

Commission Commission

expense income Net DAC

Balance, January 1 14,651,663P 7,700,160P 6,951,503P

Net change in acquisition cost 1,625,131 (958,134) 2,583,265

Balance, December 31 16,276,794P 6,742,026P 9,534,768P

December 31, 2015

As at December 31, 2016 and 2015, management believes that DAC are fully recoverable and that no impairment loss is necessary.

17. Other Assets This account consists of:

2016 2015

Creditable withholding taxes and input taxes 3,208,038P 3,042,468P

Prepayments 1,851,339 1,747,457

Accrued investment income 336,873 602,477

Deposits, receivable from employees, brokers and others 1,561,723 1,257,263

6,957,973P 6,649,665P

Creditable withholding taxes and input taxes represent deferred input taxes from reinsurance and creditable withholding taxes which can be claimed as tax credits against income tax due.

Prepayments include unused supplies and prepaid insurances.

Accrued investment income principally consists of accruals of (i) interest on debt instrument and (ii) rental on investment properties.

Deposits, receivable from employees, brokers and others include (i) security deposit for the leases of branch office in Cebu which is refundable at the end of the lease term, (ii) receivable from officers that are collectible through the employee’s semi-monthly salaries, (iii) receivable from brokers that are collectible upon remittance of premiums collected from the assured, (iv) other receivables are check payments from assured and brokers, returned by the banks, which are either closed or with insufficient balances and (v) security fund. Security fund was created under Section 365 of Presidential Decree (PD) No. 612 as amended under PD No. 1640, to be used for


payment of allowed claims against insolvent insurance companies. The balance of the fund amounting to P21,670 represents the Company’s contribution to the fund. The balance of the fund earns interest at rates determined by the IC annually.

The fair values of deposits, receivables from employees, brokers and others were not individually determined as their carrying amounts are a reasonable approximation of their fair values.

18. Reserve for Unearned Premiums

The analysis of this account is as follows:

Direct Ceded Direct Ceded

Business Business Net Business Business Net

Balances, January 1 68,392,072P 25,675,161P 42,716,911P 59,714,648P 25,790,464P 33,924,184P

Policies written

during the year 199,849,282 61,724,984 138,124,298 135,199,395 53,148,496 82,050,899

Premiums earned

during the year (168,868,869) (57,422,017) (111,446,852) (126,521,971) (53,263,799) (73,258,172)

Balances, December 31 99,372,485P 29,978,128P 69,394,357P 68,392,072P 25,675,161P 42,716,911P

2016 2015

19. Insurance Claims Payable

Outstanding claims will become payable and materialize into claims paid as and when the

amounts of insured losses suffered by policyholders were ascertained and agreed, without

any contractual maturity date. The timing of future cash outflow arising from the provision

is not ascertainable but is likely to fall within 3 years.

The provision is sensitive to many factors such as interpretation of circumstances, judicial

decisions, economic conditions, climatic changes and is subject to uncertainties such as:

• Uncertainty as to whether an event has occurred which would give rise to a

policyholder suffering an insured loss;

• Uncertainty as to the extent of policy coverage and limits applicable; and

• Uncertainty as to the amount of insured loss suffered by a policyholder as a result of

the event occurring. The movement in outstanding claims is shown below:

2016

Gross Reinsurance Net Gross Reinsurance Net

Balances, January 1 53,717,622P 18,212,022P 35,505,600P 54,405,700P 24,611,403P 29,794,297P

Claims and losses incurred -

net of salvages 91,244,135 58,508,781 32,735,354 38,150,509 2,363,326 35,787,183

Claims and loss paid -

net of salvages (48,833,977) (24,096,117) (24,737,860) (38,838,587) (8,762,707) (30,075,880)

Balances, December 31 96,127,780P 52,624,686P 43,503,094P 53,717,622P 18,212,022P 35,505,600P

2015


20. Reinsurance Liabilities Details of this account as at December 31, 2016 and 2015 are as follows:

Due to Funds Held by Payable on

reinsurers Reinsurers loss reserve Total


Policies ceded 46,502,442 3,236,908 8,274,858 58,014,208

Settlement and other adjustments (58,455,980) - - (58,455,980)


December 31, 2016

Due to Funds Held by Payable on

Reinsurers Reinsurers loss reserve Total


Policies ceded 53,263,799 - - 53,263,799

Settlement and other adjustments (59,386,295) 726,180 (1,035,622) (59,695,737)


December 31, 2015

21. Accounts Payable and Accrued Expenses This account consists of:

2016 2015

Commission payable 9,123,010P 6,910,785P

Taxes payable 3,759,510 2,041,582

Accrued and other liabilities 7,355,446 12,432,827

20,237,966P 21,385,194P

Terms and conditions:

Commission payable are settled upon remittance of premiums from agents and brokers

Taxes payable consisting of documentary stamp tax, output tax, withholding taxes and others are usually settled in the succeeding month.

Accrued expenses and other liabilities is usually settled on a 30-90 days term.

Management believes that the carrying amounts of the above accounts are the reasonable approximation of their fair values as at December 31, 2016 and 2015.


22. Equity

Share capital The Company’s capital structure as at December 31, 2016 and 2015 is as follows:

2016 2015

Authorized - P1,000 par value per share - 300,000

shares in 2016 and 2015 300,000,000P 300,000,000P

Issued and outstanding - 300,000 shares in 2016

and 2015 300,000,000 300,000,000

During December 2015, the Company issued 18,000 shares worth P18 million with a par value of P1,000 per share. As at December 31, 2016, the Company has 9 stockholders owning 100 or more shares each. Deposit for future stock subscription

At the special meeting of stockholders held on September 15, 2016, the BOD and stockholders approved the amendment of articles of incorporation increasing the authorized share capital from P300 million to P1 billion, both with par value of P1,000 per share. From the net increase in authorized share capital of P700 million, P175 million was subscribed and out of said subscription P52 million will be paid as follows:

o Debt-to-equity conversion amounting to P32 million o Cash subscription amounting to P20 million

Furthermore, in anticipation of the proposed increase in the Company’s share capital, certain stockholders infused funds into the Company totaling P328.5 million intended for the additional subscription to the Company’s share capital.

As of December 31, 2016 and 2015, deposit for future stock subscription amounted to P380.5 million and P32 million, respectively.

As April 11, 2017, the Company’s application for the increase in its authorized capital stock is still pending with the SEC, subject to the submission of certain requirements.

Retained earnings

A certain percentage of net retained premiums on earthquake and other perils of the previous underwriting period are annually determined to cover any unexpected losses resulting from catastrophic losses. As at December 31, 2016 and 2015, the balance of retained earnings appropriated for catastrophe loss is P1,553,058 and P1,457,187, respectively.

On November 28, 2016, the Board of Directors approved the declaration of 33.33% cash dividend in the aggregate amount of P100,000,000 to stockholders of record as of November 15, 2016. The dividend was paid on December 1, 2016.

At a special meeting held on December 10, 2015, the Board of Directors approved the declaration of 26.60% cash dividend in the aggregate amount of P75,000,002 to stockholders of record as of December 23, 2015. The dividend was paid on December 28, 2015.


Retained earnings available for dividend declaration computed in accordance with SEC Memorandum Circular 11 amounted to P220,075,236 and P280,350,379 in December 31, 2016 and 2015, respectively.

23. Insurance Contracts – Terms, Assumptions and Sensitivities

Terms and Conditions The major classes of general insurance written by the Company include motor, property, casualty, marine and engineering. Risks under these policies usually cover 12 months duration.

For general insurance contracts, claims provisions (comprising provisions for claims reported by policyholders and IBNR claims) are established to cover the ultimate cost of settling the liabilities in respect of claims that have occurred and are estimated based on known facts at the end of the reporting period.

The provisions are reviewed quarterly as part of a regular ongoing process as claims experience develops; certain claims are settled and further claims are reported. Outstanding claims provisions are not discounted for the time value of money.

The measurement process primarily includes projections of future claims through the use of historical experience statistics. In certain cases, where there is a lack of reliable historical data on which to estimate claims development, relevant benchmarks of similar business are used in developing claims estimates. Claims provisions are separately analyzed by geographical area and class of business. In addition, claims are usually assessed by loss adjusters. Assumptions The principal assumption underlying the estimates is the Company’s past claims development experience. This includes assumptions in respect of average claim costs, claim handling costs, claims inflation factors, and claim numbers for each accident year. Judgment is used to assess the extent to which external factors such as judicial decisions, government legislation and climatic changes affect the estimates. Other key assumptions include variation in interest and delays in settlement. Sensitivities The general insurance claims provision is sensitive to the above key assumptions. The sensitivity to certain variables such as legislative change and uncertainty in the estimation process is impossible to quantify. Furthermore, because of delays that arise between occurrence of a claim and its subsequent notification and eventual settlement, the outstanding claim provisions are not known with certainty at the end of the reporting period. Consequently, the ultimate liabilities will vary as a result of subsequent developments. Differences resulting from reassessments of the ultimate liabilities are recognized in subsequent financial statements. Since certain proportional reinsurance facilities are entered, the Company’s net exposure is minimal. The Company considers that the liability recognized in the statement of financial position is adequate. However, actual experience will differ from the expected outcome. Sensitivity test are set out below, showing the impact on profit and loss and equity, gross and net of reinsurance. The Sensitivity tests the impact of change with other assumptions unchanged.

% change in

loss ratio 2016 2015

+5% +1.6 million +1.8 million

-5% -1.6 million -1.8 million

Impact on income

There is no effect on equity except on those affecting profit and loss.


24. Premiums

Analysis of premiums follows:

Net

Direct premiums

2016 Business Assumed Total Ceded Retained

Premiums written 177,241,992P 22,851,626P 200,093,618P 61,969,319P 138,124,299P

Changes in unexpired risk (34,128,045) 2,903,296 (31,224,749) (4,547,302) (26,677,447)

Net premiums written 143,113,947P 25,754,922P 168,868,869P 57,422,017P 111,446,852P

Net

Direct premiums

2015 Business Assumed Total Ceded Retained

Premiums written 108,494,587P 26,460,472P 134,955,059P 53,148,496P 81,806,563P

Changes in unexpired risk (447,419) (7,985,669) (8,433,088) 115,303 (8,548,391)

Net premiums written 108,047,168P 18,474,803P 126,521,971P 53,263,799P 73,258,172P

25. Interest and Other Investment Income - net

Interest income Sources of interest income are as follows:

2016 2015

Cash and cash equivalents 159,831P 370,746P

Government securities 4,634,609 3,607,045

Funds held by reinsurers 90,971 119,790

4,885,411 4,097,581

Amortization of premium on HTM investments (Note 9) (659,518) (273,918)

4,225,893P 3,823,663P

Other investment income-net The breakdown of this account is as follows:

2016 2015

Dividend income 28,534,370P 5,840,275P

Recoveries of allowance for probable losses(Note 12) 1,497,539 185,519

Gain on foreign exchange 481,621 499,871

Rent (Note 14) 415,808 397,485

Gain on sale(loss) of AFS investments-net (1,824,495) 55,039,038

Other income 65,217 69,625

29,170,060P 62,031,813P

Gain on foreign exchange includes unrealized gain on foreign exchange transactions amounted to P456,958 and P493,246 in December 31, 2016 and 2015, respectively.


26. Claims, Losses and Adjustment Expenses Analysis of claims, losses and adjustment expenses paid is shown below:

Direct Assumed Total Recovered Net

Claims and losses 42,945,313P 4,384,082P 47,329,394P 23,316,234P 24,013,160P

Loss adjustment expenses 1,498,678 5,905 1,504,583 779,883 724,700

44,443,991P 4,389,987P 48,833,977P 24,096,117P 24,737,860P

For the year ended December 31, 2016

Direct Assumed Total Recovered Net

Claims and losses 27,706,133P 10,206,814P 37,912,947P 8,224,483P 29,688,464P

Loss adjustment expenses 835,628 90,012 925,640 538,224 387,416

28,541,761P 10,296,826P 38,838,587P 8,762,707P 30,075,880P

For the year ended December 31, 2015

27. Commission Expense and Commission Income The composition of this account is as follows:

Commission Commission Commission Commission

expense income expense income

Direct business 27,733,747P -P 27,097,992P -P

Reinsurance business 7,560,730 12,066,851 4,254,687 18,401,417

Total 35,294,477 12,066,851 31,352,679 18,401,417

Increase/(decrease) in DAC/DCI (See Note 16 ) 4,490,574 2,251,927 1,625,131 (958,134)


December 31, 2016 December 31, 2015

Standard commission rate for direct and reinsurance business ranges from 10% to 30%.


28. Administrative Expenses

The breakdown of this account is as follows:

2016 2015

Salaries and wages and other benefits ( see Note 29) 19,359,535P 14,216,657P

Professional fees 5,338,497 3,366,689

Seminars and trainings 2,937,204 3,397,244

Depreciation ( see Notes 14 and 15) 2,198,687 2,420,969

Repairs and maintenance 1,811,060 1,293,498

Advertising and promotions 1,672,336 3,489,554

Representation and entertainment 1,556,014 1,086,028

Communication, light and water 1,451,157 1,510,436

Dues and subscriptions 1,315,708 1,847,660

Rent 958,153 399,888

Office supplies 883,659 690,883

Taxes and licenses 861,358 1,088,985

Transportaion and travel 464,869 573,891

Provision for probable losses 387,159 872,661

Insurance 261,956 230,030

Delivery charges 126,394 128,168

Miscellaneous 1,022,528 1,378,653

42,606,274P 37,991,894P

Miscellaneous expenses include anniversary and Christmas expenses in the amount of P778,437 and P588,465 in 2016 and 2015, respectively.

29. Salaries and Wages and Other Benefits The composition of this account is as follows:

2016 2015

Salaries and wages 13,322,408P 9,032,716P

SSS, PHIC and HDMF contributions 1,006,884 743,740

Defined benefit cost 1,125,502 1,052,640

Other employee benefits 3,904,741 3,387,561

19,359,535P 14,216,657P

The Company has a non-contributory and of the defined benefit type retirement plan which provides a retirement benefit equal to one (1) month’s pay for every year of service based on the member’s average salary for the last three (3) years. The benefit is paid in a lump sum upon retirement or separation in accordance with the terms of the plan. Contribution to the plan and earnings thereof are managed by a trustee. The Plan has no specific matching strategy between the Plan asset and the Plan liabilities. The Company is not required to pre-fund the defined benefit obligation payable under the plan before they become due. The amount and timing of contribution to the plan asset are at the Company’s discretion. However, in the event a benefit claim arises and the plan asset is insufficient to pay the claim, the shortfall will then be due and payable to the plan asset. The following information summarizes the components of defined benefit costs, the unfunded status and the amounts recognized as defined benefit liability


The retirement benefits recognized in the statement of income and comprehensive income is as follows:

2016 2015

Current service cost 1,010,876P 944,744P

Net interest cost 114,626 107,896

Defined benefit cost recognized in profit or loss 1,125,502 1,052,640

Remeasurement gain(loss)recognized in OCI (4,133) 644,836

Total defined benefit cost 1,129,635P 407,804P

Re-measurement gain(loss) recognized in OCI consists of the following:

2016 2015

Actuarial gain(loss) on defined benefit obligation (5,904) 921,194

Remeasurement gain recognized in OCI, net of

deferred tax effect (4,133) 644,836 The Net defined benefit liability recognized in the statement of financial position is as follows:

2016 2015

Present value of obligation 12,933,613P 12,106,488P

Fair value of plan asset 9,563,417 9,867,698

Net defined liability 3,370,196P 2,238,790P

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

2016 2015

Balance, January 1 12,106,488P 10,731,572P

Interest expense 619,852 549,456

Current service cost 1,010,876 944,744

Benefits paid (803,603) (119,284)

Balance, December 31 12,933,613P 12,106,488P

The changes in fair value of plan asset are as follows:

2016 2015

Balance, January 1 9,867,698P 8,624,228P

Interest income 505,226 441,560

Benefits paid (803,603) (119,284)

Actuarial gain(loss) (5,904) 921,194

Balance, December 31 9,563,417P 9,867,698P

The allocation of plan asset is as follows:

2016 2015

Equity securities 6,855,589P -P

Debt instruments-government bonds 2,672,395 2,673,826

Cash and cash equivalents 3,175 7,157,194

Others 32,258 36,678

9,563,417P 9,867,698P

Plan assets are valued by the fund manager at fair value using the mark-to-market valuation. The Company contributes to the fund depending on the requirements of the plan.


Actuarial assumptions used to determine retirement benefits are as follows:

2016 2015

Discount rate 5.12% 5.12%

Salary rate increase 7.00% 7.00%

Weighted average duration of Plan (in years) 12.4 13.4

The expected future benefits payment of the plan as of December 31, 2016 is as follows:

Within next year -P

After next year to 3rd year 1,881,755

After 3rd year 901,213 The sensitivity analysis based on reasonably possible changes of each significant assumption on the defined benefit liabilities as of December 31, 2016 is as follows:

Effect on defined

benefit obligation

Discount rate

Decrease by 100 bps (33,702)P

Increase by 100 bps 33,702

Salary increase rate

Increase by 100 bps 10,109

decrease by 100 bps (10,109)

30. Income taxes

The major components of provision for (benefit from) income tax for the years ended December 31, 2016 and 2015 are as follows:

2016 2015

Current 918,085P 790,451P Deferred 1,818,834 2,943,730

2,736,919P 3,734,181P

For the years ended December 31, 2016 and 2015, the Company was subjected to Minimum Corporate income tax (MCIT) since it does not have any net taxable income. MCIT is computed at 2% of gross income and can be claimed as tax credits for a period of 3 years, whenever regular income tax is higher than the MCIT. The reconciliation of tax on pretax income computed at the applicable statutory rates to tax expense is as follows:

2016 2015

Statutory income tax 12,708,962P 14,695,914P

Adjustment for:

Income subjected to lower income tax rates 918,085 790,451

Tax effect of:

Unrecognized deferred tax asset (1,769,152) -

Non-deductible expenses 1,693,742 7,622,772

Non-taxable income (10,814,718) (19,374,956)

Actual provision for income tax 2,736,919P 3,734,181P


Components of deferred tax assets and liabilities are as follows:

2016 2015

Deferred tax assets

Deferred commission income 2,698,193P 2,022,608P

Allowance for probable losses 1,097,315 1,430,429

3,795,508P 3,453,037P

Deferred tax liabilities

Deferred acquisition cost 6,230,084P 4,883,039P

Fluctuation reserve on AFS investments 2,532,003 1,656,369

Remeasurement gain- defined benefit plan 1,425,433 1,427,204

Unrealized foreign exchange gain 137,087 147,974

10,324,607P 8,114,586P

The movements of deferred tax assets and liabilities are as follows:

Beginning profit and loss Equity EndingDeferred tax assets 3,453,037P 342,471P -P 3,795,508P

Deferred tax liabilities 8,114,586 1,336,158 873,863 10,324,607

4,661,549P 993,687P 873,863P 6,529,099P

As of December 31, 2016

Changes taken to

Beginning profit and loss Equity EndingDeferred tax assets 2,288,760P 1,164,277P -P 3,453,037P

Deferred tax liabilities 8,411,120 1,767,417 (2,063,951) 8,114,586

6,122,360P 603,140P (2,063,951)P 4,661,549P

As of December 31, 2015

Changes taken to

As at December 31, 2016 and 2015, the Company did not recognize any deferred tax assets on the following items since it does not expect to have sufficient profit against which the deferred tax assets can be utilized. As at December 31, 2016 and 2015, deferred tax assets not recognized in the financial statements are as follows:

2016 2015

Net operating loss carryover 7,536,230P 10,130,529P

Minimum corporate income tax 1,078,568 484,331

8,614,798P 10,614,860P


Components of the Company’s unrecognized/unutilized NOLCO and MCIT and the year until which these are deductible from taxable income are as follows:

Year

incurred Expiry NOLCO MCIT NOLCO MCIT NOLCO MCIT NOLCO MCIT

2016 2019 -P 825,147P -P -P -P -P -P 825,147P

2015 2018 24,839,136 43,380 - - - - 24,839,136 43,380

2014 2017 6,419,419 210,041 6,137,791 - - - 281,628 210,041

2013 2016 2,509,874 230,911 2,509,874 - - 230,911 - -

33,768,429P 1,309,479P 8,647,665P -P -P 230,911P 25,120,764P 1,078,568P

Applied Expired UnutilizedOriginal amounts

31. Related Party Transactions The Company leases its Cebu branch office from a related party at rate, terms and lease provisions comparable to unrelated parties. Rent expense charged to operations amounted to P958,153 and P399,888 in 2016 and 2015, respectively. The rate, terms and conditions of leasing arrangement are comparable with unrelated parties. As of December 31, 2016 and 2015, there are no balances that are due from or due to related parties. Compensation to key management personnel included in Salaries and other employee benefits follows:

2016 2015

Short term employee benefits 1,713,856P 2,623,409P

Defined benefit cost 576,433 882,349

Total employee benefit cost recognized in profit or loss 2,290,289 3,505,758

Defined benefit cost recognized in OCI 52,774 80,782

2,343,063P 3,586,540P

32. Reconciliation of Net Income under Philippine Financial Reporting Standards

(PFRS) and Net Income under Regulatory Accounting Policies (RAP)

PFRS varies in certain respects from RAP prescribed by the Insurance Commission. In accordance with Section 203 of the amended insurance code, the following items of assets are classified as Non-admitted assets:

Intangible assets;

Prepayments and deferred charges;

Unsecured loans, advances and other receivables;

Furniture, fixtures, equipment and the like; and

Other assets of doubtful value


The reconciliation of balances and difference in measurement bases under PFRS and RAP is as follows: (i) Statements of Financial Position

2016 2015

Total assets under PFRS 1,132,262,345P 776,779,257P

Total liabilities under PFRS 275,059,258 229,664,333

Networth under PFRS 857,203,087 547,114,924

Less: Non-admitted assets

Investments (56,587,489) (228,059,461)

Investment properties (2,077,535) (2,118,872)

Premiums due agents and reinsurers (19,461,292) (43,780,040)

Losses recoverable from reinsurers (11,929,608) (514,049)

Other non-admitted assets (59,482,438) (17,390,472)

Add: Non-ledger assets and liabilities

Revaluation of investment properties - -

Differences in measurement bases of investments - -

Provision for catastrophe losses reserve - -

Others - 30,972,509

Net worth under RAP 707,664,725P 286,224,539P

Net worth under RAP is broken down as follows:

2016 2015

Total assets under RAP 982,723,983P 533,816,741P

Total liabilities under RAP 275,059,258 247,592,202

(ii) Statements of Income

2016 2015

PFRS net income 39,626,288P 45,252,199P

Add(deduct):Difference in change in reserve for

unearned premiums - net - (7,297,424)

Deferred acquisition cost - net (2,238,197) (2,583,265)

Provision for catastrophe loss (95,871) (255,555) RAP net income 37,292,220P 35,115,955P

33. Other Significant Matters

Commitments and contingencies

Leases The Company has entered into operating leases to house its provincial branch offices with terms of 1 to 5 years. The lease agreements include escalation clauses that allow a reasonable increase in rates. The leases are payable on a monthly basis and are renewable under certain terms and conditions. During 2016, the Company leased the 7

th Floor in Union Bank Centre, Binondo, Manila

to relocate the Company’s main office until the renovation of 8th Floor is completed.

The lease is payable monthly and subject for renewal under mutual agreement of both parties.


Future minimum rentals payable under the operating leases as at December 31, 2016 and 2015 is shown below:

2016 2015

Not later than one year 958,153P 399,888P

Later than one year and not later than five years - - 958,153P 399,888P

Claims on lawsuits In the normal course of business, the Company may become defendant in lawsuits involving settlement of insurance claims. The Company recognized adequate provisions in its books to cover possible losses that may be incurred on these claims. In the opinion of management, liabilities arising from these claims, if any, will not have material effect on the Company’s financial position and will have no material impact in the financial statements, taken as a whole.

Current assets and liabilities The Company’s current assets and current liabilities are presented below:

2016 2015

Current assets

Cash and cash equivalents 51,089,973P 46,021,877P

Fair value through profit or loss 210,000,000 90,000,000

Insurance and reinsurance assets 136,052,277 87,268,435

Deferred acquisition costs 20,767,368 16,276,794

Other assets 6,957,973 6,649,665

424,867,591 246,216,771

Current liabilities

Reserve for unearned premiums 99,372,485 68,392,072

Insurance claims payable 96,127,780 53,717,622

Reinsurance liabilities 36,632,271 37,074,043

Accounts payable and accrued expenses 20,237,966 21,385,194

Deferred commission income 8,993,953 6,742,026

261,364,455P 187,310,957P

34. Supplementary Information Required under Revenue Regulations 15-2010 and 19-2011

The Bureau of Internal Revenue (BIR) issued Revenue Regulations 15-2010 and 19-2011 which require additional tax information to be disclosed in the Notes to Financial Statements. The following information covering the calendar year ended December 31, 2016 is presented in compliance thereto.

(i) Supplementary information under RR 15-2010

The details of VAT output tax declared in the Company’s 2016 VAT returns and their related accounts are as follows:

Amount subject

to VAT Output Tax

Premiums 158,198,275P 18,983,793P

Commission 19,725,613 2,367,074

Rental Income 415,808 49,897

178,339,696P 21,400,764P


The VAT input tax claimed is broken down as follows:

Balance at the beginning of the year -P

Current year's domestic purchases/payments for:

Goods 1,211,009

Services 6,201,058

7,412,067P

The premium tax on personal accident insurance paid and accrued amounted to P78,255.

Documentary stamp tax paid/accrued on insurance policies issued amounted to P21,850,000.

The amounts of withholding tax payments, by category are as follows:

Tax on compensation and benefits 1,418,084P

Expanded withholding tax 6,753,074

Final withholding taxes 74,574

As of December 31, 2016, the Company has pending tax investigations with the BIR covering the taxable year 2013.

(ii) Supplementary information under RR 19-2011

Details of the Company’s revenues for income tax purposes are shown below:

Premiums earned 111,446,852P

Commission income 16,570,730

Rental income 415,808

Other taxable income 674,096

129,107,486P

The breakdown of the Company’s cost of services for income tax purposes is as follows:

Commission expense 44,275,200P

Claims and losses 32,735,354

Salaries and wages 7,743,814

Supplies 706,927

Communication, light and water 580,463

Rent 136,665

Other underwriting expenses 1,671,697

Cost of services 87,850,120P


Details of the Company’s allowable deductions for the year are as follows:

Salaries and wages and other benefits 11,615,721P

Net operating loss carry over (NOLCO) 8,647,665

Professional fees 5,338,497

Seminars and trainings 2,937,204

Depreciation 2,198,687

Repairs and maintenance 1,811,060

Advertising and promotions 1,672,336

Representation and entertainment 1,114,469

Dues and subscription 1,315,708

Communication, light and water 870,694

Rent 821,488

Taxes and licenses 861,358

Transportaion and travel 464,869

Insurance 261,956

Office supplies 176,732

Delivery charges 126,394

Miscellaneous 1,022,528

41,257,366P

Taxes and licenses presented as part of administrative expenses in the Company’s statement of income is detailed below:

National tax

Annual registration fee 1,500P

Others 449,558

Local

Real property tax 341,472

Local government tax 56,050

Community tax 12,778

861,358P

RELIANCE SURETY & INSURANCE CO., INC. (A wholly...

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