CALURA, Donna Faith Y.

BBF 4-14S

ARTICLE
Warren de Guzman, ABS-CBN News
Feb 16 2018

MANILA - More insurance companies face possible closure due to inadequate capital, after 7 closed
voluntarily for failure to meet capital requirements, a source told ABS-CBN News.

Up to 6 more companies face closure, according to a source within the commission, who requested
not to be identified because the list of firms has not been finalized.

Seven companies closed voluntarily this week instead of meeting the minimum P550 million capital
requirement. These include Centennial Guarantee Assurance, CAP Life Insurance Corp, FLT Prime
Insurance, Manila Surety and Fidelity, Meridian Assurance, The Solid Guaranty, and United
Insurance.

CAP Life Insurance Corp is not related to CAP General Insurance, College Assurance Plan, or CAP
Pension.

The 170,000 policy holders of the 7 insurers are still entitled to claims. The companies are only
banned from selling new policies, the commission said.

"Contract 'yan (That's a contract). If you don't honor it, the holders can sue. Sana maging maayos ang
transition para walang problema (We hope the transition will be orderly and problem-free)," said Joe
Ferreria, president of personal finance consultancy Money Doctors.

"It is important to make sure insurers have enough capital to honor claims. But we also have room
for small insurers who can service far flung areas where the large insurers aren't present," he said.

The Insurance Commission is doing a good job at ensuring stability, but niche players should also be
accommodated, said Nations Reinsurance Corp president Augusto Hidalgo.

"Stability is important. But there are so many innovations now in insurance, online and what not, and
the players trying to innovate might not be able to meet the capital requirements," he said.

National Reinsurance acts as an “insurer” for insurers helping companies manage their risk.

A. VIEW AS A BBF STUDENT

“It’s easy to fall in love, but staying in love is another”

Starting the business is a struggle but the real challenge comes as you
maintain it. As a Banking and Finance Student engaging in an Insurance
Company is difficult without having the proper knowledge and preparedness in
the venture. In a battle with competitors, the industry itself, and the company’s
own performance you must be fully equipped with the knowledge and must be
aware of the tools used in analyzing the performance of your business. Being a
CALURA, Donna Faith Y.
BBF 4-14S
Analyst Insight
There are three major factors that we must consider when analyzing an
insurance company. Coincidently, these are the same ones that the A.M. Best
ratings (among other things) take into account.

1. Leverage. The first things you want to check when considering an

insurance company are the quality and strength of the balance sheet.
Everyday insurers are taking in premiums and paying out claims to
policyholders. The ability to meet their obligations toward these policy
holders is extremely important. Companies should strike a balance
between high returns while keeping leverage intact. A company that is
highly leveraged might not be able to meet financial obligations when a
large catastrophic event occurs. The following three things act to increase
leverage:

1) Writing more insurance policies

2) Dependence on reinsurance
3) Use of debt

Reinsurance allows a company to pass off some of the risk exposure to

other insurers (usually a good thing), but be careful. Too much
dependence on reinsurance means that the company is not keeping a fair
portion of responsibility for each premium dollar.
2. Liquidity. The first test of an insurer's ability to meet financial obligations is
the acid test. It tests whether a firm has enough short-term assets (without
selling inventory) to cover its immediate liabilities. Also take a close look
at cash flow. An insurer should almost always have a positive cash flow.
Other things to keep an eye on are the investment grades of the
company's bond portfolio. Too many high and medium risk bonds could
lead to instability.
3. Profitability. As with any company, profitability is a key determinant for
deciding whether to invest. For an insurance company, there are two
components of profits that we must consider: premium/underwriting
income and investment income.

Ideally, you want the growth rate to exceed the industry average, but you
want to be sure that this higher growth does not come at the expense of
accepting higher-risk clients. Conversely, a company whose premium
income is growing at a slower rate might be too picky, looking for only the
CALURA, Donna Faith Y.
BBF 4-14S
highest quality insurance opportunities. The one thing to remember is that
higher premium collections do not equate to higher profits. Lower numbers
of claims (via low risk clients) contribute more to the bottom line.

1. The second area of profitability that you need to include in your analysis is
investment income. As we mentioned earlier, a greater proportion of an
insurer's income comes from investments. To evaluate this area, take a
look at the company's asset allocation strategy (usually mentioned in the
notes of the financial statements). You aren't likely to find any secrets in
this area. A majority of the assets should be invested in low-risk bonds,
equities or money market securities. Some insurers invest a substantial
portion of their assets in real estate. If this is so, take a look at what type of
property it is and where it is located. A building in New York City is much
more liquid than one in Boise, Idaho.

ROA, ROE, and the lapse ratios (discussed above) are also useful for
evaluating the profitability of the insurer. Calculate the ROA and ROE
numbers over the past several years to determine whether management
has been increasing return for shareholders. The lapse ratio will help to tell
whether the company has managed to keep marketing expenses under
control. The more policies that remain in force (are not canceled), the
better.

Another major item that affects the performance of an insurance company

is interest rate fluctuations. Insurance companies invest much of the
collected premiums, so the income generated through investing activities is
highly dependent on interest rates. Declining interest rates usually equate
to slower investment income growth. Another downside to interest rate
fluctuations (not exclusive to insurance companies) is the cost of
borrowing. Find out when the company's debt matures and how high the
interest rates are. If the company is about to borrow or reprice its debt,
there could be a big shock to cash flows as interest expense rises.

Demographics play one of the largest roles in affecting sales for insurance,
particularly life insurance. As people age, they tend to rely more and more
on life insurance products for their retirement. Death benefit policies
ensure that beneficiaries are financially secure once the insured dies, but
in more recent years, the insurance industry has made great headway in
offering investment/savings type insurance products. Because baby
boomers are quickly approaching retirement age, take a close look at the
CALURA, Donna Faith Y.
BBF 4-14S
suite of insurance products that the company is offering and, from that, see
if it stands to benefit from this large portion of the population getting older.

The one problem with analyzing insurance companies is that the

disclosure usually isn't enough. Proper analysis requires substantial
disclosure of things like reserve ratios, exposure to
catastrophic/environmental loss and details of the company's operations.
This isn't to say that the financial statements are not enough for adequate
analysis, but to dig really deep, a person needs more information. We
should also note that A.M. Best ratings take all of this information and
more into account when they determine their ratings.

Mb

DOF pushes capital hike for insurance

firms
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Published February 21, 2018, 10:01 PM

By Chino S. Leyco

The Department of Finance (DOF) is determined to implement the current law governing the capital
requirements for insurance companies despite the appeal from the industry to review the country’s insurance
code.

Finance Secretary Carlos G. Dominguez III said the series of increases in capital requirements for life- and
non-life insurance companies should proceed as programmed by Republic Act (RA) 10607 or the amended
insurance code of the Philippines.

Under the RA 10607, existing insurance companies need to have a paid capital of P900 million next year and
P1.3 billion by 2022. Non-life insurers in particular are now requesting the government to suspend the
implemention of the final tranche of increase.

But Dominguez is not inclined to suspend the implementation of RA -10607.

“We want an industry that is strong, resilient, and an industry that can really serve the public, so in the
insurance business it is always good to have a healthy capitalization,” Dominguez told reporters.
CALURA, Donna Faith Y.
BBF 4-14S
“We are also preparing for competition for ASEAN so how can you compete with the big boys if your capital
is only $10 million,” he added.

Instead of suspending the law’s implementation, Dominguez suggested that insurance companies should
consolidate or merge if they cannot meet the minimum capital requirement.

“We want the industry to be competitive and strong and that is the way to do it to require them to have more
capitalization. In other words, it’s required to have them merge, or consolidate the industry to be more stable,
just like the banking sector,” Dominguez said.

The finance chief said that capital of every insurance firm in the country should be at least P900 million next
year and P1.3 billion by 2022.

“This is also part of our program to strengthen the capital markets, this is an important part of capital market,”
he added.

Meanwhile, Reynaldo A. de Dios, an insurance expert believes the local insurers are “over capitalized,” citing
among ASEAN, the Philippines has the highest net worth requirements by 2022.

“In addition, Philippine insurers are subject to the risk-based capital system,” De Dios said.

Last week, Insurance Commissioner Dennis B. Funa said that seven insurance companies — six non-life and
one life insurance firm — voluntarily surrendered their licenses to engage in the business of insurance.

These insurance companies are: Centennial Guarantee Assurance Corp., CAP Life Insurance Corp., FLT Prime
Insurance Corporation, Manila Surety and Fidelity Co., Inc., Meridian Assurance Corp., The Solid Guaranty.
Inc., and United Insurance Co., Inc.

As a consequence of the surrender of their licenses to act as insurance companies, these companies were issued
individual Servicing Licenses for the orderly “run-off” of their insurance businesses.

“The existing policyholders of these companies numbering to more or less one hundred seventy thousand will
not be affected by this as all existing contracts issued by these companies will remain effective,” Funa said.

He added that the insurance companies are still bound to honor their contractual obligations and settle the
insurance claims that may be filed,” he said.

Funa said that the commission continues to closely monitor the limited business activities of these companies,
specifically to ensure that all their liabilities to their policyholders are paid and settled as they become due.

According to Funa, majority of these companies voluntarily surrendered their licenses to act as insurer due to
their inability to comply with the P550-million minimum net worth requirement.

“While these companies are not compliant with the present P550-million net worth requirement, the net worth
of these companies are positive which means that they have sufficient assets to settle their obligations to their
policyholders,” he added.

bi

7 insurers give up licenses

CALURA, Donna Faith Y.
BBF 4-14S
By: Ben O. de Vera - Reporter / @bendeveraINQ
Philippine Daily Inquirer / 04:59 AM February 14, 2018

Seven insurance firms have stopped operations and voluntarily surrendered their
respective licenses as most of them were unable to comply with the higher net worth
requirement.

In a statement, Insurance Commissioner Dennis B. Funa identified the six nonlife

companies that surrendered their licenses to engage in insurance business as Centennial
Guarantee Assurance Corp., FLT Prime Insurance Corp., Manila Surety and Fidelity
Co. Inc., Meridian Assurance Corp., The Solid Guaranty Inc. and United Insurance Co.
Inc.
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One life insurance player, CAP Life Insurance Corp., also stopped operations, Funa
said.

Despite their closure, Funa said “policyholders of these companies numbering to about
170,000 will not be affected as all existing contracts issued by these companies will
remain effective and that they (the insurers) are still bound to honor their contractual
obligations and settle claims that may be filed.”
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The Insurance Commission continues to closely monitor the limited business activities
of these companies, specifically to ensure that all their liabilities to their policyholders
are settled as they fall due, Funa added.

According to Funa, the majority of these firms surrendered their licenses as their net
worth fell short of the mandatory minimum of P550 million under the Amended
Insurance Code or Republic Act (RA) No. 10607.
 CALURA, Donna Faith Y.
BBF 4-14S

“While these companies are not compliant with the P550-million net worth
requirement, their net worth are positive which means they have sufficient assets to
settle their obligations to policyholders,” he said.

Following the surrender of their licenses, these companies were issued individual
servicing licenses for the orderly “run-off” of their insurance businesses. A company in
an orderly ‘run-off’ is restricted from writing new insurance contracts or extending
existing contracts and their activities are limited only to accepting premium payments
from their policyholders, paying cash surrender values of outstanding policies to their
policyholders, reviving lapsed policies, and other related services,” he said.

RA 10607 further increases the required minimum net worth of insurance firms to P900
million by the end of 2019 and to P1.3 billion by the end of 2022.

Slowing growth. The average Best Practices firm grew organically by 6.9% in 2015, down from the
recent high of 9% in 2012. For most Best Practices agencies, consistent organic growth—or non-
acquisition growth—is the most important goal.

Sales velocity is a benchmark designed to measure the single most important driver of organic
growth: new business. Defined as new commissions written as a percentage of a firm’s baseline
(prior-year) commission and fees, sales velocity can create organic growth, even in a struggling
marketplace.

Best Practices firms generate an average sales velocity of about 15%. This is well above the industry
norm of approximately 12% and helps explain why Best Practices firms tend to outgrow the rest of
the industry. How do Best Practices firms generate such high sales velocity?

1) They build a culture of accountability where salespeople must consistently produce significant
new business at levels consistent with other Best Practices agencies.

2) They provide support structures and resources that enable producers to spend a large portion of
their time generating new client relationships.

3) They consistently grow their production team by actively recruiting and developing additional
salespeople.

Winning in a mature and crowded marketplace requires strategic clarity. The competitive landscape
requires brokers to address several key questions:

 Who is our target client?

 What internal and external challenges drive the target client’s decision-making?
 CALURA, Donna Faith Y.
BBF 4-14S
 How can our firm deliver unique and compelling value to the target client?

 Should we provide any specific resources to serve the target client’s needs?

 Can we recruit and train specific employees to focus their efforts on the target clients?

 Should we make any technology investments to better serve the target client?

 How does our firm maximize our exposure to target clients?

Although growth has slowed, Best Practices agencies find that specialization can create new revenue
streams. Today, most Best Practices agencies derive a significant portion of their revenue from areas
in which they specialize, because focused expertise can differentiate a firm in a crowded
marketplace. For the largest firms, nearly half of revenue comes from specialty industries.

Increased consolidation. The consolidation pace has steadily increased since 2009, when merger &
acquisition activity temporarily cooled in the wake of the Great Recession.

According to SNL Financial, 2015 was a record year for deal activity, marking 469 transactions.
Why are so many agencies selling?

 Record valuations result from a record number of buyers, including publicly traded brokers, privately
held agencies, banks and, most notably, private equity-backed buyers.

 Private equity’s entrance into the insurance distribution marketplace has been dramatic: Private
equity firms have grown their share of deals from 4% to nearly 50% over the past decade.

 Increasingly, agency owners are concluding that size matters. As they feel the pressure to get larger
as quickly as possible, some sell.

 The natural impulse to remain independent has, for some agencies, been thwarted by an inability or
unwillingness to invest in the next generation of leadership and production. These firms are left with
few alternatives but to sell.

 As client demands escalate, agents increasingly turn to third-party partners to provide access to the
value-added tools and resources necessary to remain relevant.

Most agency shareholders face a dilemma created by this frothy market. Best Practices agencies
address it by doing whatever it takes to close the gap between the lower internal agency value and the
higher “street value.” The higher values delivered by third-party buyers typically result largely from
expense reductions—producer compensation, owner compensation, staffing reductions—that the
seller must agree to implement after closing the deal. Today’s agency owners recognize they can
narrow the difference between internal and external value by getting more serious about making
these changes on their own, without selling their business.

Another strategy the active M&A marketplace has produced is an offensive one. After years of
believing they were priced out of the acquisition market, today’s Best Practices firms are jumping
into the acquisition fray. They typically focus on smaller, local agencies owned by friends or
respected competitors.
CALURA, Donna Faith Y.
BBF 4-14S
Finally, firms of all types and sizes recognize that in an environment dominated by consolidation,
culture matters. Over the long run, a firm’s independence hinges on its ability to attract and retain
talented employees. Most agencies today have an environment that works well for Baby Boomers
and Gen X, but in the coming decade, the employment preferences of millennials and Gen Z will
become increasingly important in shaping work environments.

Aging workforce. The average age of employees at most agencies has significantly increased. A
workforce that is too heavily concentrated among any single age group will create a succession
challenge if a large group retires within a small window of time.

Best Practices firms recognize the dual necessity of investing in talent and managing age
concentrations to ensure stability in leadership, production and client servicing. Agencies best
positioned to achieve long-term independence tend to employ generationally balanced production
talent.

Many producers’ clients are heavily concentrated among their peer group. As producers approach
retirement, decision makers at many of their clients may be doing the same. Regardless of whether or
not the decision maker is on the verge of retirement, it is not unusual for a producer’s book of
business to undergo a higher level of account attrition as they retire.

Because of this, many Best Practices agency leaders have developed plans and protocols for
transitioning producer books when they retire. Typically, a firm must customize its “standard plan”
to the needs and wishes of the retiring producer and those that will assume production responsibility
for each account once they retire. These plans vary widely across the industry, but may include:

1) Requiring the producer to give a notification period prior to the transition.

2) Implementing a process for determining which producer(s) will assume production responsibility
for each transitioning client going forward.

3) Developing a transitional compensation program that rewards both the incumbent producer and
the new producer for the time and effort that will be required of each during the transition. Some
plans, for example, split the normal producer commission between the two individuals, giving the
majority to the retiring producer in the first year, splitting evenly in the second year and giving the
majority to the replacement producer in the third. After the third year, all commissions go to the
replacement producer.

Disruptive technology. New technologies may disrupt the traditional broker model. According to
CB Insights, a firm that tracks technology investments in the insurance industry—dubbed
“InsurTech”—the first half of 2016 marked 82 investments in insurance startups, totaling more than
$1 billion.

These startups permeate every segment of the insurance industry. Best Practices agencies monitor
InsurTech developments so they can effectively respond to emerging changes.

Two areas with above-average vulnerability are small commercial property-casualty and small group
medical. Agency owners should know the percentage of business generated by these business
CALURA, Donna Faith Y.
BBF 4-14S
segments. The smallest agencies have the highest concentrations of small accounts and are therefore
generally more vulnerable to technology disruption than larger agencies.

Many firms focus on writing larger accounts with greater complexity. These types of accounts tend
to benefit more from a broker’s involvement. But suddenly increasing an agency’s target client size
is no small feat, especially for agencies outside large metro areas.

Wherever possible, agents must find ways to match or exceed the value proposition technology
players offer, while retaining the all-important client relationship and risk management expertise that
form the heart of the existing independent insurance industry.

This is the 24th edition of the annual Best Practices benchmarking analysis and the first year of the
current three-year study cycle. The complete report is available for purchase as an e-book.

B. VIEW OF GENERAL PUBLIC

C. RECOMMENDATION