ATENEO DE MANILA UNIVERSITY Graduate School of Business Rockwell Center, Makati City

A Strategic Management Paper on ABC INSURANCE CORPORATION

Submitted to: Prof. Edgar Juan Surtida III, MBA STRAMA R10 (SY 2011-2012)

Submitted by: Michael Reyes Garcia MBA Candidate

November 8, 2011

TABLE OF CONTENTS EXECUTIVE SUMMARY ........................................................................................................... 4 1. INTRODUCTION ................................................................................................................... 6 2. RESEARCH DESIGN AND METHODOLOGY ....................................................................... 7 2.1 Research Design ............................................................................................................................ 7 2.2 Scope and Limitations ................................................................................................................... 9 3. MACRO ENVIRONMENTAL ANALYSIS ............................................................................... 9 3.1 Economic Forces ........................................................................................................................... 9 3.2 Political, Government, and Legal Forces..................................................................................... 13 3.3 Technological Forces ................................................................................................................... 15 3.4 Socio-Cultural Demographic Forces ............................................................................................ 17 3.5 Climate and Environmental Forces ............................................................................................. 18 4. INDUSTRY AND COMPETITOR ANALYSIS ........................................................................19 4.1 Value Chain Analysis and Waterfall Chart................................................................................... 19 4.2 Strategic Positioning Analysis and Recommendation ................................................................. 22 4.3 Porters 5 Forces of Competitive Analysis .................................................................................. 24 4.4 Competitive Profile Matrix (CPM) ............................................................................................... 28 5. MARKET ANALYSIS ............................................................................................................45 5.1 Market and Competitors Trends ................................................................................................ 45 5.2 Market Segments ........................................................................................................................ 47 5.3 External Factor Evaluation (EFE) Matrix ..................................................................................... 60 5.4 Strategic Issues Based on External Factors ................................................................................. 67 6. COMPANY ANALYSIS .........................................................................................................68 6.1 Vision and Mission of the Company ........................................................................................... 68 6.2 Internal Audit .............................................................................................................................. 70 6.3 Mckinseys 7S Framework........................................................................................................... 76 6.4 Key Financial Ratio Analysis ........................................................................................................ 88 6.5 Internal Factor Evaluation (IFE) Matrix ....................................................................................... 94

6.6 Strategic Issues Based on Internal Factors.................................................................................. 99 7. STRATEGY FORMULATION .............................................................................................100 7.1 Strengths, Weaknesses, Opportunities, Threats (SWOT) Matrix .............................................. 100 7.2 Strategic Position and Action Evaluation (SPACE) Matrix ......................................................... 113 7.3 Internal-External Matrix ............................................................................................................ 114 7.4 Grand Strategy Matrix............................................................................................................... 114 7.5 Boston Consulting Group (BCG) Matrix .................................................................................... 117 7.6 Summary of Strategies .............................................................................................................. 119 7.7 Quantitative Strategic Planning Matrix (QSPM) ....................................................................... 119 8. STRATEGIC OBJECTIVES AND RECOMMENDED STRATEGIES ..................................121 8.1 Recommended Revised Vision and Mission ............................................................................. 121 8.2 Recommended Strategic Objectives ......................................................................................... 123 8.3 Recommended Business Strategies .......................................................................................... 125 8.4 Recommended Organizational Strategies ................................................................................ 128 8.5 Financial Projections ................................................................................................................. 130 8.6 Recommended Departmental Programs and Actions .............................................................. 135 9. STRATEGY EVALUATION, MONITORING, AND CONTROL............................................147 9.1 Strategy Map ............................................................................................................................. 147 9.2 Balanced Scorecard ................................................................................................................... 149 9.3 Contingency Planning................................................................................................................ 151 X. REFERENCES ...................................................................................................................153 XI. APPENDIX ........................................................................................................................155

EXECUTIVE SUMMARY ABC Insurance Corporation is one of the market leaders in the non-life insurance industry. The company was established in 1954 and has since then grown to become number 4 in the industry. It has business lines that include Aviation, Bonds, Engineering, Fire, General

Accident, Marine Cargo, Marine Hull, and Motor Vehicles. It should be mentioned that there is strong rivalry in the non-life insurance industry and this in turn exerts downward pressure on premium rates. This has even led to the imposition of minimum premium rates by the Insurance Commission. The industry resembles an

oligopoly that is dominated by a few large players. The top 4, including AIC, hold a total of 41.35% market share. This has led to stiff competition between players of what is

forecasted to be a rapid growth industry. Amidst this strong rivalry, AIC seems to have a moderate competitive profile as indicated by its slightly above average CPM score of 2.6. The companys major strengths lie in the perceived high quality of its products and services and its strong financial position as measured by the companys high networth. AIC is

currently ranked no. 1 by the Insurance Commission in terms of networth. On the other hand, the companys weaknesses include its relatively lower gross premium generating capacity, fewer branches and offices, and slower settlement of claims. Based on the EFE, AIC has a slightly above average responsiveness to threats and opportunities as indicated by a total weighted score of 2.70. Significant threats to AIC

include the strong rivalry in the industry and the decreasing share of insurance expenditure by the general population that can affect premium revenue per insurance buyer. The

company seems to have an above average level of responsiveness to these threats. On the other hand, the EFE matrix also highlights two opportunities that AIC seems to have neglected. These opportunities include expanding its distribution network through

bancassurance and grabbing a share of the relatively untapped large market for microinsurance.

Based on the IFE, AIC has a total weighted score of 2.75 that indicates an internal position strength that is above average. The companys major strengths include the

perceived high quality of its products and services and its strong financial position. The companys weaknesses include a decreasing premium retention rate, significantly fewer branches and offices compared to two out of three of its key competitors, and the decreasing performance of its claims settlement process. The main strategic issues that AIC faces include its relatively smaller distribution network, low premium retention rate, and the faltering performance of its claims settlement process. The companys smaller distribution network limits AICs premium generating

capacity and puts it in danger of being left behind by its key competitors. The low premium retention rate affects its profitability since it decreases the net premium revenue used to cover expenses. The decreasing performance of its claims process endangers the

sustainability of its growth since it affects its relationship with existing clients and potential new insurance buyers. Based on the analysis of external and internal factors and the results of the strategy formulation tools, AIC should focus on market penetration strategies to help achieve its objectives and address its strategic issues. Establishing a bancassurance partnership and expanding its network of brokers and agents will help the company increase its premium revenue generating capacity and increase both top line sales and market share. In support of these strategies, adhering to a higher retention rate will result in higher net earned premiums and help increase net income. These strategies will enable the company to keep pace with its key competitors and increase gross earned premiums by the end of 2014 by as much as Php 1,548,589,961, net earned premiums by Php 1,143,305,221, and net income by Php 163,900,974. strategies will also help the company increase its market share to 9.04%. These

1. INTRODUCTION ABC Insurance Corporation (AIC) is a domestic corporation established in May 13, 1954 and owned by DEF Inc. AIC is the flagship company of the AIC Group and is one of the market leaders in the non-life insurance industry. It posted gross revenues of more than Php 2.7 billion in 2010 that was supported by equity of Php 6.1 billion and managed assets amounting to Php 11.1 billion. In fact, the Insurance Commission ranks AIC as no. 1 in the non-life insurance industry in terms of networth. The companys main line of business

involves providing financial protection and security. It is in the business of non-life insurance and has lines such as Aviation, Bonds, Engineering, Fire, General Accident, Marine Cargo, Marine Hull, and Motor Vehicles. XYZ Magazine, a reputable organization and a leading journal for international financial markets, conducted a client-based ranking of the best providers of insurance services and products in 2010. Respondents were asked to identify their top three insurance companies in order of quality. The company received four awards including Best Insurer in the Philippines and Best Insurer in Asia. It should be mentioned that AIC was also awarded Best Insurer in the Philippines in 20091. According to the Insurance Commission, AIC is ranked no. 4 in terms of Gross Premiums and has a market share of 7.37% as of 2010. In contrast, Malayan Insurance Company Inc., the current market leader, has a market share of 14.49%2. AIC has a network of 34 branch and offices spread throughout the Philippines and one office in Chinas Special Administrative Region of Hong Kong. It is headquartered at AIC House Makati Building Paseo de Roxas Legaspi Village Makati City. The company is

headed by Mr. X as President and Chief Executive Officer. Other key members of the management team include Ms. Y as Chief Operating Officer and Senior Vice President for Shared Services, Ms. Z as Senior Vice President for Accounting & Property Administration, Mr. A as Senior Vice President for Branches, Ms. B as Senior Vice President for Marine &

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com) Insurance Commission / Non-life Ranking Based on Gross Premiums 2010 (www.insurance.gov.ph)

Aviation, Mr. C as Senior Vice President for Non-marine, Mr. D as Senior Vice President for Business Development, and Mr. E as Senior Vice President for Treasury. AIC employs 388 regular personnel and taps the services of 584 licensed agents and 59 brokers. The

company leverages on the expertise of licensed agents and brokers to sell its wide array of products and services to clients. AIC is also the local partner of various insurers around the world including AIOI Insurance, Allianz SE, The Chubb Group, FM Global, Fubon Insurance, IF P&C, Liberty Mutual, Nipponkoa, and Samsung Fire & Marine. AIC also serves as the local

representative of Steamship Mutual and the International Network of Insurance. Some of the more notable coverages of AIC are the historic Ali-Frazier bout Thrilla in Manila, Las Pinas Bamboo Organ, Manila Southeast Asian Games in 2005, Philippine season of Miss Saigon, exhibitions of National Artists Fernando Amorsolo, Bencab, and Anita Magsaysay Ho, fashion shows of Monique Lhuillier and Josie Natori, and concerts of Christina Aguilera, Beyonce, Alicia Keys, Rihanna, Pussycat Dolls, and Justin Timberlake. 2. RESEARCH DESIGN AND METHODOLOGY 2.1 Research Design Macro-environmental data used in the external analysis and other sections of the paper were obtained through various sources. General news, current events, and trends were sourced from credible online publications such as Philippine Daily Inquirer, Manila Bulletin, Philippine Star, Manila Standard, The Manila Times, and ABS-CBN News. Economic data were

sourced from publications and articles released by organizations such as the Asian Development Bank, International Monetary Fund, National Economic and Development Authority, Department of Trade and Industry, National Statistics Office, Bangko Sentral ng Pilipinas, Philippine Overseas Employment Administration, Land Transportation Office, Pulse Asia, Transportation Science Society of the Philippines, and Swiss RE Economic Research. Economic data was also obtained directly from the Institute for Development and Econometric Analysis through coordination with its personnel. Materials used to provide

briefings by economic experts such as Dr. Ernesto Pernia and Secretary Cayetano Paderanga Jr. of the National Economic and Development Authority were also utilized. Industry data was also obtained through multiple sources. Data from the Insurance Commission of the Philippines was referenced extensively. This includes published

documents of the Insurance Commission such as the Annual Reports for the years 2004 to 2009, Key Insurance Indicators for the years 2004 to 2010, official circulars, lists of licensed and accredited entities, and ranking files with varying basis. Data was also obtained from publications of the Philippine Insurers and Reinsurers Association including its recently released 2011 PIRA Fact Book. Published documents from the International Association of Insurance Supervisors were also referenced to help identify certain factors deemed critical to the successful operation of insurance companies. To gather pertinent information regarding the key competitors of the company, copies of the audited financial statements for multiple years of the respective companies were obtained from the Securities and Exchange Commission. Online web sites of key

competitors were also referenced to gather relevant information and acquire copies of annual reports of some key competitors. To gather internal information about the company, the permission and assistance of the Chief Executive Officer and Chief Operating Officer were obtained. Lists of questions

covering the various topics under finance, operations, and marketing were emailed to company personnel. Numerous interviews were also conducted to gain further In addition, key personnel such as the Vice

understanding of certain technical details.

President for Business Planning and Technology, First Vice President for Organizational Development and People Management, Assistant Vice President for Reinsurance, Vice President for Motor Line, Manager for Information Management, and personnel of the Process Review and Documentation department were also consulted. Various internal

publications, confidential documents, and other materials inclusive of the audited financial statements were also referenced extensively to gain more information about the company.

The 13th Edition of Strategic Management Concepts and Cases by Fred R. David was also used as the main reference for matrices, tools, and other strategic management topics. Mr. Florendo Garcia, a financial consultant, was also consulted for the financial projections. 2.2 Scope and Limitations This paper will be limited to the Philippine operations of ABC Insurance Corporation. The paper will mainly focus on AIC and will only cover its subsidiary CBA Assurance Corporation as much as it is relevant to the recommended strategy. Due to the strong rivalry in the nonlife insurance industry and the confidential nature of the information discussed in the paper, top management of the company has requested that all hard copies of this paper be retrieved upon the fulfillment of the authors academic requirements. 3. MACRO ENVIRONMENTAL ANALYSIS 3.1 Economic Forces 3.1.1 GDP Growth Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage3. Based on information published by the Bangko Sentral ng Pilipinas the Gross Domestic Product at constant 1985 prices grew by 4.2% in 2008, 1.1% in 2009, and 7.6% in 2010 4. The head of the National Economic and Development Authority, Secretary Cayetano Paderanga Jr., credits the strong recovery witnessed in 2010 to the performance of the industrial sector as well as some notable increases in private investment5.

Institute for Development and Econometric Analysis (IDEA) / 2011 IDEA Midyear Economic Briefing August 8, 2011
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Bangko Sentral ng Pilipinas (BSP) / Selected Economic Indicators 2000-2011 (www.bsp.gov.ph)

National Economic and Development Authority (NEDA) / 2011 IDEA Midyear Economic Briefing August 8, 2011

Relevance:

According to the Institute for Development and Econometric Analysis, real

Gross Domestic Product (GDP) is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Since growth in GDP can indicate growth in the production of final goods and services, this can translate into more goods and services that will require insurance coverage. This presents an OPPORTUNITY for AIC to increase its premium revenue by offering insurance coverage for the new goods and services being produced in the country. For instance, the amount of goods that need to be transported will likely

increase and these goods can be covered by AICs Marine Cargo insurance products.

3.1.2 Micro Enterprises According to the Department of Trade and Industry, 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises as of 20096. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped7. Relevance: 91.4% of business enterprises operating in the Philippines are micro

enterprises. This segment of the insurance market has been largely ignored until recently with the emergence of microinsurance. This presents an OPPORTUNITY for AIC to

increase its premium revenue by offering its existing products to this large segment. AIC can decrease the coverage of existing products thus lowering the required amount for premium payments and making these products more affordable to micro enterprises. In addition, providing financial protection to micro enterprises allows AIC to aid in nation building since this type of enterprise makes up the majority of businesses and contributes a significant portion of total jobs generated in the country. The Philippine Insurers and

Reinsurers Association estimates the local microinsurance market to be potentially worth Php 2 billion. In addition, the non-life microinsurance market is presently only estimated to

Department of Trade and Industry (www.dti.gov.ph) / MSME Statistics Philippine Insurers and Reinsurers Association / 2011 PIRA Fact Book

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be generating around Php 200 million. This means that around Php 1.8 billion remains untapped. AIC should try to grab its share of this large market. TABLE 3.1.2-A
Potential Microinsurance Market Size AIC's Market Share Effect on Income 2,000,000,000 7.37% 147,460,317

3.1.3 Projected Number of Registered Motor Vehicles The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 20138. Relevance: According to data published by the Land Transportation Office of the

Department of Transportation and Communications, the number of registered motor vehicles in the country grew from 5,891,272 in 2008 to 6,634,855 in 20109. In addition, the

Transportation Science Society of the Philippines forecasts the number of motor vehicles to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013. This presents an OPPORTUNITY for AIC to grab its share of the growing market for motor insurance. This will help AIC potentially increase its premium revenue from its motor car product line by as much as Php 59.2 million in 2011, Php 68.4 million in 2012, and Php 68.4 million in 2013. TABLE 3.1.3-A
2010 No. of Motor Vehicles % increase from previous yr. Motor Car Premiums Increase in Income 454,046,195.41 6,634,855 2011 7,500,000 13% 513,251,075.66 59,204,880.25 2012 8,500,000 13% 581,684,552.41 68,433,476.75 2013 9,500,000 12% 650,118,029.17 68,433,476.75

Transportation Science Society of the Philippines / 17 Annual Conference of the Transportation Science Society of the Philippines 2009
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Land Transportation Office (LTO) / Number of Motor Vehicles Registered 2008-2010

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3.1.4 Decreasing Share of Insurance Expenditure Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry10. Relevance: According to the Family Income and Expenditure Survey of 2009 that was

released by the National Statistics Office, insurance expenditure as a percentage of total family expenditure is decreasing. The share of insurance expenditure decreased from

1.88% in 2006 to just 1.69% in 2009. This translated to a decrease of around Php 6.4 billion in potential premium revenue for the life and non-life insurance industries. Thus, the smaller share of insurance in total family expenditure is a THREAT to AIC and other insurance companies. Information from A.M. Best Special Report on the Philippine Life and Non-life Industry seems to support the decreasing share of insurance expenditure. According to the report, total non-life insurance industry premium revenue as a percentage of Gross Domestic Product declined from 0.54% in 2007 to 0.51% in 2008 and further down to 0.43% in 200911. To compensate for the decreasing share of insurance expenditure, AIC and other insurance companies will need to try and reach more insurance buyers. TABLE 3.1.4-A
2009 54,590,000,000 3,239,186,000,000 1.69%

Insurance Expenditure Total Family Expenditure % Source: FIES 2009

TABLE 3.1.4-B
Life Non-life Total Premium Income (billions) 57.24 20.74 77.98 % of Total 73% 27% Source: Insurance Commission's Annual Report 2009

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National Statistics Office (NSO) / Family Income and Expenditure Survey 2009 A.M. Best / Special Report on the Philippine Life and Non-life Industry April 18, 2011

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TABLE 3.1.4-C
2006 % Share of Insurance Potential Premium Revenue at 1.88% Actual Insurance Expenditure 2009 Effect on Insurance Industry Share of Non-life Insurance Industry Share of AIC (based on Market Share) 1.88% 60,996,580,249.29 54,590,000,000.00 6,406,580,249.29 1,703,930,166.33 125,631,040.84

3.2 Political, Government, and Legal Forces 3.2.1 Compulsory Insurance Coverage The enactment of Republic Act 10022 has led to the Compulsory Insurance Coverage for Agency-Hired Migrant Workers12 Relevance: The enactment into law of RA 10022 necessitates concerned parties to provide insurance coverage for migrant workers. This presents an OPPORTUNITY for AIC to All insurance

increase its premium revenues by addressing the needs of this market.

companies that intend to provide coverage in adherence to RA 10022 are required to first seek approval and accreditation from the Insurance Commission. AIC is one of only 3 nonlife insurance companies that have been successfully accredited to provide coverage. AIC should prioritize putting in place all necessary operating structures to support the demand that will be coming from this new market segment. The Bangko Sentral ng Pilipinas believes there will be continued strong demand for skilled Filipino workers abroad13. According to the Overseas Employment Statistics document released by the Philippine Overseas Employment Administration in 2010, there are 1,123,676 landbased and 347,150 seabased overseas Filipino workers14. Circular 35-2010 issued by the Insurance Commission

stipulates an annual minimum premium rate of $72 for landbased workers and $100 for seabased workers12. Taking this into consideration, the industry can potentially generate around Php 4.97 billion in gross premium revenues from this market.

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Insurance Commission (www.insurance.gov.ph) Bangko Sentral ng Pilipinas (www.bsp.gov.ph) Philippine Overseas Employment Administration / Overseas Employment Statistics 2010

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Assumption: Php 43 : $1 USD TABLE 3.2.1-A

Premium Landbased Workers (as of 2010) Seabased Workers (as of 2010) 1,123,676 347,150 72 100 Revenue 80,904,672 34,715,000 Revenue per yr (Php) 3,478,900,896 1,492,745,000

per yr (in USD) per yr (in USD)

Total 4,971,645,896

TABLE 3.2.1-B
Total Premium Revenue AIC's Market Share Effect on Income 4,971,645,896 7.37% 366,560,238.75

3.2.2 Graft and Irregularities at LTO Starting to Endanger Systems Vital to Insurers Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers15. Relevance: According to a survey conducted by Pulse Asia from February 24 to March 6, 2011 concerning graft and corruption in government agencies, the Land Transportation Office is considered by many Filipinos as one of the most corrupt agencies in the country today16. The graft, corruption, and other irregularities at the LTO have recently escalated to the point of endangering systems vital to insurance companies. Stradcom functions as the LTOs information systems support and operations group. It maintains, operates, and

supports all critical systems of the LTO. These systems are interconnected to the Certificate of Cover Authentication Facility (COCAF) system of the Philippine Insurers & Reinsurers Association. The COCAF allows for the authentication of CTPL policies and verifies validity of these policies. It is alleged that there were irregularities in the contract of LTO with Stradcom17. In addition, a Commission on Audit report alleges that Stradcom illegally

15

The Manila Times / Stradcom to begin layoffs in LTO units starting September August 29, 2011 Pulse Asia / Graft and Corruption in Government Agencies March 2011 Philippine Insurers and Reinsurers Association / 2011 PIRA Fact Book

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earned around Php 2 billion using LTO data18. To compound the problem further, an internal power struggle has commenced between two factions within Stradcom. This even led to an incident where 30 armed men tried to take over the Stradcom offices at the LTO. On top of this, Stradcom now has legal cases filed against the LTO and the LTO is also withholding payment for Stradcom services. The situation has deteriorated to the point that the LTO Chief Virginia Torres issued a statement that the LTO was ready to return to manual operations if ever Stradcom decided to shutdown its computer operations due to nonpayment of its service fees19. This presents a THREAT to insurers since COCAFs

connectivity and interfacing with Stradcom systems may now be in danger. If LTO returns to manual operations then it will be much more difficult for insurers to protect against fake policies. On the other hand, if LTO decides to utilize a totally different system then it will take significant time and resources for insurers to design, develop, and implement a new system capable of interfacing and communicating with any new LTO system. 3.3 Technological Forces 3.3.1 Projected Growth of Internet Usage in the Philippines Internet usage has been steadily increasing from 2000 to 2010 with a compound annual growth rate of 27.8% and is forecasted to continue its rapid growth20. Its continued growth will make powerful emerging web-based technologies more accessible and cost efficient for corporations.

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Philippine Daily Inquirer News / Stradcom Earned P2 Billion Using LTO Data COA October 7, 2011 The Manila Times / Stradcom to begin layoffs in LTO units starting September August 29, 2011 Internet World Stats (www.internetworldstats.com) 2010

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TABLE 3.3.1-A
YEAR 2000 2005 2008 2009 2010 Users 2,000,000 7,820,000 14,000,000 24,000,000 29,700,000 Population 78,181,900 84,174,092 96,061,683 97,976,603 99,900,177 % Pop. Usage Source

2.60% ITU 9.30% C.I.Almanac 14.60% Yahoo! 24.50% Nielsen 29.70% ITU

Source: Internet World Stats

Relevance: The number of internet users as a percent of total Philippine population has been increasing for the past decade. Many Filipinos, including potential insurance buyers, now use the internet to gather information about products and services. Recognizing this trend, many companies now try to go beyond merely establishing an internet presence in the form of a corporate website by integrating features that better facilitate customer interaction. In a survey conducted by IBM, it was determined that insurance buyers prefer using more than one interaction point when purchasing insurance plans and policies. These interaction points include the use of the internet to augment existing means of connecting with potential buyers21. AIC needs to continue to improve its online presence, including its corporate website and social networking pages, to ensure it remains competitive. If the growth rate of internet usage in the country remains constant then AIC can potentially reach more people through its internet presence without any additional costs. Assuming the same growth rate of 27.8%, then for 2011 alone, AIC can potentially reach an additional 8,255,703 Filipino internet users through the internet. By leveraging on the internet, AICs reach will grow as the internet usage grows. This underscores the importance of strengthening its online presence and taking advantage of the OPPORTUNITY that the continued growth of the internet presents. AIC can also utilize web-based technologies to help build stronger

relationships with its brokers and agents. The company can accomplish this by creating a secure portal for brokers and agents that can serve as an additional medium for communications and also help facilitate information dissemination. The portal can even use
21

Institute for Development and Econometric Analysis / Industry Analysis: Life, Non-life, and Pre-need Insurance June 2011

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mobile technologies such as a GSM model pool that will be capable of sending and receiving messages to interact with brokers and agents who may be out in the field. In addition, the increase in internet usage also provides access to new web based technologies that utilize web 2.0 platforms. This allows web-based technologies to seamlessly communicate with backend servers that enable front-end applications to become as powerful and feature-rich as desktop applications. For instance, AIC can use web-based technologies such as

Googles Google+ Hangout that enables up to 10 users to connect and communicate through voice and video. This application can also be accessed through mobile phones which will be a useful feature for personnel in the field. AIC can use this web-based

technology to establish stronger relationships with brokers and agents as well as facilitate real time communication, collaboration, and coordination between branches and offices spread across the country. Since the application has built in security features, branch heads can easily setup secure communications that only allow authorized personnel to join in. In light of the strong rivalry in the industry, these types of productivity enhancing tools that provide stronger integration between the different organizational units can help the company compete more effectively. 3.4 Socio-Cultural Demographic Forces 3.4.1 Rising Number of Motor Vehicle Related Accidents Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic accidents has increased from 7,267 in 2007 to 15,750 in 200922 and road accident related deaths is currently growing at 4.2% per annum23. Relevance: According to the National Statistics Office, motor vehicle related traffic

accidents have been increasing. Vehicles involved in traffic accidents have increased from 7,267 in 2007 to 15,750 in 2009. The number of casualties resulting from traffic related accidents has also increased from 4,287 in 2007 to 8,687 in 2009. In a study conducted by
22

National Statistics Office (NSO) / 2011 Philippines in Figures Asian Development Bank / Regional Road Safety Program 2005-2010

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the Asian Development Bank it was also determined that the number of road accident related deaths has been increasing by 4.2% per year. This presents a THREAT to AIC since an increase in traffic accidents will likely put upward pressure on the claims ratio of its motor car product line. Higher claims costs for its motor product line will in turn bring up its total losses due to claims and result in lower income for the company. This seems to be supported by the fact that Gross Claims Liabilities of AIC for the Motor Car line increased by 46% from Php 130,910,998 in 2007 to Php 191,361,433 in 2010. 3.5 Climate and Environmental Forces 3.5.1 Heightened Risk of Extreme Weather According to the Presidential Task Force on Climate Change, there is heightened risk of extreme weather due to climate change24. Relevance: Extreme weather due to climate change is a THREAT to AIC. Extreme weather brings about damaging typhoons, flooding, landslides as well as droughts and fires. Aside from potential damage to AICs corporate properties, branches, and offices, the extreme weather conditions can also increase its losses due to claims. The table below illustrates the potential impact on operating income of calamities by obtaining the difference in terms of claims cost between 2009 when Ondoy and Pepeng occurred and 2010 which was relatively uneventful. There is a difference of Php 56.6 million in terms of claims cost. In the event of the occurrence of calamities, insurance companies such as AIC need to quickly respond to the needs of its clients. Claims need to be processed quickly so that the burden of the aggrieved parties may quickly be alleviated or mitigated. Anti-fraud personnel should also be wary of false claims that will seriously affect AICs solvency and profitability. AIC needs to have a well formulated contingency and calamity plan in place before another Ondoy or Pepeng hits the country. These two severe typhoons caused significant losses to most insurance companies and seriously affected their financial disposition even long after they occurred.
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Presidential Task Force on Climate Change / Climate Change in the Philippines 2011

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TABLE 3.5.1-A
Claims Cost 2010 2009 Potential Effect on Income 397,066,744 453,674,148 (56,607,404)

However, it should be mentioned that the recent calamities may have also helped people realize the value of insurance. In the long run, this may help increase the demand for insurance products. This positive effect may eventually compensate for the higher losses due to claims. 4. INDUSTRY AND COMPETITOR ANALYSIS 4.1 Value Chain Analysis and Waterfall Chart

Source: Insurance Commission

4.1.1 Underwriting Underwriting entails the selection, evaluation, and acceptance of risks. This step includes the design, development, and offering of non-life insurance products and services. Risks are selected and in some occasions actual inspection may be necessary. Proposed coverage, insured amount, exclusions, and premium rates are submitted to insurance buyers in this step. Once terms have been approved and finalized by all parties concerned, a policy is 19

then issued. For non-life insurance, policies usually cover one year terms except for projects that span multiple years. It is also in this step that the risk exposure of the insurance company is managed to ensure solvency and sustained growth. Risk needs to be spread among different types as well as geographically. Insurance companies favor low severity versus covariant types of risk events. It is also in this step where the balance between cession and retention of risks is managed. This includes allocating and distributing risks ceded between treaty and facultative agreements. This step also includes managing claims and losses associated with it. Some claims require adjusters to assess actual losses to determine the extent of the insurance companys true liability. To supplement its

underwriting revenue and increase its underwriting capacity, an insurance company also engages in investment portfolio management. This allows the insurance company to utilize premium revenues in generating more income through investments.

4.1.2 Distribution The distribution step involves coursing the insurance companys products and services through the different distribution channels. One channel is through the insurance companys own network of branches and offices. Another channel is composed of brokers and agents who serve as intermediaries to insurance buyers or in some cases decision makers in the insurance buying process themselves. These brokers and agents are licensed and

accredited by the Insurance Commission. This channel captures a significant amount of value in the form of commissions. Another channel that is starting to gain popularity is bancassurance. This entails a partnership between the insurance company and a bank. The Bangko Sentral ng Pilipinas requires that the bank own 5% of the insurance company to be able to sell insurance products within its bank branches.

4.1.3 Consumption Individuals and corporations of various industries serve as consumers of non-life insurance products and services. Consumption of these products and services is classified by the 20

Insurance Commission into five categories, namely, fire and allied perils, motor, marine and aviation, casualty, and surety. Of the five categories, fire and motor historically have the largest share of total consumption. As of 2010, the share of fire was at 29.32% while the share of motor was at 32.02%. 23.25%, and surety has 4.25%25. On the other hand, marine has 11.02%, casualty has

Key Findings and Insights AIC is in two steps of the value chain, namely, underwriting and distribution. Most of the value created is in underwriting. However, with 28.73% of the premium going to distribution, there is significant value also created in distribution. AIC already has downstream presence in the form of its branches and offices that aid in the distribution step. Nonetheless, brokers and agents currently play a critical role in the distribution step since they form valuable links with insurance buyers. This is especially true for those that offer microinsurance because insurance companies rely more heavily on agents to do the footwork and absorb most of the selling and marketing costs. Relevance: The significant value created in the distribution step presents an opportunity for AIC. It may be profitable for AIC to increase its presence in this step. This will entail exploring alternative distribution channels such as bancassurance as well as establishing more branches and offices. This will increase AICs links to insurance buyers and decrease the bargaining power of brokers and agents.

25

Insurance Commission / Key Insurance Indicators 2006-2010

21

4.1.4 Waterfall Chart

4.2 Strategic Positioning Analysis and Recommendation 4.2.1 Perceptual Map of the Top 10 Insurance Companies in the Non-life Insurance Industry

X-Axis: The x-axis represents the number of types of insurance products & services offered by a company. A wide product array allows insurance companies to better manage risk by 22

spreading their risk among different types. It also allows insurance companies to have numerous potential sources of premium revenue. Narrow Product Array: Fewer insurance products and services offered Wide Product Array: More insurance products and services offered Y-Axis: The y-axis represents the Gross Premium revenue amount of each insurance company that was submitted to the Insurance Commission for 2010. Low Premiums: Php 1.8 billion or lower. The lowest Gross Premiums amount

posted for the top 10 non-life insurance companies was by MAPFRE at Php 1.66 billion. High Premiums: Php 2.2 billion or higher. Highest Gross Premiums amount posted was by Malayan at Php 5.85 billion26. Based on the perception map, AIC is strategically positioned in the group along with Malayan, Prudential, and BPI/MS. The strategic group that AIC belongs to is composed of companies with relatively high premium revenues and a wide array of products. The

advantage of such a positioning is that the wide product array enables companies in this group to have more potential revenue streams compared to the other players with fewer products and services. A wide product array also allows companies to better manage risk by being able to spread its risk exposure over different types of risk. The disadvantage is that the wide product array coupled with high premium revenues increases a companys exposure to a higher number of potential risk events. A company in this group should try to ensure it maintains underwriting discipline to avoid the risk of incurring higher losses due to claims. It is also worth noting that the members of this strategic group were ranked by the Insurance Commission as the top 4 in the non-life insurance industry for 2010. Over the medium to long term, AIC should retain its strategic positioning. AIC should try to develop new products or generate premium revenue through other means to keep pace with its current strategic grouping and maintain its current positioning.

26

Insurance Commission / Non-life Ranking Based on Gross Premiums

23

4.3 Porters 5 Forces of Competitive Analysis 4.3.1 Rivalry of Competition STRONG There is intense market competition among the different players in the non-life insurance industry. The industry is composed of 76 domestic corporations, 5 domestically incorporated foreign corporations, 3 branches of foreign corporations, and 1 domestic professional reinsurance corporation. As of 2010, the non-life insurance industry resembled more of an oligopoly with the top 4 corporations in terms of Gross Premiums holding 41.35% market share while the rest of the players split the remaining 58.65% amongst themselves 27. In

addition, the gap in terms of Gross Premium Revenues for the top 4 players has narrowed in the last five years. The gap between Malayan and BPI/MS in 2006 which was Php

3,214,581,650 decreased to Php 1,807,300,563 in 2010, the gap between Malayan and Prudential which was Php 2,473,297,470 in 2006 decreased to Php 1,698,670,340 in 2010, and the gap between Malayan and AIC which was Php 3,446,984,312 in 2006 decreased to Php 2,626,410,850. This has led to stiffer competition among the top players. In fact, if BPI/MS maintains its growth rate, it may surpass Prudential in a few years and become the new no. 2 in the industry. Although there have been attempts at differentiation, the top players offer similar products. This homogeneity in products further contributes to the intense level of competition. On top of this, the strength of the rivalry within the industry resulted in a price war that forced premium rates downward and led to the imposition of minimum premium rates by the Insurance Commission.

27

Insurance Commission / Non-life Ranking Based on Gross Premiums 2010

24

TABLE 4.3.1-A
2006 (Php Gross Premiums Earned) Market Size AIC Malayan Prudential BPI/MS All others combined % Market Share Market Size AIC Malayan Prudential BPI/MS All others combined 100% 6.74% 18.96% 10.19% 7.57% 56.54% 100% 6.76% 20.92% 10.22% 8.02% 54.08% 100% 6.60% 19.67% 9.74% 7.82% 56.16% 100% 7.08% 19.41% 9.25% 8.28% 55.98% 100% 7.37% 14.49% 9.89% 9.59% 58.65% 2007 2008 2009 2010

28,219,600,000 29,123,100,000 31,182,000,000 32,501,400,000 36,893,800,000 1,902,921,338 1,968,258,148 2,057,802,651 2,299,824,733 2,720,185,713 5,349,905,650 2,876,608,180 2,135,324,000 15,954,840,832 6,092,837,233 2,977,308,810 2,336,351,000 6,134,432,804 3,038,518,345 2,439,670,000 6,309,624,015 3,007,491,798 2,689,849,000 5,346,596,563 3,647,926,223 3,539,296,000 21,639,795,501

15,748,344,809 17,511,576,200 18,194,610,454

4.3.2 Potential for New Entrants WEAK The biggest barrier to entry into the insurance industry is the relatively large capital requirement amounting to Php 125 million imposed by the Insurance Commission. This minimum requirement will be raised to Php 175 million by 2011. Only upon meeting this minimum requirement can new players be granted a license and awarded a Certificate of Authority allowing it to operate. It should also be mentioned that the Insurance Commission plans to keep on increasing the minimum capital requirement until it reaches the target of Php 500 million by 2015. This is being done by the Insurance Commission to ensure that local insurance companies will have the financial strength to compete against its foreign counterparts once the ASEAN Free Trade Area takes effect in 201528. In addition, the large combined asset base of the well entrenched top 4 players of the non-life insurance industry amounting to Php 42,041,300,928 also presents an obstacle to new entrants. This provides

28

Philippine Insurers and Reinsurers Association / 2011 PIRA Fact Book

25

the top players with a competitive advantage that is difficult to match for incoming players. The top players also offer a broad array of products with 13 to 14 different product categories that allow them to spread their risk exposure and help manage losses due to claims. For new players to compete effectively they will need to offer a reasonable number of product categories that will allow them to do the same. That will entail a significant amount of resources on top of the required minimum capital imposed by the Insurance Commission. The fact that the total number of players in the non-life insurance industry did not change from 2009 to 2010 also seems to indicate a weak potential for new entrants29.

4.3.3 Bargaining Power of Suppliers STRONG Players in the non-life insurance industry do not require any raw materials to offer their products and services. Insurance companies mostly utilize typical office supplies and other common items necessary to conduct business operations. These materials and items have a large number of suppliers, have relatively low switching costs, and are abundantly and readily available from many alternative sources. The supplier group of these minor items has weak bargaining power. On the other hand, supplier groups that provide critical sales services for insurance companies such as brokers and agents have a strong bargaining power. Brokers normally generate around 50% of total premium revenue in the non-life insurance industry30. This makes the role they play critical to insurance companies. Large insurance buyers also like to course their insurance needs through brokers to ensure their requirements are well met and that they get the best insurance package in the market. Moreover, considering the similarity between typical insurance products, brokers and agents may easily switch from selling the products of one insurance company to the next. Adjusters comprise another supplier group in the industry. This supplier group plays the important role

29

Insurance Commission / Key Insurance Indicators 2006 - 2010 Insurance Commission / Annual Report 2009

30

26

of determining the actual value of losses due to claims. Insurance companies have required even more of the services of this supplier group in recent years given the high claims / loss ratio of 44% and the occurrence of calamities such as Ondoy and Pepeng31. Thus, all of this results in a generally strong bargaining power of suppliers.

4.3.4 Bargaining Power of Buyers STRONG The price of a non-life insurance policy is largely dependent on factors beyond the control of the buyer such as the propertys location, age, history, and other characteristics. However, considering the homogeneity of insurance products and the relative ease with which a buyer can switch from one insurance company to the next, there seems to be a generally strong bargaining power of buyers. In addition, large organizations with insurance requirements that are of a considerable amount do have bargaining power in terms of determining what can be potentially included in the coverage of the policy. Moreover, buyers who have

insurance requirements that have a high degree of public relations and marketing value such as those related to a big event like the Southeast Asian Games also have higher bargaining power.

4.3.5 Potential for Substitutes WEAK A substitute product to non-life insurance is what most people refer to as self-insurance. This involves judiciously setting aside funds for future use in case an unforeseen event occurs that will require monetary resources from an individual or an organization. This is usually only popular with high networth individuals or organizations that do not need to comply with regulatory requirements imposed by the government regarding insurance. In addition, self-insurance will most likely require a high propensity for saving. Considering that

31

Insurance Commission / Key Insurance Indicators 2006 -2010

27

according to the Asian Development Bank the current and projected domestic saving rate of the Philippines is low compared to its Asian neighbors, the likelihood of an individual or organization to engage in self-insurance is relatively low32. This further weakens the threat from self-insurance as a substitute to non-life insurance. FIGURE 4.3.5-A

Source: Asian Development Bank 4.4 Competitive Profile Matrix (CPM) The three key competitors of AIC are Malayan Insurance Co. Inc., Prudential Guarantee and Assurance Inc., and Bank of the Philippine Islands & Mitsui Sumitomo Insurance Corporation. Together with AIC, these three key competitors comprise the top 4 companies in the non-life insurance industry based on the ranking list published by the Insurance Commission in 201033.

4.4.1 Key Competitors of AIC Malayan Insurance Co. Inc. 2010 Gross Premium Revenue: Php 5,346,596,563

32

Asian Development Bank / ADB Economics Working Paper Series October 2010 Insurance Commission / Non-life Ranking Based on Gross Premiums 2010

33

28

2010 Market Share:14.49% 2010 Industry Rank based on Gross Premiums: 1 Malayan Insurance is viewed as the founding pillar of the Yuchengco Group of Companies. It has been in the non-life insurance business for more than 8 decades and continues to provide property, motorcar, casualty, accident, and marine insurance as well as surety bonds to business and families. The company attained market leadership in 1970 and has been able to maintain its leadership for the past 40 years34. Its consistently high gross premium revenues, large managed asset base, and broad product array make it currently the most dominant player in the non-life insurance industry. product array similar to AIC. In addition, Malayan offers a

Prudential Guarantee and Assurance Inc. 2010 Gross Premium Revenue: Php 3,647,926,223 2010 Market Share: 9.89% 2010 Industry Rank based on Gross Premiums: 2 Prudential is ranked number 2 and recognized by many as a leader in the non-life insurance industry. It was founded by Robert Coyiuto Sr. in 1950 and provides a wide array of non-life insurance products. Mr. Coyiuto himself is considered an industry legend having become the first Filipino to be a member of the well-known Lloyds of London35. In the past few years, Prudential has grown in terms of both Gross Premium Revenues and Asset Base. This has turned it into a strong contender for market leadership and an aggressive challenger of Malayan. The companys robust performance amidst the turbulent global economic

environment highlights the need for other top players in the industry to keep an eye on its progress.

34

Malayan Insurance Co. Inc. (www.malayan.com) Prudential Guarantee and Assurance Inc. (www.prudentialguarantee.com)

35

29

Bank of the Philippine Islands & Mitsui Sumitomo Insurance Corporation 2010 Gross Premium Revenue: Php 3,539,296,000 2010 Market Share: 9.59% 2010 Industry Rank based on Gross Premiums: 3 BPI/MS was established through a joint venture between the Bank of the Philippine Islands, a dominant player in the banking industry, and Mitsui Sumitomo, one of the largest non-life insurance companies in Japan. It offers a wide product array similar to AIC. The company is ranked 3rd, right above AIC, and poised to maintain a leadership position in the non-life insurance industry partly due to its continued growth in terms of Gross Premiums Earned for the past several years36. BPI/MS has widened the gap between itself and AIC from 2006 to 2010 in terms of Gross Premiums Earned. AIC will likely need to surpass the performance of BPI/MS if it wants to elevate its ranking in the industry. In 2010, BPI/MS grew by more than 31.58% in terms of Gross Premiums Earned while AIC only grew by around 18.28%. BPI/MS seems to be AICs closest rival and this underscores the need for AIC to outpace it in terms of performance.

4.4.2 Critical Success Factors CSF#1 - High quality of products and services from the perspective of insurance buyers (15%) The quality of the products and services of an insurance company directly affects how the company is perceived and also whether the companys current growth will be sustainable. A high quality of products and services helps ensure the retention of existing clients and also becomes the foundation upon which sales and marketing efforts can draw in new clients.

36

Bank of the Philippine Islands & Mitsui Sumitomo Insurance Corporation (www.bpims.com)

30

This is given a weight of 15% since it is important that an insurance company have multiple sources of premium revenue and different types of risk exposure. The results of XYZ

Magazines Insurance Survey 2010 will be used to ascertain individual ratings for this factor. XYZ Magazine is a reputable organization and a leading journal for international financial markets. The XYZ Magazine Insurance Survey is an annual client-based ranking of the best providers of insurance services and products. Around 250 respondents are asked to identify their top three insurance companies in order of quality. Respondents include insurance buyers such as chief financial officers, risk managers, insurance managers, vice presidents, and heads of treasury. Methodology according to XYZ Magazine: Insurance companies received four points for a first-placed nomination, three points for a second-placed nomination and two points for third-placed nomination. These points were then totaled to give an overall score.... Respondents then rated their insurance providers from 1 to 7 (1=very poor and 7=excellent) across seven service categories. The arithmetic mean was taken for each category for each insurance company to produce a ranking.37

37

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com)

31

Survey Results: XYZ Magazine

Due to the methodology of the survey conducted, the level of brand awareness and preference may also be gleaned from the results. Respondents were asked to nominate the top 3 insurance companies from memory and also order them in terms of quality.

CSF#2 - Good risk management as determined by a claims ratio of 44% or less (20%) An insurance company is in the business of managing risk. Taking this into consideration, insurance companies should be able to manage the quality of underwriting it undertakes as well as ensure it is able to minimize losses due to its risk exposure. The claims ratio shows the losses incurred by the insurance company due to claims and benefits. Managing risk also includes knowing when and how much risk to cede to reinsurance. This means good risk management also entails maintaining strong relationships with reinsurers. In addition,

32

managing risk also involves the ability of insurance companies to successfully spread their risk exposure over various types and different geographical areas.

This is given a weight of 20% since it is critical that insurance companies manage its losses due to claims and keep it at a reasonable level so it does not completely erode profitability.

CSF#3 - Good investment management that supplements premium revenue by generating investment income rather than loss (5%) The non-life insurance industry in the country has a high combined ratio. In fact, the

combined ratio (computed as claims ratio plus expense ratio) was 99.25% in 2008 and 107.7% in 200938. The claims ratio and expense ratio are computed as a percentage of premium revenues. The fact that the sum of claims and expenses can potentially exceed premium revenue underscores the need for insurance companies to supplement premium revenue with income from other sources such as those resulting from investment activities. An insurance companys income from investment augments revenues generated from premiums and contributes to the companys overall profitability by helping cover claims and expenses. A good measure for how well an insurance company utilizes its premium revenue to generate investment income is the Investment Income Ratio. The investment income ratio is computed by getting investment income as a percentage of net premiums earned.

This is given a weight of 5% because it is important for insurance companies to maximize the revenue generating potential of the premium revenue it receives by engaging in investing activities that help cover claims and expenses.

CSF#4 - Strong financial position with a high capacity for risk as measured by a networth of at least 350 million (10%)

38

A.M. Best / Special Report on the Philippine Life and Non-life Industry April 18, 2011

33

It is necessary to gauge and closely monitor the amount of risk an insurance company is capable of handling. The size of an insurance companys assets versus its liabilities can be indicative of its level of solvency and capacity to handle its existing risk exposure as well as take on additional risk. An insurance companys high networth can also positively influence the perception of insurance buyers. A high networth can also be an indicator for sound financial management. The top 10 players in the industry each have at least a Php 350 million or higher networth39.

This is given a weight of 10% because it reflects an insurance companys capacity for handling risk.

CSF#5 - Accessible network of offices with at least 10 or more spread across the country (15%) It is necessary for insurance companies to ensure its accessibility through a network of branches and offices spread across the country. activities as well as in processing claims. This becomes important in its selling

This is given a weight of 15% since it is important for increasing customer touch points and contributes to higher repeat business.

CSF#6 - Prompt settlement of claims as measured by payment of all claims incurred during the year (15%) It is necessary for insurance companies to ensure prompt settlement of all claims incurred during the year. This becomes critical in attracting new insurance buyers as well as

maintaining existing clients. Thus, it is important that insurance companies avoid any delays in the processing of valid claims.

39

Insurance Commission / Non-life Ranking Based on Networth 2010

34

This is given a weight of 15% because it affects the companys reputation as an insurance provider and contributes to retaining existing clients.

CSF#7 - Effective sales organization that contributes to premium revenue generation resulting in at least Php 1 billion in gross premiums earned (20%) Even though it can generate income from investments, the primary source of revenue of insurance companies is still premium revenue. In this light, it becomes essential to have an effective sales organization that is able to generate gross premium revenue that can help fuel growth. Premium revenues also help cover claims and general expenses. An effective sales organization should also be able to establish and maintain strong relationships with intermediaries such brokers and agents.

This is given a weight of 20% since an effective sales organization that generates high gross earned premiums is key to the growth of an insurance company.

4.4.3 AICs Critical Success Factor Ratings CSF#1 - High quality of products and services from the perspective of insurance buyers (4) AIC received 4 awards from XYZ Magazines Insurance Survey 2010. XYZ Magazine is a reputable organization and a leading journal for international financial markets. The XYZ Magazine Insurance Survey is an annual client-based ranking of the best providers of insurance services and products. Respondents to the survey are insurance buyers mainly composed of risk managers, chief financial officers, insurance managers, heads of treasury, and vice presidents. Respondents are asked to identify their top three insurance companies in order of quality40. AIC ranked no.1 in Asia and the Philippines. Thus, AIC receives a rating of 4 for the quality of its products and services.

40

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com)

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CSF#2 - Good risk management as determined by a claims ratio of 44% or less (3) The claims or loss ratio is computed by getting the claims cost as a percentage of net premiums earned. AIC has a claims ratio of 41.86%. Since AICs ratio is better than its key competitors average and the average of the industry but less than the best ratio that was posted by a competitor, AIC gets a rating of 3. AIC also gets a rating of 3 even though Prudentials claims ratio is slightly higher since the difference is negligible and AICs claims cost as a percentage of total revenue is actually better than Prudentials percentage as shown in the table below. TABLE 4.4.3-A
AIC 2010 Revenue Claims Cost % 397,066,744 29.13% 2009 453,674,148 37.29% Prudential 2010 858,734,417 37.81% 2009 877,834,902 43.63%

1,363,288,030 1,216,512,050 2,271,169,278 2,011,851,588

CSF#3 - Good investment management that supplements premium revenue by generating investment income rather than loss (3) The investment income ratio indicates how well an insurance company is able to use the premium revenue it receives to generate investment income. The investment income ratio of an organization is derived by computing investment income as a percentage of net premiums earned41. AIC posted an Investment Income of Php 216,038,612 and Net

Premiums Earned of Php 948,514,745 that resulted in an Investment Income Ratio of 22.78% for 2010. Since AICs Investment Income Ratio is the second highest compared to its key competitors, AIC receives a rating of 3 for investment management. CSF#4 - Strong financial position with a high capacity for risk as measured by a networth of at least 350 million (4) Based on its Audited Financial Statements for 2010 the company has assets amounting to Php 11,147,545,949 and liabilities amounting to Php 5,038,536,503 that result in a networth
41

International Association of Insurance Supervisors / A Primer on Non-life Insurance Ratios for Insurance Supervisors

36

of Php 6,109,009,446 as of 2010. Thus, based on the Audited Financial Statements, AIC would have the second highest networth in the industry. On the other hand, according to the Insurance Commissions ranking based on networth AIC is ranked no. 1 in the industry42. The difference in ranking is mainly due to what the Insurance Commission considers as admissible assets. Some of Malayans assets were deemed inadmissible by the Insurance Commission in computing networth. The Insurance Commissions ranking will be followed since the companies are being evaluated from an insurance perspective. In this light, AIC gets a rating of 4 since it is ranked no. 1 by the Insurance Commission. CSF#5 - Accessible network of offices with at least 10 or more spread across the country (2) The company has 34 branches and offices spread throughout the country. Considering it has fewer branches and offices than BPI/MS and Malayan, AIC receives a rating of 2. CSF#6 - Prompt settlement of claims as measured by payment of all claims incurred during the year (2) In 2010, the company paid 79.88% of all claims incurred during the year. Claims incurred during the year amounted to Php 394,932,068 while claims paid amounted to Php 315,459,805. Since it posted the second lowest percentage, AIC gets a rating of 2. CSF#7 - Effective sales organization that contributes to premium revenue generation resulting in at least Php 1 billion in gross premiums earned (1) The company posted gross premiums earned of Php 2,720,185,713 in 2010. Considering that it posted the lowest gross premium revenue compared to its key competitors, AIC receives a rating of 1.

4.4.4 Malayans Critical Success Factor Ratings CSF#1 - High quality of products and services from the perspective of insurance buyers (3)

42

Insurance Commission / Non-life Ranking Based on Networth 2010

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Malayan received enough votes in XYZ Magazines Insurance Survey 2010 to rank no. 7 in Asia with an overall score of 2.64%43. Since that is the second highest score compared to its key competitors, Malayan receives a rating of 3. CSF#2 - Good risk management as determined by a claims ratio of 44% or less (1) Malayan has a claims ratio of 54.84% which is the worst ratio compared to its key competitors and also lower than the 44% average of the industry44. Thus, Malayan gets a rating of 1. CSF#3 - Good investment management that supplements premium revenue by generating investment income rather than loss (4) The company posted an Investment Income of Php 652,976,710 and Net Premiums Earned of Php 2,426,957,623 that resulted in an Investment Income Ratio of 26.91% for 2010. This is the highest Investment Income Ratio compared to its key competitors so Malayan receives a rating of 4. CSF#4 - Strong financial position with a high capacity for risk as measured by a networth of at least 350 million (3) Based on its Audited Financial Statements for 2010 the company has assets amounting to Php 18,060,249,292 and liabilities amounting to Php 10,129,801,837 that result in a networth of Php 7,930,447,455 as of 2010. So based on the Audited Financial Statements, Malayan would have the highest networth in the industry. On the other hand, according to the Insurance Commissions ranking based on networth Malayan is only ranked no. 2 in the industry. The difference in ranking is mainly due to what the Insurance Commission

considers as admissible assets45. Some of Malayans assets were deemed inadmissible by the Insurance Commission in computing networth. The Insurance Commissions ranking will be followed since the companies are being evaluated from an insurance perspective. In this

43

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com) Insurance Commission / Key Insurance Indicators 2006-2010 Insurance Commission / Non-life Ranking Based on Networth 2010

44

45

38

light, Malayan will receive a rating of 3 since it is ranked by the Insurance Commission as no. 2. CSF#5 - Accessible network of offices with at least 10 or more spread across the country (3) The company has 42 branches and offices spread throughout the country. In addition it has a bancassurance partnership with RCBC which cross-sells its products46. This increases the companys network of offices to 398. Since it has the second highest number of branches and offices compared to its key competitors, Malayan receives a rating of 3. CSF#6 - Prompt settlement of claims as measured by payment of all claims incurred during the year (4) In 2010, the company paid 131.04% of all claims incurred during the year. Claims incurred during the year amounted to Php 1,318,374,128 while claims paid amounted to Php 1,727,556,007. In consideration of the fact that Malayan has the highest percentage

compared to its key competitors, it receives a rating of 4. CSF#7 - Effective sales organization that contributes to premium revenue generation resulting in at least Php 1 billion in gross premiums earned (4) The company posted gross premiums earned of Php 5,346,596,563 in 2010. Malayan

posted the highest gross premium revenue for 2010 compared to its key competitors so it receives a rating of 4.

4.4.5 Prudentials Critical Success Factor Ratings CSF#1 - High quality of products and services from the perspective of insurance buyers (1) Prudential did not receive enough votes in XYZ Magazines Insurance Survey 2010 to rank in Asia. This means it ranked the lowest compared to all of its key competitors. Thus, Prudential receives a rating of 1. CSF#2 - Good risk management as determined by a claims ratio of 44% or less (3)

46

Malayan Insurance Co. Inc. (www.malayan.com)

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Prudential has a claims ratio of 40.34% which is better than the average of its key competitors and the industry average but lower than the best ratio. receives a rating of 3. CSF#3 - Good investment management that supplements premium revenue by generating investment income rather than loss (1) The company posted an Investment Income of Php 89,067,242 and Net Premiums Earned of Php 2,128,674,528 that resulted in an Investment Income Ratio of 4.18% for 2010. Prudential posted the lowest investment income ratio compared to its key competitors so it receives a rating of 1. CSF#4 - Strong financial position with a high capacity for risk as measured by a networth of at least 350 million (1) The company has assets amounting to Php 6,864,456,687 and liabilities amounting to Php 6,063,880,937 that result in a networth of Php 800,575,750 as of 2010. Prudential has the lowest networth compared to its key competitors so it receives a rating of 1. CSF#5 - Accessible network of offices with at least 10 or more spread across the country (2) The company has 34 branches and offices spread throughout the country47. In Thus, Prudential

consideration of the fact that both BPI/MS and Malayan have more branches and offices, Prudential will receive a rating of 2. CSF#6 - Prompt settlement of claims as measured by payment of all claims incurred during the year (3) In 2010, the company paid 101.29% of all claims incurred during the year. Claims incurred during the year amounted to Php 834,569,823 while claims paid amounted to Php 845,354,061. Prudential posted the second highest percentage so it receives a rating of 3. CSF#7 - Effective sales organization that contributes to premium revenue generation resulting in at least Php 1 billion in gross premiums earned (3)

47

Prudential Guarantee and Assurance Inc. (www.prudentialguarantee.com)

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The company posted gross premiums earned of Php 3,647,926,223 in 2010. Prudential posted the second highest gross premium revenue for 2010 compared to its key competitors. Thus, Prudential receives a rating of 3.

4.4.6 BPI/MSs Critical Success Factor Ratings CSF#1 - High quality of products and services from the perspective of insurance buyers (3) BPI/MS received enough votes in XYZ Magazines Insurance Survey 2010 to rank no. 9 in Asia with an overall score of 2.49%48. Since BPI/MSs overall score of 2.49% is very close to Malayans 2.64%, BPI/MS also receives a rating of 3. CSF#2 - Good risk management as determined by a claims ratio of 44% or less (4) BPI/MS has a claims ratio of 38.25% which is the best ratio compared to its key competitors so it gets a rating of 4. CSF#3 - Good investment management that supplements premium revenue by generating investment income rather than loss (2) The company posted an Investment Income of Php 238,575,000 and Net Premiums Earned of Php 1,342,912,000 that resulted in an Investment Income Ratio of 17.77% for 2010. BPI/MS posted the second lowest investment income ratio so it receives a rating of 2. CSF#4 - Strong financial position with a high capacity for risk as measured by a networth of at least 350 million (2) The company has assets amounting to Php 5,969,049,000 and liabilities amounting to Php 3,866,486,000 that result in a networth of Php 2,102,563,000 as of 2010. BPI/MS has the second lowest networth compared to its key competitors. Thus, BPI/MS receives a rating of 2. CSF#5 - Accessible network of offices with at least 10 or more spread across the country (4) The company has 13 branches and offices spread throughout the country. In addition it has a bancassurance partnership with BPI which cross-sells its products. Bancassurance is only

48

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com)

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implemented in selected BPI Bank branches so not all bank branches have Bancassurance Sales Executives. This increases the companys network of offices to 68349. BPI/MS has the most number of branches and offices compared to its key competitors so it receives a rating of 4. CSF#6 - Prompt settlement of claims as measured by payment of all claims incurred during the year (1) In 2010, the company paid 75.49% of all claims incurred during the year. Claims incurred during the year amounted to Php 447,440,000 while claims paid amounted to Php 337,789,000. BPI/MS posted the lowest percentage so it receives a rating of 1. CSF#7 - Effective sales organization that contributes to premium revenue generation resulting in at least Php 1 billion in gross premiums earned (2) The company posted gross premiums earned of Php 3,539,296,000 in 2010. BPI/MS posted the second lowest gross premium revenue for 2010 compared to its key competitors so it receives a rating of 2.

49

Bank of the Philippine Islands & Mitsui Sumitomo Insurance (www.bpims.com)

42

4.4.7 Competitive Profile Matrix (CPM)

Malayan, the current market leader, garnered the highest total score among the four companies. In terms of total scores BPI/MS placed 2nd, AIC 3rd, and Prudential 4th. This seems to reflect the performance of these three companies in terms of growth for the last 5 years. For instance, BPI/MS posted the highest compound annual growth rate from 2006 to 2010 among the top four. In fact, BPI/MS grew by as much as 31.58% in 2010 alone. On the other hand, AIC posted the second highest compound annual growth rate from 2006 to 2010. On top of this, both BPI/MS and AIC gained market share from 2006 to 2010 while Prudential lost market share.

Malayan rates high for good investment management, claims settlement, and its effective sales organization. These three factors may be contributing to Malayans efforts to sustain market leadership in the face of the narrowing gap between the top players. Unlike BPI/MS, Malayan's 42 dedicated offices seem to have been able to effectively provide support to its 356 bancassurance partner branches in terms of claims processing. Even though Malayans gross premium revenue decreased from 2009 to 2010, it still posted the highest amount 43

compared to its key competitors. On the other hand, BPI/MS received the highest ratings for its good risk management and accessible network of offices. These factors seem to be the main drivers of the company's exceptional growth for the last 5 years. However, possibly due to its rapid pace of growth in 2010, the company seems to be currently experiencing some problems with claims settlement. This may be due to the fact that most of the

branches in its network of offices are borne out of its bancassurance partnership with BPI. BPI/MS only has 13 dedicated offices and when it comes to claims processing these offices may be having trouble supporting the 670 bancassurance partner branches that are only staffed by bancassurance sales executives. Looking at Prudential's ratings, its strengths

are in good risk management, prompt settlement of claims, and an effective sales organization. Prudential needs to work on increasing its networth, improving the quality of its products and services, and better managing its investment portfolio. On the other hand, AIC's strengths lie in the quality of its products and services and its strong financial position as evidenced by its high networth. AIC needs to work on improving its claims settlement and increasing its reach by expanding its network of branches and offices. Its relatively smaller network of branches and offices may be limiting its gross premium revenue generating capacity relative to its key competitors. AIC should consider venturing into bancassurance by partnering with one of the larger banks in the country. This will allow the company to better compete by providing additional customer touch points that will support its sales activities. The company will then be able to increase its capacity to generate premium revenue.

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5. MARKET ANALYSIS 5.1 Market and Competitors Trends TABLE 5.1-A

2006
(Php Gross Premiums Earned)

2007

2008

2009

2010

CAGR 5.51% 7.41% -0.01% 4.87% 10.63% 6.29%

Market Size AIC Malayan Prudential BPI/MS All others combined

28,219,600,000 29,123,100,000 31,182,000,000 32,501,400,000 36,893,800,000 1,902,921,338 1,968,258,148 2,057,802,651 2,299,824,733 2,720,185,713 5,349,905,650 2,876,608,180 2,135,324,000 15,954,840,832 6,092,837,233 2,977,308,810 2,336,351,000 6,134,432,804 3,038,518,345 2,439,670,000 6,309,624,015 3,007,491,798 2,689,849,000 5,346,596,563 3,647,926,223 3,539,296,000 21,639,795,501

15,748,344,809 17,511,576,200 18,194,610,454

The market size of the non-life insurance industry grew by a compound annual growth rate (CAGR) of 5.51% from 2006 to 2010. The industry is growing at a faster pace than Malayan and Prudential which posted -0.01% and 4.87% CAGRs respectively. In fact, Malayan has the lowest CAGR among the top 4 in the industry. Malayans faltering performance presents an opportunity for the other three competitors, including AIC, to catch up. In stark contrast, both BPI/MS and AIC grew at a faster pace than the industry. BPI/MS posted the highest CAGR of 10.63% and increased its gross premium revenue by as much as Php 1,403,972,000. AIC posted the second highest CAGR of 7.41% and increased its gross premium revenue by Php 817,264,375. On the other hand, Malayans gross premium revenue instead of increasing actually decreased by Php 3,309,087. It should also be noted that the gap between Prudential and BPI/MS which amounted to Php 741,284,180 in 2006 decreased to just Php 108,630,223 in 2010. If the trend continues, it would not be surprising for BPI/MS to surpass Prudential in the next couple of years to become the new no. 2.

TABLE 5.1-B
% Market Share Market Size AIC Malayan Prudential BPI/MS All others combined 2006 100% 6.74% 18.96% 10.19% 7.57% 56.54% 2007 100% 6.76% 20.92% 10.22% 8.02% 54.08% 2008 100% 6.60% 19.67% 9.74% 7.82% 56.16% 2009 100% 7.08% 19.41% 9.25% 8.28% 55.98% 2010 100% 7.37% 14.49% 9.89% 9.59% 58.65%

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Malayan still has the highest market share among the top 4 in the industry with 14.49% as of 2010. However, it is worth noting that its market share decreased from 18.96% in 2006 to just 14.49% in 2010. After 2007, it started to lose market share and ended up losing as much as 6.43 percentage points by 2010. Malayan has expressed a need for the company to get rid of unprofitable accounts and try to lower its relatively high claims ratio. It also mentioned that gross premium revenue generation may suffer because of this. Like

Malayan, Prudential also lost some market share between 2006 and 2010. Prudentials market share decreased from 10.19% in 2006 to 9.89% in 2010. In contrast, BPI/MS gained the most market share between 2006 and 2010. It was able to increase its market share from 7.57% in 2006 to 9.59% in 2010 and close the gap between itself and Prudential. AIC gained the second highest amount of market share between 2006 and 2010. It was able to increase its share from 6.74% in 2006 to 7.37% in 2010. Generally speaking, the gap between the top 4 has narrowed in the past 5 years.

TABLE 5.1-C
% Change vs. Prior Year Market Size AIC Malayan Prudential BPI/MS All others combined N/A N/A N/A N/A N/A N/A 2006 2007 3.20% 3.43% 13.89% 3.50% 9.41% -1.29% 2008 7.07% 4.55% 0.68% 2.06% 4.42% 11.20% 2009 4.23% 11.76% 2.86% -1.02% 10.25% 3.90% 2010 13.51% 18.28% -15.26% 21.29% 31.58% 18.94%

The gross premium revenue of Malayan, the current market leader, contracted by as much as 15.26% in 2010. While the other three competitors posted high growth rates for 2010, Malayans premium revenue contracted by an exceptionally large margin. On the other hand, BPI/MS posted the highest growth rate of 31.58% in 2010. Its bancassurance

partnership with BPI may have contributed to this rapid pace of growth. The second highest growth rate for 2010 was posted by Prudential but the high growth rate only came after a slight contraction in the previous year. Both BPI/MS and AIC grew every year for the last 5

46

years. Aside from growing in the last 5 years, AICs growth rate has also been increasing every year.

Relevance: Malayan posted the lowest CAGR for the last five years and also contracted by a large margin in 2010. On top of this, Malayan lost 23.58% of its market share between 2006 and 2010. The shaky performance exhibited by Malayan in the past 5 years presents an opportunity for the other three to catch up. This means that AIC needs to be even more aggressive in trying to grab market share and ensure it remains competitive. AIC should also try to close the gap between itself and the top 3. It may be wise for AIC to benchmark against BPI/MS considering the companys rapid pace of growth. AIC should also look into establishing a bancassurance partnership similar to BPI/MS that will help fuel its continued growth. 5.2 Market Segments

AIC offers non-life insurance products and services to the general population as well as all types of businesses. According to the National Statistics Office, the largest sector is

manufacturing with 21.9%, followed by wholesale and retail trade with 19.1%, hotels and

47

restaurants with 14%, education with 13.6%, and real estate with 9.5%. All other sectors comprise the remaining 22% of Philippine business establishments50. Non-life insurance companies group these different types of business establishments according to their insurance needs and the roles that different entities play in the insurance buying process. The table below lists the profiles of the various entities from the different sectors and the roles they play in the insurance buying process.

TABLE 5.2-A
Type of Insurance Need
Hull Broker senior officer 35 yrs. old and up

Primary Entity

Secondary Entity
Agent individual 50 yrs. old and up Direct Client -

Decision Maker

Nature of business/ industry

Ship-owners

Client senior officer 35 yrs. old and up

Port/terminal operators Bareboat charterers Mortgagers Shipyard owners

Fire

Broker female 35 to 50 yrs. old

Agent Direct Client

Broker

Owners of: Warehouses Industrial buildings Commercial/ structures general

Engineering

Broker usually background finance/acctg/ engineering male 40 to 55 yrs. old w/ in

Contractor Direct Client

Broker

Contractors Engineering projects

Motor

Broker -

Agent mix male/female 25 yrs. old and up Direct Client Diamond Motors

Client

Varied companies with fleet

Cargo

Broker

Agent Direct Client

Client finance/logistics late 20s to 50s

Consignees/ importers Exporters

50

National Statistics Office (www.census.gov.ph)

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Aviation

Broker

Direct Client

Finance Officer Risk Manager male 40 yrs. old and up Varied janitorial, manpower, manufacturing, NGOs, education, construction, etc.

General Accident

Broker

Agent Direct Client

Client account officers/ managers male/ female 25 to 45 yrs. old

Relevance: Although most of AICs products are not geared towards any specific sector it would be good marketing strategy to package certain products based on the needs of a segment. These packaged products can then be branded such as what its key competitors have done for their respective product arrays. This will make AICs products more relevant to the insurance buyer and thus underscore its value to the buyer. In addition, one can glean the important roles that brokers and agents play in the insurance buying process. This highlights the need for AIC to establish strong relationships with these entities to ensure continued growth of the company in terms of its capacity to generate premium revenues. In essence, brokers and agents function as primary entities in the insurance buying process. This means that the company needs to ensure it provides these entities with up-to-date information about products and services and that they are also provided with ample support to facilitate the insurance buying process.

5.2.1 Key Products and Services TABLE 5.2.1-A

(Php Millions) 2008 Fire Marine Motor Casualty Suretyship 10,177.60 3,541.10 9,881.60 6,368.50 1,174.20 2009 10,520.60 3,710.80 10,139.30 6,845.50 1,239.00 2010 10,818.20 4,066.00 11,812.60 8,579.20 1,568.20 2010 % of total 29.32 11.02 32.02 23.25 4.25 2008-09 % increase 3.37% 4.79% 2.61% 7.49% 5.52% 2009-10 % increase 2.83% 9.57% 16.50% 25.33% 26.57%

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Fire and Allied Perils As categorized by the Insurance Commission, this product category includes non-life insurance for Fire, Earthquake/Fire/Shock, Typhoon, Flood, and Extended Coverage. This category is currently valued at Php 10.82 billion in terms of gross premium revenue with 29.32% share of the total non-life insurance industry51. This category has increased by 3.37% from 2008 to 2009 and by 2.83% from 2009 to 2010. Relevance: The decreasing growth rate of this category even after the recent calamities that hit the country seems to indicate the declining appetite of insurance companies for this type of risk despite what would seem to be a growing interest in Acts of Nature coverage. AIC should keep a close eye on the growth rate of this category considering that it generates the second highest amount of premium for the company. Marine This product category includes non-life insurance for Marine Cargo, Aviation, and Marine Hull. This category is currently valued at Php 4.07 billion in terms of gross premium revenue with 11.02% share of the total non-life insurance industry52. This category increased by 4.79% from 2008 to 2009 and by 9.57% from 2009 to 2010. Relevance: The continued growth of this category is not surprising considering that the Philippines is a strategically located island country. On top of this, bodies of water separate the country into 7,107 islands. AIC should continue to strive to increase its share in this category particularly for the Marine Cargo line. However, the company should also be The U.S. and

mindful about recent international trends in trade, imports, and exports.

Japan, the two largest trading partners of the Philippines, are currently experiencing some economic problems that may affect the marine and aviation related businesses and in turn affect demand for marine and aviation insurance.

51

Insurance Commission / Key Insurance Indicators 2006-2010 Insurance Commission / Key Insurance Indicators 2006-2010

52

50

Motor Car This product category includes non-life insurance for CMVL-LTO (Compulsory Motor Vehicle Liability-Land Transportation Office), CMVL-Non-LTO, other than CMVL-LTO, and other than CMVL-Non-LTO. This category is currently valued at Php 11.81 billion in terms of gross premium revenue with 32.02% share of the total non-life insurance industry52. This category has increased by 2.61% from 2008 to 2009 and by 16.50% from 2009 to 2010. Relevance: The increasing growth of this category seems to be consistent with the

forecasted growth of registered motor vehicles in the country. This category grew six times faster from 2009 to 2010 compared to its growth from 2008 to 2009. Considering that this category generates the most amount of net premium revenue for the company, AIC should try to be more aggressive in capturing more share of this rapidly growing category. Nonetheless, the company should continue to focus on lines within this category that are not too heavily dependent on the LTO in view of the on-going problems and irregularities between the LTO and Stradcom. Casualty This product category includes non-life insurance for Health, Personal Accident, Engineering, and Miscellaneous. This category is currently valued at Php 8.58 billion in terms of gross premium revenue with 23.25% share of the total non-life insurance industry53. This category has increased by 7.49% from 2008 to 2009 and by 25.33% from 2009 to 2010. Relevance: This category is the third largest in the industry and is second highest in terms of growth in 2010. AIC should try to increase its share by at least as much as the rate of

increase of this category. Suretyship This product category is currently valued at Php 1.57 billion in terms of gross premium revenue with 4.25% share of the total non-life insurance industry53. This category has

increased by 5.52% from 2008 to 2009 and by 26.57% from 2009 to 2010.

53

Insurance Commission / Key Insurance Indicators 2006-2010

51

Relevance:

This category seems relatively small compared to the others.

However, it

should be noted that it posted the highest growth rate in 2010.

AIC should look into

increasing its share of this category in consideration of the categorys rapidly increasing monetary value. 5.2.2 Prices Risk Based Pricing in the non-life insurance industry is mainly based on risk evaluation and assessment. It can factor in characteristics such as age of property, location of real estate, monetary value of property, historical data of property, safety considerations, scope of coverage, loss experience, and many other factors. On top of these considerations, insurance companies also need to adhere to the minimum premium rates stipulated by the Insurance Commission through its circulars. The Insurance Commission was forced to implement minimum rates when the strong rivalry in the industry pushed premiums rates down to the point of endangering the capacity of insurance companies to remain solvent and settle claims. Moreover, as a member of the Philippine Insurers and Reinsurers Association, non-life insurance companies also need to abide by the agreed upon rates of members of the association. Premium rates also vary depending on the type of risk involved or the product category. Risks with the potential for higher losses due to claims normally merit higher premium rates since rates are computed as a percentage of the insured amount. This

makes pricing more of a case to case basis which takes into consideration the unique circumstances of a property. Due to the strong rivalry in the non-life insurance industry, players do not have much flexibility in terms of pricing. For instance, in the Fire line of nonlife insurance, as members of the Philippines Insurers and Reinsurers Association all insurance companies need to abide by the same set of rates. These rates are based on the type of structure, the zone it belongs to, and the class it falls under. Thus, non-life insurance companies often compete based on what their policies cover as well as what their policies offer in addition to the basic coverage. For instance, for its comprehensive motor vehicle insurance, AIC also offers its Auto Rescue package which allows the insured to call for road side assistance in case of motor vehicle problems. This package includes overnight hotel 52

accommodation for a maximum of two nights in case the vehicle cannot be repaired within the day. Another example is Malayans Home Protect package which includes alternative accommodation allowance of Php 5,000 per day for 15 days that will allow the insured to book temporary residence in case the house covered by the policy is damaged54. Since premium rates are mostly the same due to the strong rivalry, these add-ons allow non-life insurance companies to compete in terms of the value they provide to insurance buyers. Motor Premium Rates: TABLE 5.2.2-A
BODILY INJURY Comm. Vehicles Comm. Vehicles Light/Medium Heavy Motorcycles 150.00 230.00 50.00 190.00 270.00 60.00 230.00 310.00 70.00 280.00 370.00 80.00 340.00 440.00 90.00 390.00 500.00 100.00 450.00 570.00 N/A 500.00 650.00 N/A 570.00 730.00 N/A 630.00 820.00 N/A 700.00 910.00 N/A PROPERTY DAMAGE 700.00 800.00 300.00 740.00 830.00 340.00 780.00 860.00 370.00 830.00 890.00 430.00 880.00 930.00 480.00 930.00 970.00 530.00 990.00 1,010.00 N/A 1,050.00 1,060.00 N/A 1,120.00 1,120.00 N/A 1,400.00 1,470.00 N/A 1,690.00 1,820.00 N/A

Coverages Private Cars 50,000.00 130.00 75,000.00 150.00 100,000.00 180.00 150,000.00 230.00 200,000.00 280.00 250,000.00 340.00 300,000.00 390.00 400,000.00 450.00 500,000.00 520.00 750,000.00 610.00 1,000,000.00 700.00 50,000.00 75,000.00 100,000.00 150,000.00 200,000.00 250,000.00 300,000.00 400,000.00 500,000.00 750,000.00 1,000,000.00 650.00 690.00 730.00 780.00 830.00 880.00 930.00 1,010.00 1,090.00 1,280.00 1,490.00

54

Malayan Insurance Co. Inc. (www.malayan.com)

53

TABLE 5.2.2-B

Classification Premium Private Car 447.01 CV - Light/Medium 486.92 CV - Heavy Motorcycle 957.88 199.55

Private Car 1,285.14 CV - Light/Medium 1,396.89 CV - Heavy Motorcycle 2,746.34 574.72

CTPL PREMIUM (1 YEAR) Doc. Stamps EVAT L.G.T. Other Total Premium w/ Taxes 56.00 53.64 0.89 50.40 607.95 61.00 58.43 0.97 50.40 657.72 Not Over 3,930 kgs. 120.00 114.95 1.92 50.40 1,245.14 Heavy Trucks and Buses Over 3,930 kgs. 25.00 23.95 0.40 50.40 299.30 Motorcycles / Tricycles / Trailers CTPL PREMIUM (3 YEARS) 161.00 154.22 2.57 50.40 1,653.33 175.00 167.63 2.79 50.40 1,792.71 Not Over 3,930 kgs. 343.50 329.56 5.49 50.40 1,792.71 Heavy Trucks and Buses Over 3,930 kgs. 72.00 68.97 1.15 50.40 767.24 Motorcycles / Tricycles / Trailers

Fire Premium Rates: TABLE 5.2.2-C

Residential Church Residential Brick Warehouse Zone 1 Zone 1 Zone 2 Zone 2 Class A Class B Class B Class A Class A 0.100% 0.307% 0.336% 0.437% 0.605%

Garments Factory Zone 1

General Accident Premium Rates: Plate Glass - Usually 0.25% to 1.25% but can go up to 3% Property Floater 2.5% to 3.5% (Paintings at least 3%) Merchandise Floater 4%

Aviation Premium Rates: Hull 5% Hull War 0.20%

54

Engineering Premium Rates: TABLE 5.2.2-D

Contractors' All Risk Works Residential Buildings Office / Commercial Buildings (up to 5 stories) High Rise Buildings (max. 4 basements) Factories / Warehouses (max. 2 stories) Bridges (max. 3 spans) Road Works (w/n city limits) Highways / Mountain Roads Power Plants Water Supply, Sewage Treatment Garbage Handling / Treatment Radio, Television, Telephone Pulp and Paper Industry Printing / Packing Materials Industry Textile Industry Food Industry Food Ref., Canneries, Cold Storage Rate Range 0.200% -0.275 0.225% - 0.300% 0.225% - 0.350% 0.225% - 0.300% 0.400% - 0.500% 0.300% - 0.500% 0.300% - 0.500% 0.300% - 0.500% 0.300% - 0.500% 0.400% - 0.500% 0.300% - 0.500% 0.300% - 0.600% 0.225% - 0.400% 0.225% - 0.400% 0.225% - 0.400% 0.225% - 0.400%

Erection All Risk

Relevance: AIC, like other insurance companies, need to ensure it is able to accurately determine the amount of risk involved so that losses due to claims do not exceed premium revenue. This entails tapping the services of experienced industry experts such as those with vast underwriting experience as well as implementing claims monitoring information systems that can later be mined for information and relevant trends. Considering the intense price competition that resulted in similar rates for the players and the imposition of minimum rates by the Insurance Commission, AIC should continue with its efforts in trying to differentiate through packaged products with add-ons that insurance buyers will value.

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5.2.3 Distribution Channels

Taking into consideration the distribution channels of the non-life insurance industry, AIC will need to foster good working relationships with brokers and agents as well as maintain good business relationships with other insurance companies. Direct The direct business of insurance companies is commonly coursed through its branches as well as through licensed brokers and agents. This channel has an estimated value of Php 23.29 billion in gross premium revenues with a share of 63.13% of the total non-life insurance industry55. This distribution channel contracted by 1.53% from 2008 to 2009 and then increased by 12.48% from 2009 to 2010 in terms of Gross Premium revenue. The share of this channel decreased from 67.44% in 2008 to 63.13% in 2010. Relevance: Direct business comprises the majority of the business of non-life insurance companies such as AIC. The recent emergence of bancassurance may signal some The Global

potential changes in the distribution landscape of the insurance industry.

Insurance Center projects the continued growth in popularity and acceptance of the bancassurance model. In 2010, BSP reviewed 23 bancassurance applications and

55

Insurance Commission / Key Insurance Indicators 2006-2010

56

approved 2256. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. Some major players in the industry have already partnered with banks to tap their network of branches and increase their reach. For instance, BPI/MS has partnered with BPI and

Malayan has partnered with RCBC. AIC may need to establish more partnerships as well to be able to continue to effectively compete with the current top players. Indirect The indirect business of insurance companies is normally coursed through other insurance companies via treaties or facultative agreements. This occurs when insurance companies cede risk to other insurance companies in the form of reinsurance. This channel has an estimated value of Php 13.6 billion in gross premium revenues with a share of 36.87% of the total non-life insurance industry57. This channel increased by 16.17% from 2008 to 2009 and by 15.33% from 2009 to 2010 in terms of Gross Premium revenue. The share of this channel increased from 32.56% in 2008 to 36.87% in 2010. Relevance: The significant increase in ceded risk in the form of reinsurance can also When ceding to or

indicate a lower retention ratio in the non-life insurance industry.

accepting cession from other insurance companies, AIC should ensure it has sound policies that protect it against excessive risk exposure to counterparties failing to satisfy their obligations due to capacity, solvency, or liquidity problems. AIC should monitor its

reinsurance recoverable on paid losses and ensure that counterparties in its treaties and facultative agreements are able to settle their accounts in a timely manner. This will help AIC protect its solvency and level of liquidity. Since around 95% of treaty and 75% of facultative outbound reinsurance of AIC is with foreign entities and in consideration of the increasing share of this distribution channel, the company should ensure it maintains strong

56

Manila Bulletin / BSP to fast-track bancassurance approvals January 18, 2011 Insurance Commission / Key Insurance Indicators 2006-2010

57

57

relationships with these foreign companies. AIC should also build stronger ties with local entities in view of the fact that all of its inward reinsurance is through local companies. TABLE 5.2.3-A
(Php Millions) Channel Direct Indirect 2008 21,030.50 10,151.50 2009 20,708.40 11,793.00 2010 23,292.40 13,601.40 2008 % of total 67.44% 32.56% 2010 % of total 63.13% 36.87% 2008-09 % increase -1.53% 16.17% 2009-10 % increase 12.48% 15.33%

5.2.4 Marketing and Promotions Insurance companies rely heavily on sales generated by its relationships with brokers, agents, and other insurance companies. Thus, most of its marketing efforts are geared towards establishing strong working relationships with these entities. Recently,

bancassurance has gained popularity and resulted in banks serving as touch points to insurance buyers. Some degree of marketing is also coursed through these partner

establishments. In view of the large premium revenue generating potential of the motor category, some top players in the industry have also partnered with auto servicing shops to help promote their brands and facilitate faster processing of motorcar claims. Malayan Most of Malayans marketing efforts are coursed through brokers, agents, and its 42 branches and offices. It has also partnered with RCBC so that the bank can cross-sell its products and services. This bancassurance partnership extends its network of branches and offices to 398. The company also has 10 branded and packaged products to enable it to differentiate itself from its competitors. To further strengthen its position in the motor category, it partnered with Phoenix Petroleum to help market its Todo Karga brand. The company also tries to leverage on technology with its online presence in the form of a corporate website and social networking pages58.

58

Malayan Insurance Co. Inc. (www.malayan.com)

58

Prudential Like Malayan, Prudentials marketing efforts are mostly coursed through brokers, agents, and its 34 branches and offices. Recognizing the significance of the motor category, the company partnered with PGA cars to help promote its products and also help in claims processing. The company also has an online presence in the form of a corporate website and social networking pages59. BPI/MS Similar to the other players of the industry, most of BPI/MSs marketing efforts are channeled through brokers, agents, and its 13 branches and 5 evaluation centers. The company has also partnered with BPI so that the bank can cross-sell its products and services. This valuable partnership extends its network of branches and offices to 683 and helps fuel its impressive growth in the last 5 years. Its network of branches and offices will likely continue to grow as more bancassurance sales executives are assigned to BPI bank branches nationwide. Currently, only selected BPI branches have bancassurance sales executives. The company also engages in branding its packaged products to enable it to differentiate from its competitors. BPI/MS also makes use of technology by maintaining an online

presence in the form of a corporate website and social networking pages60. Relevance: Generally speaking, insurance products are intrinsically hard to distinguish

when viewed from the perspective of the buyer. This makes the efforts of some players to differentiate through branding seem like a sound marketing strategy. AIC should look into creating more brands for its generic products to try and differentiate itself and compete effectively. AIC should also try to form more partnerships to increase its reach and improve its market presence. It can try partnering with a reputable bank that will cross-sell its

products. On top of this, AIC should try to establish more partnerships with auto servicing shops as well so they can help promote the companys products and further speed up the

59

Prudential Guarantee and Assurance Inc. (www.prudentialguarantee.com) Bank of the Philippine Islands & Mitsui Sumitomo Insurance (www.bpims.com)

60

59

processing of motor vehicle related claims. Motor is the largest product category with the highest share amounting to 32.02%61. 5.3 External Factor Evaluation (EFE) Matrix 5.3.1 Opportunities and Importance Weight O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for AgencyHired Migrant Workers (Macro - Political) WEIGHT 10%: This was given a moderate weight since it is still in the initial stages of implementation by the Insurance Commission but it does have potential to significantly increase premium revenue. Considering that the Bangko Sentral ng Pilipinas believes that there is continued strong demand for skilled Filipino workers abroad, providing coverage for agency-hired workers can potentially be quite profitable. O2. The Global Insurance Center projects the continued growth in popularity and In 2010, BSP reviewed 23 bancassurance

acceptance of the bancassurance model.

applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. (Market Analysis) WEIGHT 15%: This was given a high weight since it can significantly impact an insurance companys capacity to generate gross premium revenue. Bancassurance allows an

insurance company to considerably extend its distribution network and sell its products through bancassurance partner bank branches without having to heavily invest in adding to its own branch network. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. (Macro - Economic) WEIGHT 10%: This was given moderate weight since it can potentially increase premium revenue assuming risk exposure is managed well. Micro enterprises make up 91.4% of all
61

Insurance Commission / Key Insurance Indicators 2006-2010

60

businesses thus providing products and services to this large segment will help increase overall insurance penetration in the country and significantly increase the premium revenue of any insurance company that will be able to capture this market. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. (Macro - Economic) WEIGHT 15%: This was given a high weight since growth of GDP can potentially increase the premium revenue for multiple product lines of insurance companies. Growth in the production of final goods and services can translate to more goods and services requiring insurance coverage. O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013. (Macro - Economic) WEIGHT 10%: This was given a moderate weight since the growth of the motor market can potentially increase premium revenue for the motor car product category. The increase in motor market size can translate to more insurance buyers for the TPL and Comprehensive motor insurance products. The motor car category currently generates the most premium revenue for the non-life insurance industry. It is the primary source of premium revenue for most insurance companies including the top 4.

5.3.2 Threats and Importance Weight T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic

accidents have increased from 7,267 in 2007 to 15,750 in 2009 and road accident related deaths is currently growing at 4.2% per annum. (Macro Socio-Cultural) WEIGHT 10%: This was given moderate weight since it can potentially increase losses due to claims for the motor car product line of insurance companies. The increase in claims cost will in turn decrease income and negatively affect the companys profitability. The motor car line currently generates the highest amount of gross premium revenue for the non61

life insurance industry and is thus considered by many insurance companies to be one of the more important lines. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. (Macro Political / Government / Legal) WEIGHT 5%: This was given a low weight even though it does have an effect on the motor car product line since it can only potentially slow down the existing process but manual operations can still be performed. The graft, corruption, and other irregularities at the Land Transportation Office are endangering the smooth and continued use of the Certificate of Cover Authentication Facility (COCAF) system which is used to protect against fake insurance policies. These irregularities together with some legal issues with Stradcom have affected LTO operations and can potentially affect its future operations as well. Insurance policy issuance is closely tied to the registration operations of the LTO. T3. There is strong rivalry among competitors in the non-life insurance industry (5 Forces) WEIGHT 15%: This was given the highest weight since the strong rivalry among competitors has resulted in a price war that has brought down premium rates. It reached a point where the Insurance Commission had to step in and impose minimum premium rates to ensure the stability and solvency of insurance companies. Premium revenue is the main source of revenue for insurance companies and is only supplemented by investment income and interest income. T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry. (Macro - Economic) WEIGHT 10%: This was given moderate weight because it affects the premium revenue per family of insurance companies. With a smaller share of expenditure, insurance

companies will need to compensate by trying to reach more insurance buyers. In addition, the overall impact on the non-life insurance industry as a whole is also significant.

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5.3.3 Opportunities and Responsiveness Ratings O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for AgencyHired Migrant Workers (Macro - Political) RATING 4: AIC immediately sprung into action after recognizing the significant potential premium revenue that can be generated from the OFW market segment. It is currently 1 of only 3 non-life insurance companies accredited to provide coverage for RA 10022 and it has even had its policy form already approved by the Insurance Commission62. The list of those already accredited to provide coverage does not yet include any of AICs key competitors. O2. The Global Insurance Center projects the continued growth in popularity and In 2010, BSP reviewed 23 bancassurance

acceptance of the bancassurance model.

applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. (Market Analysis) RATING 1: AIC currently does not have any bancassurance partnerships even though some of its key competitors such as Malayan and BPI/MS have already ventured into bancassurance. This is primarily why some of AICs key competitors have significantly more extensive distribution networks. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. (Macro - Economic) RATING 1: AIC currently does not offer non-life microinsurance specifically geared towards capturing the micro enterprise market. Only AIC Life, its sister company, offers microinsurance. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services

62

Insurance Commission / List of Accredited Insurance Providers for RA10022 2010

63

within the country and this can translate into more goods and services that will require insurance coverage. (Macro - Economic) RATING 3: AIC seems responsive and takes advantage of opportunities presented by growth. The fact that the company has grown faster than the growth rate of GDP for the last 3 years seems to indicate it is responsive to growth. TABLE 5.3.3-A
2008 Real GDP Growth Rate Pioneer Growth Rate AIC Growth Rate 4.2% 4.55% 2009 1.1% 11.76% 2010 7.6% 18.28%

Source: Bangko Sentral ng Pilipinas (Historical GDP)

O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013. (Macro - Economic) RATING 4: AIC is quite aggressive in terms of trying to improve its motor insurance products to better serve potential and existing motor insurance buyers. On top of the usual coverage for motor, AIC also offers overnight accommodation in case the motor vehicle breaks down and it cannot be fixed within the day. AIC offers Hotel Overnight

Accommodation of up to Php 1,000 (maximum of two nights). In addition, AIC also offers Fastbreak or motor claims processing within 3 hours of claims under 15,000.

5.3.4 Threats and Responsiveness Ratings T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic

accidents has increased from 7,267 in 2007 to 15,750 in 2009 and road accident related deaths is currently growing at 4.2% per annum. (Macro Socio-Cultural) RATING 3: To compensate for the increasing losses due to claims for the motor car product line, AIC can strive to better manage its other risk exposures and achieve a lower overall claims or loss ratio. In addition, the company can also try to increase its premium revenue to decrease its claims cost in proportion to its total premiums earned. This will also help ensure there is sufficient amount of premium revenue to cover the increasing claims cost. In this light, AIC was able to decrease its claims ratio from 53.19% in 2009 to 41.86%

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in 2010. AIC was also able to increase its Gross Premium revenue by 18.28% from Php 2,299,824,733 in 2009 to Php 2,720,185,71 in 2010. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. (Macro Political / Government / Legal) RATING 3: AIC has tried to avoid lines within the motor car product category that are more heavily dependent on and more closely tied to the Land Transportation Office. AIC has focused more on the line referred to as Other than Compulsory Motor Vehicle Liability (CMVL) Non-LTO. Around 92.3% of AICs premium revenue for the motor car product category comes from this line. T3. There is strong rivalry among competitors in the non-life insurance industry (5 Forces) RATING 3: Even though strong rivalry is bringing down premium rates, AIC tries to compensate by increasing its market share. This is evidenced by the increase in AICs market share from 7.08% 2009 to 7.37% in 2010 as well as the CAGR in Gross Premiums Earned of 7.41% from 2006 to 2010. In addition, AIC has a broad array of products and also keeps a close eye on potentially lucrative new opportunities such as the implementation of the RA 10022 or the Compulsory Insurance for Migrant Workers Act. T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry. (Macro - Economic) RATING 3: To compensate for the smaller share in expenditure, an insurance company can try to reach more insurance buyers and increase its market share. AICs market share increased from 7.08% in 2009 to 7.37% in 2010. AIC also increased its gross premium revenue and posted the second highest compound annual growth rate of 7.41% from 2006 to 2010.

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5.3.5 EFE Matrix Table

Importance Weight (0%to100%) 10% Responsiveness Rating (1 to 4) 4

Opportunity O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for Agency-Hired Migrant Workers O2. The Global Insurance Center projects the continued growth in popularity and acceptance of the bancassurance model. In 2010, BSP reviewed 23 bancassurance applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013.

Source

Wt. Score

Macro Political

0.40

Market Analysis

15%

0.15

Macro Economic

10%

0.10

Macro Economic

15%

0.45

Macro Economic

10%

0.40

Threats

Importance Weight (0%to100%)

Responsiveness Rating (1 to 4)

Wt. Score

T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic accidents has increased from 7,267 in 2007 to 15,750 Macro in 2009 and road accident related deaths is currently growing at 4.2% Socio-Cultural per annum. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. T3. There is strong rivalry among competitors in the non-life insurance industry 5 Forces T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry. Total

10%

0.30

Macro Political

5%

0.15

15%

0.45

Macro Economic 10% 100% 3 0.30 2.70

Rating Score: 4 = superior response, 3 = above average, 2 = average, 1 = poor AIC has an above average responsiveness to threats and opportunities as indicated by its total weighted score of 2.70 which is higher than the average of 2.5. This means that AIC is able to take advantage of opportunities and minimize the effects of threats. However, given

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that the highest possible score is 4, AIC still has a lot of space for improvement. First, it should strive to establish a bancassurance partnership with one of the larger banks in the country that has an extensive existing network of branches. This will extend AICs Second, the

distribution network and help the company reach more insurance buyers.

company should try to offer its products and services to the large micro enterprise market which can increase its premium revenue and potentially increase its market share. This can be done by venturing into microinsurance. The company may even opt to leverage on the microinsurance experience of AIC Life, its sister company. 5.4 Strategic Issues Based on External Factors Historically speaking, the growth of the non-life insurance industry has been greatly dependent on the performance of brokers and agents. Brokers and agents have served and continue to serve as the primary entities in the insurance buying process. Based on the Value Chain Analysis, brokers and agents are able to capture a significant amount of value in the distribution step. Unfortunately, this model of generating premium revenue also limits the industry's growth to the selling capacity of brokers and agents. This limitation becomes evident in the relatively low level of insurance penetration in the country. The emergence of bancassurance empowers insurance companies to break free from this limitation and extend its reach. Bancassurance allows companies such as BPI/MS to expand its network of

branches and offices and connect with more potential insurance buyers across the country. Thus, it is not surprising that based on Market Analysis and the Competitive Profile Matrix BPI/MS posted the highest compound annual growth rate in the last five years compared to its key competitors. The company was able to fuel its growth by leveraging on the existing branch network of its bancassurance partner. This underscores the need for all members of the top 4, including AIC, to similarly try to augment their existing network by establishing their own bancassurance partnerships. Given the huge disparity between AIC's existing branch network and that of BPI/MS, AIC should set this as one of its top priorities if it wants to remain competitive. If AIC fails to expand in time then it will likely be left behind by the

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other top players of the industry. On top of this, the smaller share of insurance expenditure also underscores the need for insurance companies to compensate by trying to reach more insurance buyers. Another strategic issue hounding the industry involves trying to remain profitable in the face of strong rivalry that is putting downward pressure on premium rates. This is coupled with the rising cost of losses due to claims brought about by the more frequent occurrence of covariant risk events such as calamities. This type of risk affects multiple product lines of non-life insurance companies and costs billions in damages. In fact, Malayan, the market leader whose performance is currently faltering, is grappling with this problem in trying to improve its profitability. One of the reasons its growth trend has declined in the past 5 years is because it is trying to improve profitability by sacrificing gross premium growth and getting rid of unprofitable accounts. It is trying to accomplish this amidst its rising losses due to claims. AIC and its key competitors will need to find ways to address these strategic issues that stem from external factors for growth to continue. 6. COMPANY ANALYSIS 6.1 Vision and Mission of the Company Company Vision Statement To be a model Filipino enterprise Vision Statement Evaluation Table
Parameter Yes / No No Why

Does it clearly answer the question: What do we want to become? Is it concise enough yet inspirational?

The statement is vague and does not specify what type of business it wants to become or what line of business it wants to pursue. It also does not indicate what constitutes a model Filipino enterprise. It is concise but it is not really inspirational. It does not seem motivating or does not elicit a strong desire to try and achieve the objective. One possible reason for this is that the statement does not specify what constitutes a model Filipino enterprise. Due to the lack of detail it becomes difficult to accurately ascertain whether or not the organization has already achieved its vision or still aspiring to achieve it.

No

Is it aspirational?

No

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Does it give clear indication as to when it should be attained?

No

There is no time-frame mentioned in the statement.

Company Mission Statement Were in the business of affording our clients peace of mind by providing them with financial options to secure what matters to them. Mission Statement Evaluation Table
Parameter Yes / No Yes If yes, which part of the statement

1. Customers

It was mentioned in affording our clients peace of mind. Considering that non-life insurance is offered to the general public the statement seems specific enough. The statement mentions financial options to secure what matters to them but does not specify what type of options. The phrase financial options may be too ambiguous and may lead to confusion as to what the company can and cannot venture into later on in terms of products and services. There is no mention of markets. There is no mention of technology. There is no mention of what the company will do to ensure survival, growth, and profitability. There is no mention of the companys values, beliefs, and aspirations. There is no mention of the companys major competitive advantage or distinctive competence. There is no mention of the companys concern for its employees. There is no mention of the companys concern for nation building.

2. Products & services

No

3. Markets 4. Technology 5. Concern for growth, profitability 6. Philosophy survival,

No No No

No

7. Self-concept

No

8. Concern for employees

No

9. Concern for nation building

No

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6.2 Internal Audit Management AIC utilizes strategic management concepts by engaging in strategic formulation, implementation, and evaluation. The company has a strategic management process in This process

place that is internally referred to as Strategic & Action Planning (SAP).

includes the formulation and implementation of strategic objectives as well as the evaluation of its performance based on a balanced scorecard. It involves all levels of the organization and is conducted annually. The plans cover a 3 year time period but is adjusted and

updated annually. The process usually begins around August of each year and ends in January of the following year. The company is able to clearly identify and communicate objectives and goals through the SAP process which involves all levels of the organization. It also has processes in place that help it measure its performance and progress towards achieving its objectives and goals. The process also involves utilizing tools such as SWOT matrices, balance scorecards, worksheets, action plans, and performance plans. Individual employees are even partly evaluated in the performance appraisal process by comparing their actual performance versus the individual performance plans they created and submitted during the SAP process. There seems to be a clear line of authority and chain of command and managers are able to delegate both authority and responsibility to their subordinates. Since individual employees are held responsible for achieving the objectives and goals stated in their individual performance plans, the company empowers individuals with the authority necessary to accomplish their tasks and achieve their objectives and goals. In terms of structure, the company has an organizational structure that utilizes a combination of the vertical functional approach and divisional approach. This seems to support the companys strategy by negating the weaknesses of the divisional structure such as higher cost implications as well as leveraging on the advantages of a vertical functional structure for its shared services such as economies of scale and efficient resource use. The company has a vertical functional organizational structure with divisions that focus on each

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product line integrated into the structure.

It also has a shared services group that is

comprised of divisions such as Organizational Development, Marketing, Business Support Services, Office & Administration, and Legal. The company is able to practice efficient use of resources with its Shared Services Group while empowering the product line divisions to adapt and respond to the changing needs of their respective lines. The structure allows the company to leverage on the strengths of the divisional structure without the attendant costs of redundant functions found in more typical divisions. Human Resources Looking at human resource management indicates some positive aspects as well as some potential issues of the company. For instance, the company maintains job

descriptions and job specifications but not all can be considered clear. During the course of conducting several interviews with company personnel the following issues pertaining to job descriptions were mentioned: Some functions were transferred to an organizational unit but management did not

specify whether it was temporary or permanent Additional responsibilities were assigned to personnel that go beyond the scope of

their job descriptions Some personnel do not possess a copy of their job description On the positive side,

It should be mentioned that these issues seemed uncommon.

employer turnover at the company is lower than the average of the industry. According to the Human Resources Administration Department, employee turnover at the company is at 9% while the average industry turnover is 12%. In addition, the company seems able to effectively utilize reward and control mechanisms. awards such as the MVP, WOW, and Loyalty awards. Some examples of control mechanisms are: better 71 Turnaround time monitoring for operational activities of the different lines After Action Review evaluation of performance such as what could have been done Employees are motivated to vie for

Yearend Report to the President and CEO by the branch, line, and department heads Results of performance appraisals are used as one of the determinants of the

amount of profit share an employee should receive These control mechanisms seem to be effective considering the current performance of the company. AICs ranking improved from 5th in the industry in 2009 to 4th in 2010. Moreover, the company received four awards including Best Insurer in the Philippines and Best Insurer in Asia in 2010.

Marketing The company segments markets based on the type of insurance they need such as fire, hull, cargo, motor, engineering, aviation, and general accident. The company then identifies key entities based on the roles they play in the insurance buying process to be able establish links with potential customers. These entities include the following subgroups: Primary entities - composed of brokers Secondary entities - composed of agents, direct clients, and contractors Decision makers - composed of brokers, agents, and direct clients

Insurance companies such as AIC offer seemingly homogenous products. There are many points-of-parity and few points-of-difference. Riders which refer to additional coverage

options are mostly what differentiate one insurance product from the next. AIC currently employs what may be considered a type of personnel differentiation strategy. The

companys strategy entails relying on deep and well established relationships with brokers, agents, and direct clients to differentiate against competitors. The company internally refers to this thrust as Wowing Your World or WYW. Considering that the companys market share improved from 6.74% in 2006 to 7.37% in 2010, AICs marketing and sales team seem to be effective. The company has account management personnel who contribute to premium revenue growth. As shown in the table below, the companys Gross Premium Revenue has been constantly increasing for the past 5 years. Even the growth rate seems to be trending upwards. 72

TABLE 6.2-A
Year Gross Premiums % Increase 2006 2007 2008 2009 2010 1,902,921,338 1,968,258,148 2,057,802,651 2,299,824,733 2,720,185,713 3.43% 4.55% 11.76% 18.28%

The company also seems to excel in terms of product quality and customer service. This is evidenced by the four awards that the company received from XYZ Magazine Insurance Survey 2010. XYZ Magazine is a reputable organization and a leading journal for international financial markets. The XYZ Magazine Insurance Survey is an annual clientbased ranking of the best providers of insurance services and products. Respondents are asked to identify their top three insurance companies in order of quality63. The company received the following four awards: Best Insurer in Asia Best Insurer in the Philippines Best Insurer General Property & Casualty Asia Best Insurer Employer Liability Asia In terms of pricing, the company adheres to previously agreed upon minimum premium rates. It complies with the Insurance Commissions Circular Letter 21-2010 and was even party to the Declaration of Mutual Covenant and Undertaking by the top 25 companies in the industry which promises adherence to the minimum premium rates stipulated by the Insurance Commission64. The company is also a member of the Philippine Insurers and Reinsurers Association and abides by the previously agreed upon premium rates stipulated by the members. To sell its products, the company promotes and advertises and even releases special targeted print ads for areas affected by calamities such as typhoon and flooding. On top of
63

XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com) Insurance Commission (www.insurance.gov.ph)

64

73

this, the company also has an Agents Development & Servicing Department that establishes and maintains communication links with those that assume the role of decision maker in the insurance buying process. The company also tries to entice renewal of policies by offering incentives and promos such as discounted premium rates upon renewal. Finance The financial ratio analysis indicates that the company is weak with respect to its Activity ratios such as Fixed Assets and Total Assets Turnover. It is also weak in terms of Profitability as evidenced by its low Operating Profit Margin and Net Operating Margin. The analysis also shows that the company is strong with respect to the growth rates of its Sales and Net Income. In addition, the company has a healthy level of liquidity as indicated by its current and quick ratios. The following ratios indicate financial weaknesses of the company since they show ratios that are both below the average of key competitors and the industry average: TABLE 6.2-B Ratio Fixed Assets Turnover Total Assets Turnover Operating Profit Margin Net Operating Margin 1.99 0.24 6.29% 5.42%

The following ratios indicate financial strengths of the company since they show ratios that are both better than the average of key competitors and the industry average: TABLE 6.2-C Ratio Current Ratio Quick Ratio Sales Growth Net Income Growth 1.76 1.76 18.28% 362.06%

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In terms of debt, the company seems capable of raising short term capital. It can utilize its high level of Fixed Assets as collateral in obtaining a short term loan from financial institutions. However, this may no longer be necessary considering its high level of liquidity. The company already maintains a high level of liquidity as evidenced by its current ratio of 1.76. However, if the need to raise short term capital arises it is also capable of securing a short term loan. This is evidenced by the company securing short term loans of 320 million in 2009 and 135 million in 2010 recorded under notes payable. Moreover, the company has an exceptionally large Fixed Asset base which can be used to secure loans. The company has Fixed Assets amounting to Php 1,367,528,132 as of 2010. Looking at working capital, the company maintained a high level of working capital in 2009 and 2010 as shown in the table below. TABLE 6.2-D
2010 2009

Current Assets

8,848,826,980

8,014,234,295

Current Liabilities

5,038,536,503

4,183,536,906

Working Capital

3,810,290,477

3,830,697,389

The company seems to have the capacity to handle its existing risk exposure as well as take on additional risk. According to the Insurance Commissions ranking based on networth for 2010, AIC has a networth of Php 6,354,111,077. AIC is ranked by the Insurance

Commission as no.1, Malayan as no.2, BPI/MS as no. 3, and Prudential as no. 13. Thus, the company seems to have more than enough assets to cover its liabilities. Operations AICs offices, facilities, and equipment are in good condition and well maintained. Aside from this fact being evident through a cursory ocular inspection, the financial information also

75

seems to support it.

The companys property and equipment are valued at Php

1,367,528,132 and the depreciation on buildings, property and equipment was only Php 21,799,531 in 2010 and only Php 19,181,199 in 2009. The company has 34 offices and branches spread throughout the country. There are offices in Luzon, Visayas, and Mindanao and a head office strategically situated in Makati which is the main central business district of the country. It also has an office building in Cebu which is the center of business and commerce in Visayas. However, it should be mentioned that it has significantly fewer branches and offices compared to some of its key competitors such as Malayan and BPI/MS. This is primarily because Malayan and BPI/MS augment their own branches with bancassurance partner branches to significantly extend their distribution network. The company also has quality control policies and procedures in place. For instance, the quality of underwriting determines the amount of potential losses due to claims that an insurance company incurs. In this light, the company has been able to maintain a low loss or claims ratio indicating a relatively high quality of underwriting activity. The company was able to decrease its claims or loss ratio from 53.19% in 2009 to just 41.86% in 2010. In addition, the lower loss ratio it posted in 2010 was better than the average loss ratio of its key competitors which was 44%. Malayan, the current market leader, even posted a loss ratio of 55%.

6.3 Mckinseys 7S Framework 6.3.1 Strategy Differentiation In 2006, the company commissioned a market study to gauge its positioning relative to its competitors. Based on the results of that study, the company decided to embark on a new differentiation strategy. From 2006 onwards the company endeavored to implement a differentiation strategy of building relationships with its customers based on its corporate

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values. The company views this as being in line with its vision of becoming a model Filipino enterprise. The company internally refers to this differentiation strategy as Wowing your world (WYW). Wowing is defined by the company as demonstrating and providing a set of tangible and intangible benefits beyond the functional features, a combination of which provides value beyond what the customer had expected to receive. This is operationalized through a Balanced Scorecard that is cascaded throughout all levels of the organization and integrated into the Strategic & Action Planning process of the company. It also factors into the determination of the financial, customer, learning & growth, and process objectives of the company. Conclusion Effective Considering that the companys market share has increased from 6.74% in 2006 to 7.37% in 2010, the companys differentiation strategy seems to be effective since there was growth in market share. It should also be noted that in the same period, only one of its key

competitors also gained market share. Malayans market share decreased from 18.96% in 2006 to 14.49% in 2010 while Prudentials market share decreased from 10.19% in 2006 to 9.89% in 2010. On the other hand, BPI/MS increased its market share from 7.57% in 2006 to 9.59% in 2010. Although it performed better than those ranked no. 1 and 2, AIC should still try to improve its efforts to differentiate and better position itself against its competitors so it can effectively compete, gain more market share, and catch up with those ranked above it. Currently the company is more focused on building the AIC brand rather than engaging in branding any specific product or set of packaged products. On the other hand, BPI/MS which gained the highest market share in the past 5 years compared to the other members of the top 4, has started to do more branding of specific products. In this light, AIC may explore employing a similar product specific branding strategy to further differentiate itself from its key competitors. Considering that insurance products are quite homogenous in nature, this might be an effective means to improve its differentiation strategy.

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Market Penetration AIC currently has 34 branches and offices spread throughout the country. Its most recent significant addition to its existing network of branches was an entire office building in Cebu. The company is also trying to further improve market penetration by targeting specific segments within its existing target market. For instance, it recently completed accreditation to provide coverage for Republic Act 10022 or the Compulsory Insurance Coverag e for Agency-Hired Migrant Workers Act. Conclusion Effective Based on the fact that the companys Gross Premium Revenue has been steadily increasing for the past five years and that the company increased its market share from 7.08% in 2009 to 7.37% in 2010, the market penetration strategy seems to be effective. The company should continue with this strategy. TABLE 6.3.1-A
Year Gross Premiums % Increase 2006 2007 2008 2009 2010 1,902,921,338 1,968,258,148 2,057,802,651 2,299,824,733 2,720,185,713 3.43% 4.55% 11.76% 18.28%

Cost Management The company is implementing a cost management strategy that aims to increase its profitability through better management of claims costs, rationalizing expenses, and improving cost efficiency. However, it should be mentioned that the strategy is really geared towards improving profitability and not intended for attaining the lowest premium rates or prices. Conclusion Not Effective As shown in the table below, the company was only able to slightly reduce its General Expenses from 30.5% of its Revenues in 2009 to 28.9% in 2010. In addition, the companys

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general expenses as a percentage of revenues in 2010 was higher than all of its key competitors (refer to Comparative General Expenses Table). The company should strive to improve its cost management strategy. The company should also ascertain if it can further reduce the cost impact of the items under general expenses that posted a significant increase when compared to the previous year (refer to General Expenses Partial Breakdown Table). TABLE 6.3.1-B
Comparative General Expenses Revenue General Expenses % AIC 2010 393,951,735 28.90% 2009 370,993,051 30.50% Malyan 2010 744,058,412 22.58% 2009 728,226,487 21.79% Prudential 2010 641,456,431 28.24% 2009 569,555,328 28.31% BPI/MS 2010 351,827,000 23.34% 2009 309,589,000 24.18%

1,363,288,030 1,216,512,050 3,294,791,044 3,341,379,042 2,271,169,278 2,011,851,588 1,507,527,575 1,280,406,692

TABLE 6.3.1-C
% increase from previous year 20% 16% 25% 31%

General Expenses Partial Breakdown Communication, light and water Office supplies, printing and stationery Entertainment, amusement and recreation Transportation and travel

2010 35,614,765 14,429,336 13,632,183 7,030,355

2009 29,748,436 12,447,655 10,869,009 5,381,491

6.3.2 Structure AICs organizational structure is tall and has a relatively narrow span of control at each hierarchical level. Its organizational structure is a combination of vertical functional and divisional. It has a Shared Services Group composed of divisions and departments

responsible for functions such as organizational development, information technology, and office administration. In addition, the company also has product line divisions such as its Marine & Aviation Division and Motor & Special Lines Division. This structure provides for efficient use of resources for shared services while also empowering product line divisions to have more control over how they serve their respective market segments.

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Conclusion Effective A typical divisional structure usually necessitates replicating certain functions within each division which may lead to higher costs. However, AIC was able to avoid that problem by creating a Shared Services Group and leaving only critical line specific functions such as underwriting, policy issuance, and claims processing in each product line division. This allows the company to manage its costs while still being able to leverage on the strengths of a divisional structure by delegating more authority to each product line division. Each

product line division is thus empowered to adapt and respond to the changing needs of the market segment it serves. In this light, the companys organizational structure helps support its differentiation and market penetration strategies without becoming a hindrance to its cost management strategy. The companys general expenses have remained stable and even slightly decreased as a percentage of revenue from 30.5% in 2009 to 28.9% in 2010. At the same time, the companys market share increased from 7.08% in 2009 to 7.37% in 2010.

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6.3.3 Systems The 3 major business processes of AIC are the following: Underwriting & Policy Issuance The process begins with a request for proposal coursed through a broker or agent or simply direct from the client. During the proposal stage, information is gathered about the insured entity and coverage is negotiated. For some lines, conducting actual risk inspection may be necessary. The policy is issued once the proposal is approved by the client. Product line divisions are responsible for underwriting and policy issuance for their respective products. It is within the underwriting and issuance process where risks are selected, evaluated, and accepted. It is also within this process where terms and conditions are determined including those pertaining to amount of retention. Conclusion Effective The companys underwriting and policy issuance process was able to support its strategy of increasing market penetration as shown by the increase in Gross Earned Premiums from Php 2,299,824,733 in 2009 to Php 2,720,185,713 in 2010 coupled with an increase in market share from 7.08% in 2009 to 7.37% in 2010. This was accomplished while also decreasing the companys claims or loss ratio from 53.19% in 2009 to 41.86% in 2010. This illustrates that the underwriting and issuance process was able to support the companys growth efforts without sacrificing underwriting discipline and quality. TABLE 6.3.3-A
2010 Net Premiums Earned Claims Cost % 948,514,745 397,066,744 41.86% 2009 852,905,278 453,674,148 53.19%

Collection Once a policy has been issued, an invoice is generated and this is given to the client. This serves as a reference for premium payment. Payments may be paid directly by the client or coursed through agents and collectors. If paid directly, an Official Receipt is issued, 81

otherwise a provisional receipt is given. No claim will be processed unless the policy has been paid. Conclusion Effective The companys impaired or uncollected insurance receivables as a percentage of total insurance receivables decreased from 0.68% in 2009 to 0.52% in 2010. Thus, the collection process seems to be effective. TABLE 6.3.3-B
2010 Total Insurance Receivables Impaired / Uncollected % 759,598,054 3,924,805 0.52% 2009 529,218,537 3,616,379 0.68%

Claims The claims process begins with the receipt of a notice of loss from the assured, 3rd party claimant, agent, or service partner. Verification then follows to check if the cause of loss is covered by the policy, if it is not an exclusion, and if there was any violation. At this stage, the assured also provides documents supporting the claim. The claim will then be reviewed and a report will be submitted to the approving officers or the Claims Committee. If

approved, settlement may be in the form of a Letter of Authority for accredited shops or check payment. Conclusion Needs Improvement The performance of the companys claims process declined in terms of the amount of total claims it was able to process in 2010. As the table below indicates, only 79.88% of claims incurred in 2010 were processed while as much as 105.37% of the claims incurred in 2009 were processed. This shows that in 2009 the companys claims process was able to

process more claims than it incurred during the year. In contrast, the company fell short of processing all claims incurred in 2010.

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TABLE 6.3.3-C
2010 Claims incurred during the year Claims paid during the year % 394,932,068 315,459,805 79.88% 2009 451,681,643 475,949,782 105.37%

The company should direct its Process Review and Documentation Department to determine the problematic step or steps within the Claims Process and have the Organizational Development Division propose a process improvement. Initial investigation through reports submitted by personnel involved in the claims process seem to indicate that ongoing digital data migration, manual monitoring of turn-around-time, and lack of manpower are potentially contributing to some of the delays in the processing of claims.

Information Technology Some of the companys most utilized information systems are the following: Non-life Insurance Information System (NIIS) Human Resource Information System (HRIS) Performance Planning & Appraisal System Departmental Data Management Systems Intranet Portal Internal Instant Messaging System Lotus Notes In addition, desktops and laptops are all running Microsofts Windows platform. The

company also has a strong policy against using open source freeware software on client systems. To secure and protect the internal network, the company also setup firewalls that filter all incoming and outgoing network traffic. Conclusion Helpful These different information systems help automate some of the tedious day-to-day tasks and help increase the productivity of the companys personnel. The information systems also

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provide access to numerous functionalities that provide tools for secure information storage and dissemination, internal communications, and help facilitate some operational processes. Some helpful features of the systems are the following: NIIS order of payment (reimburse, liquidate, request for check), OR issuance, connection to branches HRIS view, file, approve procedures Performance Planning & Appraisal (PPA) System View PPA guide, upload Performance Appraisal Departmental Data Management Systems archiving, indexing of department data Intranet Portal Post announcements, news, employee information, view map of floors and where peoples offices are exactly located, view latest industry related developments IP Instant Messaging inter office communications Lotus Notes for workflow, document management, and communications leaves, tardiness, undertime, overtime, view HR policies &

6.3.4 Style AIC employs a democratic participative leadership style. One of the means this is

operationalized is through the companys Strategic Action & Planning process or SAP. The SAP process involves all levels of the organization and provides employees and managers of all levels the opportunity to contribute their input. The process even reaches the level of the individual employee through the crafting and execution of Individual Performance Plans

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that need to be aligned with the overall department, division, and corporate action plans. Employees are also encouraged to voice out any concern, idea, or suggestion they may have that will help the company achieve its goals. Conclusion Effective The democratic participative style of leadership in AIC encourages individual employee participation. It also provides divisional and departmental managers more control over how their respective organizational units can respond and adapt to the changing needs of the environment. For instance, to be able to position itself better relative to its competitors, the Marine & Aviation Division has to address a totally different set of needs compared to the Motor & Special Lines Division. A style of leadership that encourages input from all levels allows the company to more effectively manage the different product lines of its broad product array. Considering that the companys industry ranking improved from 5th in 2009 to 4th in 2010, the companys style of management seems to be effective.

6.3.5 Staff AIC employs 388 regular personnel and also taps the services of 584 licensed agents and 59 brokers to sell its broad product array. The companys employee turnover is low

considering it has a turnover rate of 9% and the industry average is around 12%. Reward and Control Mechanisms AIC has effective reward and control mechanisms. Employees are motivated to vie for

awards such as the MVP Award, WOW Award, and the Loyalty Award. Examples of some control mechanisms are: better Yearend Report to the President and CEO by branch, line, and department heads Results of performance appraisals are used as one of the determinants of the Turnaround time for operational activities of the different lines After Action Review evaluation of performance such as what could have been done

amount of profit share an employee should receive 85

Conclusion - Effective These control mechanisms can be considered effective because of the following reasons: The companys industry ranking improved from 5 in 2009 to 4 in 2010 XYZ Magazine bestowed awards deeming the company Best Insurer in Asia and

Best Insurer in the Philippines for 2010 Gross Premium Revenue has been steadily increasing for the past 5 years

Management Trainee Program The company has a Management Trainee Program that helps develop future managers and leaders of the company. It is a 2 year program that includes being rotated and assigned to the different product lines for the purpose of gaining the relevant exposure and experience. The program also includes evaluation points that allow trainees to be promoted to the next higher level if they pass. The program ends with the trainee getting promoted to the rank of assistant manager. Conclusion Needs Improvement Most participants in the Management Trainee Program do not complete the 2 year program. Participants are either pirated by other companies or are pulled out from the program by one of the product line groups they are temporarily assigned to because of an immediate staffing requirement. The company should strive to ensure that there is a steady flow of competent managers being developed if it wants its current growth to be sustainable. To be able to continue to execute its strategies it will need competent managers at the helm. The

company can instruct its Human Resources Administration Department and Process Review & Documentation Department to find a means to improve the existing Management Trainee Program in order to ensure a steady flow of program graduates that will have the necessary skills to lead the company in the future.

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Workforce Development The company sets aside and allocates budget for the training of each employee. Employees are also encouraged to take trainings and seminars to further hone their skills. Strengths and skills that can be further developed by the individual employee are discussed with the direct superior during private consultations and performance evaluation. Conclusion Effective Considering the low turnover rate and the companys improving performance based on its ranking in the non-life industry, workforce development in AIC seems to be effective.

6.3.6 Skills AICs core competencies include functional skills in underwriting, policy issuance, and claims management. The job specifications of product line personnel specify these skills as basis for qualifying for the different positions in the profit centers of the company. The company tries to ensure that its personnel maintain a high level of skill in these functional areas by providing the relevant in-house and outsourced training programs. For instance, some training that cover Basic Non-life Insurance and Business Interruption are outsourced to the Insurance Institute of Asia and the Pacific. All employees of the company are also given the opportunity to learn about the different products and types of policies that AIC offers through in-house training sessions. Conclusion Effective The performance of the different profit centers such as the product line divisions in terms of generating revenue and managing losses due to claims can be indicative of the level of skill that the personnel have achieved. In terms of generating revenue, AIC posted a growth in sales of 18.28% in 2010 which is higher than the industry average and higher than the average of its key competitors. In terms of managing losses due to claims, AIC was able to successfully decrease its claims/loss ratio from 53.19% in 2009 to just 41.86% in 2010. Thus, AIC should continue with its efforts in improving the skill set of its personnel since this seems to support its strategies of market penetration and cost management. 87

6.3.7 Shared Values / Superordinate Goals AICs long term vision is to become a model Filipino enterprise. Its shared values are integrity, humanity, and excellence. It tries to operationalize these shared values through the following value propositions: We offer depth of relationship founded on our values. We are committed to understanding our customers needs. What matters to them, matters to us. Their problems are our problems too. The peace of mind we offer comes as a result of being genuine.

We exert effort towards realizing the potential of the Filipino. We excel in our industry and find ways to help the Filipino excel. We attract colleagues, clients and stakeholders of the same soul. Conclusion Helpful Since insurance companies sell intangible products the success of a sale is highly dependent on the relationship and level of trust between the insurance buyer and the insurance company. AICs shared values allow the company to establish stronger working relationships with brokers, agents, and direct clients. In this light, the shared values support its strategies of market penetration and differentiation. 6.4 Key Financial Ratio Analysis 6.4.1 Liquidity Ratios TABLE 6.4.1-A
RATIOS TYPE 2008 Liquidity Current Ratio Quick Ratio 2.22 2.22
AIC Pioneer Malayan 2009 2010 2010

Prudential 2010 1.08 1.08

BPI/MS 2010 1.49 1.49

KEY COMPETITORS' AVE. 1.42 1.42

INDUSTRY AVE. 1.70 1.70

1.92 1.92

1.76 1.76

1.71 1.71

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AIC has been highly liquid in the past 3 years. However, its current ratio has been decreasing. AIC is 23% more liquid than the key competitors' average and has a ratio slightly above the industry average. Current Ratios are the same as the Quick Ratios since Insurance Companies do not have inventories. Possible Strategy or Action: AIC should maintain its current level of liquidity to remain at par with the industry average. This will ensure that it has enough liquidity to cover sudden increases in claims cost such as what had occurred in 2009. This will allow the company to avoid having to borrow heavily just to cover losses due to claims.

6.4.2 Leverage Ratios TABLE 6.4.2-A

RATIOS TYPE Pioneer Malayan AIC 2008 2009 2010 2010 0.36 0.56 0.42 0.72 0.45 0.82 0.56 1.28 0 69.97 Prudential 2010 0.88 7.57 0.303 3.66 BPI/MS 2010 0.65 1.84 0 134.40 KEY COMPETITORS' AVE. 0.70 3.56 0.101 69.34 INDUSTRY AVE. 0.59 1.42 0.044

Leverage

Debt to total assets ratio Debt to equity ratio

Long term debt to equity ratio 0.032 0.055 0.022 Times-interest earned (or coverage) 17.86 2.49 11.54

AIC's debt to asset ratio has been steadily increasing for the past 3 years. However, its current ratio is still lower than the average of its key competitors and the average of the industry. This indicates that an increasing amount of its growing asset base is being financed through debt. AIC has been increasing its financial leverage in the past 3 years but it is still less financially leveraged compared to the average of its key competitors and the industry average. This indicates that an increasing amount of the company's growth is financed through debt rather than equity. AIC's current long-term debt to equity ratio has decreased by 31% compared to 2008. The ratio temporarily increased in 2009 when it borrowed to cover its losses due to claims for the year that typhoons Ondoy & Pepeng hit the country. Its current long term debt to equity ratio is below the average of its key competitors and below the industry average. Nonetheless, it should be noted that Malayan and BPI/MS have

already cleared their long-term debts. AIC's interest coverage significantly decreased from

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2008 to 2009 because of heavier borrowing and losses due to claims in 2009. The company started to recover in 2010 but was still less than the average of its key competitors by as much as 600%. Possible Strategy or Action: AIC should take advantage of lower forecasted interest rates without over leveraging and going above the industry average. It is more prudent for AIC to try and fund most of its growth by increasing net income. This can be partly achieved by increasing its net earned premiums or retention ratio and decreasing general expenses rather than heavily relying on debt to finance growth.

6.4.3 Activity Ratios TABLE 6.4.3-A

RATIOS TYPE 2008 Activity Inventory turnover Fixed Assets turnover Total Assets turnover N/A 1.68 0.226 Pioneer AIC 2009 N/A 1.77 0.230 2010 N/A 1.99 0.244 Malayan 2010 N/A 25.70 0.296 Prudential 2010 N/A 18.08 0.531 BPI/MS 2010 N/A 32.67 0.593 KEY COMPETITORS' AVE. N/A 25.48 0.473 0.339 INDUSTRY AVE. N/A

Since insurance companies do not have inventory the inventory turnover ratio was not computed. AIC's fixed assets turnover ratio has been increasing for the past 3 years but is still the lowest compared to its key competitors. It should also be noted that AIC has the largest fixed asset amount compared to its key competitors. Its total fixed assets is 657% more than Malayan's which has the second highest fixed asset amount. AIC's total assets turnover ratio has increased in the past 3 years but is still lower than the industry average and significantly less than the average of its key competitors. This is mainly due to its very large asset base. It has the second largest asset base in the industry. Malayan, the market leader, also has a ratio below the industry average since it has the largest asset base. Possible Strategy or Action: Because of its exceptionally large fixed asset amount, AIC will have to achieve sales that is several times greater than the sales of its key competitors just to improve its fixed assets turnover ratio relative to its competitors. Another option is to liquidate some of its fixed assets and use the proceeds to augment its investment portfolio

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by converting it to available-for-sale financial assets. Apropos its total assets turnover ratio, AIC should strive to be at par with the industry average by further increasing its Gross Premium Revenues. It should at least be at par with Malayan in terms of Total Asset turnover since Malayan has a similarly large asset base but it was still able to achieve a higher total assets turnover ratio.

6.4.4 Profitability Ratios TABLE 6.4.4-A

RATIOS TYPE 2008 Pioneer AIC 2009 2010 41.58% 6.29% 5.42% 1.32% 2.41% 49.11 Malayan Prudential BPI/MS 2010 2010 2010 37.81% 7.27% 7.73% 2.29% 5.21% 48.87 32.94% 2.21% 1.06% 0.56% 4.84% 15.50 46.68% 12.99% 10.11% 5.99% 17.01% 102.21 KEY INDUSTRY COMPETITORS' AVE. AVE. 39.14% 31.14% 7.49% 7.50% 6.30% 6.39% 2.95% 2.17% 9.02% 4.84% 55.53

Profitability Gross profit margin 42.26% 33.99% Operating profit margin 9.07% 1.81% Net operating margin 8.58% 1.39% Return on total assets 1.94% 0.32% Return on stockholders' equity 3.03% 0.55% Earning per share 58.82 10.63

AIC's Gross Profit Margin, operating profit margin, and net operating margin ratios significantly decreased in 2009 mainly due to higher claims costs brought about by Ondoy and Pepeng. However, the company was able to recover in 2010 and post a ratio almost at par with its ratio prior to the calamities. Its Gross Profit Margin ratio in 2010 is higher than the average of its key competitors and the industry average. It should also be noted that BPI/MS posted the highest Gross Profit Margin ratio. AIC's operating profit margin has declined since 2008 and is lower than the average of its key competitors and the industry average. It has the second lowest operating profit margin compared to its key competitors. AIC's net operating margin has shrunk by 36.8% since 2008. Its margin is lower than the average of its key competitors and the industry average. AIC's return on total assets ratio has decreased in the past 3 years. Its ratio is lower than the average of its key competitors but higher than the industry average. It has the second lowest ratio compared to its key competitors. This is partly due to its exceptionally large asset base. AICs return on

stockholders' equity has decreased and is significantly lower than the average of its key competitors and the industry average. Another possible concern is the fact that companys

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earnings per share used to be higher than the average of its key competitors but has since decreased and is now lower. Possible Strategy or Action: Even though it has a gross profit margin ratio that is higher than the average of its key competitors and the industry average, AIC should still strive to improve its ratio and become at par with BPI/MS. It can accomplish this by trying to manage risks and claims costs. Maintaining underwriting discipline as the company grows in terms of gross premiums will allow the company to sustain its current Gross Profit Margin ratio or even potentially improve on it. In addition, AIC should strive to achieve operating profit and net operating margins that are higher than its key competitors so it can increase its ranking by having more funds available to finance its growth. This will also help the company cover its interest expenses and taxes. This can be achieved by decreasing the amount of premiums it cedes to reinsurance, managing the risk of losses due to claims, and decreasing general expenses. This will also positively affect its ROE and EPS. AIC should also more effectively leverage on its large asset base to generate income. This can be achieved by increasing its investment income from its financial assets as well as utilizing its large fixed asset base to improve its pre and post sales activities.

6.4.5 Growth Ratios TABLE 6.4.5-A

RATIOS TYPE 2008 Growth Sales Net income Earning per share Pioneer AIC 2009 2010 Malayan Prudential BPI/MS 2010 2010 2010 21.29% 852.58% 31.58% 26.69% KEY INDUSTRY COMPETITORS' AVE. AVE. 12.54% 13.52% 322.27% 119.25%

4.55% 11.76% 18.28% -15.26% 81.84% -81.93% 362.06% 87.55% -81.93% 362.06%

AIC's sales has steadily increased in the past 3 years. Its growth rate is higher than the industry average and the average of its key competitors. It should also be noted that the sales of Malayan, the market leader, has significantly contracted. AIC's net income has also increased significantly since 2009 and its growth rate is above the average of its key competitors. It should be mentioned that the exceptionally high growth rate in 2010 was

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mainly due to the extremely low net income figures for 2009 brought about by huge losses due to claims during that year. The fact that the company was able to improve its claims/loss ratio from 53.19% in 2009 to 41.86% in 2010 and also slightly decrease its general expenses as a percentage of revenues from 30.50% in 2009 to 28.9% in 2010 helped increase its Net Income. The growth of EPS is the same as net income for 2009 and 2010 since the number of shares of common stock outstanding remained constant. Possible Strategy or Action: AIC should maintain a higher growth rate than the average rate of its key competitors so it may catch up and increase its ranking. This can be achieved by increasing gross premium revenue, increasing the retention ratio, decreasing general expenses, and managing its risk exposure. The contraction in sales of the market leader underscores the opportunity to catch up.

6.4.6 Insurance Related Ratio TABLE 6.4.6-A

RATIOS TYPE 2008 Insurance Retention
AIC Pioneer 2009

2010 34.87%

Malayan Prudential 2010 2010 45.39% 58.35%

BPI/MS 2010 41.35%

39.59% 37.09%

KEY INDUSTRY COMPETITORS' AVE. AVE. 48.37% 63.13%

AIC's net earned premiums has been decreasing for the past 3 years and is significantly lower than both the average of its key competitors and the average of the industry. This is mainly due to its decreasing retention ratio. It has been ceding a larger portion of its gross premium revenue to reinsurance. Possible Strategy or Action: Even though AICs decreasing net earned premiums and retention ratio decreases its direct risk exposure, it also increases its risk to third party default from reinsurance which it has less control over. AIC should strive to maintain a level of net earned premiums that is at par with at least its key competitors if not with the industry average. This will also address its problem of sliding down to the no. 6 position from no. 4 when ranking is based on net earned premiums rather than gross earned premiums. This can be achieved by reducing the amount of premiums it cedes to reinsurance.

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6.5 Internal Factor Evaluation (IFE) Matrix 6.5.1 Strength Ratings and Importance Weight S1. A high quality of underwriting that helps manage risk and reduce the claims ratio from 53.19% in 2009 to 41.86% in 2010. The company's claims ratio is better than the industry average of 44.49%. RATING 3: This is a minor strength of the company since it has a claims/loss ratio of 41.86% which is better than the average of its key competitors of 44%. The company was also able to reduce its claims ratio from 53.19% in 2009 to just 41.86% in 2010 while it was increasing its gross premium revenue by 18.28%. It is only a minor strength since BPI/MS, one of its key competitors, was able to achieve a better claims ratio of 38.25% in 2010. This was given the highest weight of 20% since losses due to claims comprise a large portion of the total expenses of insurance companies and thus affects its profitability.

S2. Account management personnel who contribute to a premium revenue growth rate that has been increasing in the past 5 years. The company posted a growth rate of 3.43% in 2007, 4.55% in 2008, 11.76% in 2009, and 18.28% in 2010 as well as the 2nd highest CAGR of 7.41% compared to key competitors from 2006 to 2010. RATING 3: This is a minor strength of the company since its Gross Premium Revenue has been increasing for the past 5 years and its rate of growth is also increasing. In addition, its Gross Premium Growth rate for 2010 was higher than the average of its key competitors and the industry average. It is only a minor strength because BPI/MS posted a higher growth rate of 31.58% in 2010. This was given the moderate weight of 15% since premium revenue is the primary source of revenue of insurance companies and it comprises a significant portion of total underwriting income.

S3. A high quality of products and services as confirmed in a survey conducted by XYZ Magazine in 2010 with direct insurance buyers as respondents. Respondents were asked to

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nominate insurance companies in order of quality.

The company received 4 awards

including "Best Insurer in the Philippines" and "Best Insurer in Asia"65. RATING 4: This is a major strength of the company since the high quality of its products and services will help increase its premium revenue as well as ensure the sustainability of its growth. In addition, being recognized by a well-known and reputable organization such as XYZ Magazine helps publicize and underscore this strength. AIC was ranked no.1 in Asia

and the Philippines in the 2010 XYZ Magazine Insurance Survey which asked insurance buyers to rank insurance companies in order of quality. This was given the moderate weight of 15% since the quality of the products and services directly affects how the company is perceived and also whether the companys current growth will be sustainable.

S4. Strong financial position with a high capacity for risk as measured by a networth of Php 6.35 billion in 2010 which is ranked no. 1 in terms of networth by the Insurance Commission66. RATING 4: This is a major strength since the Insurance Commissions ranking based on networth for 2010 places AIC as no. 1 in the industry. According to the Insurance

Commission, AIC has a networth of Php 6.35 billion in 2010. The Insurance Commission ranks Malayan as no.2, BPI/MS as no. 3, and Prudential as no. 13. This was given the lowest weight of 5% even though it can indicate an insurance companys capacity to handle its existing risk exposure since the other factors have the potential of having greater impact on the company.

S5. Good investment management that supplements premium revenue by generating an investment income ratio of 22.78% in 2010 which is the second highest compared to its key competitors.

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XYZ Magazine Insurance Survey 2010 (www.XYZMagazine.com) Insurance Commission / Non-life Ranking Based on Networth 2010

66

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RATING 3: This is a minor strength because investment income supplements premium revenue and contributes to the profitability of an insurance company by helping cover expenses and claims costs. In addition, AIC's investment income ratio of 22.78% is the second highest compared to its key competitors. Malayan has an investment income ratio of 26.91%, BPI/MS has 17.77%, and Prudential has 4.18%. This was given the lowest weight of 5% since investment income is important but it should only supplement premium revenue which is the primary source of revenue of insurance companies. Investment income helps insurance companies cover expenses and claims costs.

6.5.2 Weakness Ratings and Importance Weight W1. Product line reinsurance operations that have inadvertently resulted in a decreasing premium retention rate for the past 3 years which is counter to the company's standing policy to protect and maintain its retention rate. The company has the lowest retention rate compared to key competitors and its retention rate is lower than the industry average. RATING 1: This is a major weakness since the company has a Retention Rate that is lower than all of its key competitors and lower than the industry average. In addition,

premium revenue is the primary source of revenue for insurance companies. This highlights the importance of trying to protect and maintain the companys retention rate. The companys Retention Rate has been decreasing for the past 3 years. It was 39.59% in 2008, 37.09% in 2009, and 34.87% in 2010. Even though the amount of net earned

premiums retained by an insurance company comprises a significant portion of its total revenue, this was given a lower weight of 5% since a low retention rate can more easily be remedied or corrected compared to the other factors.

W2. Significantly fewer branches and offices spread throughout the country compared to some of its key competitors such as Malayan and BPI/MS. RATING 2: This is a weakness since branches and offices are important for driving and sustaining growth. Some of its key competitors like Malayan and BPI/MS have already 96

increased their reach by expanding their network of branches and offices through bancassurance partnerships. It is a minor weakness only since AIC at least has the same number of branches and offices as Prudential. AIC and Prudential both have 34 branches, Malayan has 398, and BPI/MS has 683. This was given a high weight of 15% since

branches and offices help support sales efforts as well as provide customer touch points for claims processing.

W3.

Ongoing digital data migration, manual turn-around-time monitoring, and lack of

manpower are contributing to a decline of more than 25 percentage points of the performance of the company's claims process in terms of total amount of claims processed compared to claims incurred during the year. RATING 2: This is a weakness since only 79.88% of claims incurred in 2010 were processed while as much as 105.37% of the claims incurred in 2009 were processed. This is a minor weakness only since it was still able to process almost 80% while BPI/MS was only able to process 75.49%. This was given a high weight of 15% since the claims process is one of the core processes of an insurance company and the quality of its performance helps shape the customers perception of the company. Prompt settlement of claims is also a key consideration for existing clients in their decision to stay on or switch to another insurance company.

W4.

An ineffective cost management strategy that results in general expenses as a

percentage of revenue of 28.9% which is higher than all of its key competitors. RATING 2: This is a weakness since AICs general expenses as a percentage of revenue is higher compared to all of its key competitors. Managing the cost impact of general

expenses is important considering that claims costs can suddenly spike and cause total expenses to rise. This is a minor weakness only since the company was able to slightly reduce general expenses as a percentage of revenue from 30.5% in 2009 to 28.9% in 2010. This was given a lower weight of 5% since general expenses only comprises a portion of an 97

insurance companys total expenses and will have less impact on the companys overall profitability compared to the other factors.

6.5.3 IFE Matrix Table

AIC received a total weighted score of 2.75 which is higher than the average of 2.5. Even though this indicates that the company has an internal position strength that is above average, there is still room for improvement. First, the company should strive to be at least at par with the average of its key competitors and the industry in terms of its Retention rate. This can be accomplished by decreasing the amount of risk that the company cedes to reinsurance. The company should also closely monitor and track the resulting retention rates of reinsurance operations for both facultative and treaty agreements. Second, AIC 98

should look at trying to expand its network of branches and offices. This can be done by establishing a bancassurance partnership with one of the larger banks in the country. Another possible course of action is to sell a portion of its available-for-sale financial assets which make up 38.3% of its total assets and use the proceeds to expand its existing network of branches with the aim of increasing top line sales and improving claims settlement. Third, the company should try to rectify the negative effect of its digital data migration, manual turnaround-time monitoring, and manpower shortage so it can reverse the decline in the quality of the performance of its claims process and restore the level of productivity back to the 2009 level or better. The company can use its Process Review & Documentation

Department to evaluate the process and come up with recommended improvements. Fourth, the company should try to improve its cost management strategy so it can at least be at par with its key competitors in terms of general expenses. This can be done by instructing its internal audit department to thoroughly examine the accounts that comprise general expenses. The company can begin by looking at accounts that posted a significant increase compared to the previous year. 6.6 Strategic Issues Based on Internal Factors There are several strategic issues that AIC needs to address. One strategic issue that AIC faces is a challenge common to all non-life insurance companies operating in the Philippines. The strong rivalry in the industry has been pushing premium rates down and making it even more critical for insurance companies to keep both claims cost and general expenses in check. AIC can attack this problem from two sides, namely, the premium

revenue side and the cost management side. The company can try to increase its gross premium revenue by expanding its network of branches and offices and reaching out to more insurance buyers. This can be accomplished by establishing a bancassurance

partnership with one of the larger banks that already has an existing relatively extensive network of branches. The company should also try to protect and maintain its retention ratio so it can keep most of the gross premiums it generates in the form of net earned premiums.

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AIC can then use the higher premium revenue to cover its general expenses and claims costs. On the cost side, the company should continue endeavoring to decrease its claims ratio and general expenses. Claims costs can be kept in check by maintaining underwriting discipline in the face of its increasing rate of growth. The company can do this by continuing to avoid unprofitable accounts and spreading its risk exposure geographically as well as among different types. General expenses can be managed by closely monitoring increasing trends and filtering out unnecessary expenses. However, AIC should be careful not to

inadvertently stifle growth by cutting back on costs that may be vital to its operations. For instance, if the claims process needs manpower augmentation then the company should move to allocate the necessary funds. companys continued growth and success. 7. STRATEGY FORMULATION 7.1 Strengths, Weaknesses, Opportunities, Threats (SWOT) Matrix 7.1.1 Strength Opportunity Strategies
STRENGTHS
S1. A high quality of underwriting that helps manage risk and reduce the claims ratio from 53.19% in 2009 to 41.86% in 2010. The company's claims ratio is better than the industry average of 44.49%. S2. Account management personnel who contribute to a premium revenue growth rate that has been increasing in the past 5 years. The company posted a growth rate of 3.43% in 2007, 4.55% in 2008, 11.76% in 2009, and 18.28% in 2010 as well as the 2nd highest CAGR of 7.41% compared to key competitors from 2006 to 2010. S3. A high quality of products and services as confirmed in a survey conducted by XYZ Magazine in 2010 with direct insurance buyers as respondents. Respondents were asked to nominate insurance companies in order of quality. The company received 4 awards including "Best Insurer in the Philippines" and "Best Insurer in Asia". S4. Strong financial position with a high capacity for risk as measured by a networth of Php 6.35 billion in 2010 which is ranked no. 1 in terms of networth by the Insurance Commission. S5. Good investment management that supplements premium revenue by generating an investment income ratio of 22.78% in 2010 which is the second highest compared to its key competitors.

Prompt settlement of claims is critical to the

OPPORTUNITIES
O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for Agency-Hired Migrant Workers O2. The Global Insurance Center projects the continued growth in popularity and acceptance of the bancassurance model. In 2010, BSP reviewed 23 bancassurance applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013.

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S.O. STRATEGIES SO1: Offer new packaged non-life insurance products specifically tailored to address the needs of agency-hired migrant workers. AIC can package together a set of its existing products that will address the requirements of agency-hired migrant workers as well as comply with Insurance Commissions regulations related to R.A. 10022. It can then brand this new product and market it to insurance buyers as specifically customized for the needs of agency-hired migrant workers. (S2, O1) SO2: Establish partnerships with umbrella organizations and associations of overseas

recruitment agencies such as the Philippine Association of Service Exporters, Inc. (PASEI) to create sales and marketing opportunities coursed through them or their activities. The company can try to connect and establish links with overseas recruitment agencies through umbrella organizations and associations. Partnering with these organizations will provide AIC with the opportunity to reach a large number of member agencies. The company needs to focus on establishing links with these recruitment agencies since these entities will be the ones actually paying the premiums for the insurance coverage of the overseas Filipino workers that will be sent abroad. (S2, S3, O1) SO3: Advertise and promote awards garnered to new and existing insurance buyers.

Considering the nature of the insurance business where risk is the primary concern and the product is intangible, building a strong reputation based on the high quality of its products can be a boon to increasing the companys market share. To be branded Best Insurer in the Philippines and Best Insurer in Asia by a reputable company helps improve AICs competitive position from the perspective of the insurance buying public. The company should ensure that these awards are included in most of its marketing communications and prominently displayed in all of its customer touch points. (S3,O4,O5) SO4: Establish a bancassurance partnership with a large bank that has an extensive

network of existing branches. AIC can help augment its existing distribution network by partnering with a large bank for purposes of cross-selling its array of non-life insurance products. This will allow partner bancassurance bank branches to serve as AICs additional 101

sales outlets or marketing channels. This will entail stationing non-life insurance agents at the different bank branches or providing bank personnel with the appropriate training. (S3, S4, O2, O4) SO5: Establish more partnerships with 3rd party entities such as auto shops and dealers for cross-selling of motor insurance products. In consideration of the growing number of

registered motor vehicles in the country, the company can try to establish more partnerships with auto shops and auto dealers. AIC can leverage on the awards it recently received to help in establishing these partnerships. The company can also provide these potential new partners with marketing materials that showcase the awards it received. These 3rd party entities can then help contribute to the sales and marketing efforts of the companys products and services. (S3,O5)

7.1.2 Strength Threat Strategies

STRENGTHS
S1. A high quality of underwriting that helps manage risk and reduce the claims ratio from 53.19% in 2009 to 41.86% in 2010. The company's claims ratio is better than the industry average of 44.49%. S2. Account management personnel who contribute to a premium revenue growth rate that has been increasing in the past 5 years. The company posted a growth rate of 3.43% in 2007, 4.55% in 2008, 11.76% in 2009, and 18.28% in 2010 as well as the 2nd highest CAGR of 7.41% compared to key competitors from 2006 to 2010. S3. A high quality of products and services as confirmed in a survey conducted by XYZ Magazine in 2010 with direct insurance buyers as respondents. Respondents were asked to nominate insurance companies in order of quality. The company received 4 awards including "Best Insurer in the Philippines" and "Best Insurer in Asia". S4. Strong financial position with a high capacity for risk as measured by a networth of Php 6.35 billion in 2010 which is ranked no. 1 in terms of networth by the Insurance Commission. S5. Good investment management that supplements premium revenue by generating an investment income ratio of 22.78% in 2010 which is the second highest compared to its key competitors.

THREATS
T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic accidents has increased from 7,267 in 2007 to 15,750 in 2009 and road accident related deaths is currently growing at 4.2% per annum. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. T3. There is strong rivalry among competitors in the non-life insurance industry T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry.

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S.T. STRATEGIES ST1: Sell a portion of the available for sale financial assets to fund the incorporation of a new joint venture company with a large bank that will then venture into bancassurance. This joint venture should be between AIC and one of the larger banks in the country that already has an extensive branch network. This new joint venture company can then venture into bancassurance to sell AICs non-life insurance products utilizing the banks branch network. The Bangko Sentral ng Pilipinas requires that a bank own 5% of the resulting entity so that it may sell its products and services using the banks network of branches. Establishing a bancassurance partnership will help AIC catch up with BPI/MS and Malayan and also allow the company to reach a greater number of potential insurance buyers. (S4, S5, T3, T4) ST2: Spread risk exposure by generating premium revenue from different geographical areas. The company can leverage on its account management personnel and underwriters to try to spread its risk exposure. Certain cities, municipalities, and areas such as Quezon City and Makati historically record more motor vehicle accidents. The company can try to ensure that its risk exposure does not cluster in these high risk areas by spreading its risk exposure geographically. (S1, S2, T1) ST3: Decrease premium rates without exceeding minimum set by Insurance Commission and agreed upon by PIRA members. The company can try to decrease premium rates further without violating minimums set by the Insurance Commission and any of its agreements with other PIRA members. However, it should be mentioned that considering the strong rivalry in the industry, this may only result in lower premium revenues once other players match the lower rates. Strategies such as this are partly the reason why the

Insurance Commission was forced to impose minimum rates to ensure solvency and financial stability of insurance companies. (S1, S4, T3, T4) ST4: Expand network of brokers and agents to increase reach and connect with more insurance buyers in order to compensate for the smaller premium revenue per insurance buyer. AIC has a network of 34 branches and offices strategically spread throughout the 103

country.

The company can utilize these branches and offices as well as its account

management personnel in the head office to establish links with more brokers and agents. This will also have a multiplier effect since each broker and agent can bring in more than one direct client. The company should also ensure that branches and offices have the necessary authority and resources to implement this strategy. (S2, S3, T3, T4)

7.1.3 Weakness Opportunity Strategies

WEAKNESSES
W1. Product line reinsurance operations that have inadvertently resulted in a decreasing retention rate for the past 3 years which is counter to the company's standing policy to protect and maintain its retention rate. The company has the lowest retention rate compared to key competitors and its retention rate is lower than the industry average. W2. Significantly fewer branches and offices spread throughout the country compared to some of its key competitors such as Malayan and BPI/MS. W3. Ongoing digital data migration, manual turn-around-time monitoring, and lack of manpower are contributing to a decline of more than 25 percentage points of the performance of the company's claims process in terms of total amount of claims processed compared to claims incurred during the year. W4. An ineffective cost management strategy that results in general expenses as a percentage of revenue of 28.9% which is higher than all of its key competitors.

OPPORTUNITIES
O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for Agency-Hired Migrant Workers O2. The Global Insurance Center projects the continued growth in popularity and acceptance of the bancassurance model. In 2010, BSP reviewed 23 bancassurance applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013.

W.O. STRATEGIES WO1: Adhere to policy with higher premium retention rate to fund maintaining more

manpower dedicated to claims processing and be in a position to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers. AIC has a retention rate that is lower than the average of its key competitors and the industry. It should try to increase its retention rate to increase its premium revenue. The additional premium revenue can then be used to augment the manpower allocated to claims processing in proportion to the growth of the company in gross premium revenues. This will help the company avoid stifling growth because of delays in the settlement of claims. This

104

will also allow the company to increase its claims processing capacity in response to the growing number of insurance buyers that the company will be serving as it continues to expand its distribution network and extend its reach to even more insurance buyers. (W1, W3, O4, 05) WO2: Sell a portion of the available-for-sale financial assets to fund the expansion of the existing network of branches and offices and be in a position to take advantage of the growing number of properties requiring insurance coverage. asset base in the industry. AIC has the second largest

It has more than Php 11 billion in managed assets Php

4,266,208,612 of which is in the form of available-for-sale financial assets. The company can sell a portion of its AFS and use the proceeds to expand its existing network of branches and offices. This will increase the companys existing presence in the geographic areas where there are currently only few branches and offices and allow the company to reach more potential insurance buyers. (W2, O4, O5) WO3: Adhere to policy with premium higher retention rate to fund venturing into non-life microinsurance. AIC can offer its existing product array to the lower income market and micro to small enterprises. The company can use the additional premium revenue from its higher retention rate to fund its foray into this new market segment that it currently does not yet serve. This will allow AIC to generate more total premium revenue and improve its competitive position relative to its key competitors. (W1,O3)

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7.1.4 Weakness Threat Strategies

WEAKNESSES THREATS

W1. Product line reinsurance operations that have inadvertently resulted in a decreasing retention rate for the past 3 years which is counter to the company's standing policy to protect and maintain its retention rate. The company has the lowest retention rate compared to key competitors and its retention rate is lower than the industry average. W2. Significantly fewer branches and offices spread throughout the country compared to some of its key competitors such as Malayan and BPI/MS. W3. Ongoing digital data migration, manual turn-around-time monitoring, and lack of manpower are contributing to a decline of more than 25 percentage points of the performance of the company's claims process in terms of total amount of claims processed compared to claims incurred during the year. W4. An ineffective cost management strategy that results in general expenses as a percentage of revenue of 28.9% which is higher than all of its key competitors.

T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic accidents has increased from 7,267 in 2007 to 15,750 in 2009 and road accident related deaths is currently growing at 4.2% per annum. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. T3. There is strong rivalry among competitors in the non-life insurance industry T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry.

W.T. STRATEGIES WT1: Adhere to policy with higher premium retention rate to help cover the potential

increase in claims costs for the motor line. AIC has a premium retention rate that is lower than the average of its key competitors and the industry. It should try to increase its

retention rate to increase its premium revenue. This will allow the company to catch up with its key competitors in terms of net earned premiums and also help cover any increase in losses due to claims. (W1, T1) WT2: Sell a portion of the available-for-sale financial assets to fund expansion of existing network of branches and offices and reach more insurance buyers. AIC has the second largest asset base in the industry. It has more than Php 11 billion in managed assets Php 4,266,208,612 of which is in the form of available-for-sale financial assets. The company can sell a portion of its AFS and use the proceeds to expand its existing network of branches and offices. This will increase the companys existing presence in the geographic areas where there are currently only few branches and offices and allow the company to reach more potential insurance buyers. (W2, T3, T4)

106

WT3: Sell a portion of the available-for-sale financial assets to acquire some of the smaller players in the industry such as Empire Insurance Co. which has already expressed that it is looking for a buyer. AIC can sell a portion of its large asset base to fund the acquisition of some of the smaller non-life insurance companies. This will help increase its capacity in terms of underwriting, policy issuance, and claims processing. Empire Insurance Co. has already expressed to the Insurance Commission that it is willing to cease operations if it is unable to find a potential buyer for the company. AIC can perform due diligence and look into acquiring controlling interest in Empire Insurance Co. or other companies in a similar predicament.67 (W2, T3)

7.1.5 Grouping of SWOT Strategies 1 Market Penetration Strategies S2,S3,T3,T4 - Expand network of brokers and agents to increase reach and connect with more insurance buyers in order to compensate for the smaller premium revenue per insurance buyer. AIC has a network of 34 branches and offices strategically spread

throughout the country. The company can utilize these branches and offices as well as its account management personnel in the head office to establish links with more brokers and agents. This will also have a multiplier effect since each broker and agent can bring in more than one direct client. The company should also ensure that branches and offices have the necessary authority and resources to implement this strategy. S3,O4,O5 - Advertise and promote awards garnered to new and existing insurance buyers. Considering the nature of the insurance business where risk is the primary concern and the product is intangible, building a strong reputation based on the high quality of its products can be a boon to increasing the companys market share. To be branded Best Insurer in the Philippines and Best Insurer in Asia by a reputable company helps improve AICs competitive position from the perspective of the insurance buying public. The company

67

Philippine Star / Insurers struggle to meet new capital requirement May 24, 2011

107

should ensure that these awards are included in most of its marketing communications and prominently displayed in all of its customer touch points. S3,S4,O2,O4 - Establish a bancassurance partnership with a large bank that has an extensive network of existing branches. AIC can help augment its existing distribution

network by partnering with a large bank for purposes of cross-selling its array of non-life insurance products. This will allow partner bancassurance bank branches to serve as AICs additional sales outlets or marketing channels. This will entail stationing non-life insurance agents at the different bank branches or providing bank personnel with the appropriate training. S3,O5 - Establish more partnerships with 3rd party entities such as auto shops and dealers for cross-selling of motor insurance products. In consideration of the growing number of registered motor vehicles in the country, the company can try to establish more partnerships with auto shops and auto dealers. AIC can leverage on the awards it recently received to help in establishing these partnerships. The company can also provide these potential new partners with marketing materials that showcase the awards it received. These 3rd party entities can then help contribute to the sales and marketing efforts of the companys products and services. S1,S2,T1 - Spread risk exposure by generating premium revenue from different geographical areas. The company can leverage on its account management personnel and underwriters to try to spread its risk exposure. Certain cities, municipalities, and areas such as Quezon City and Makati historically record more motor vehicle accidents. The company can try to ensure that its risk exposure does not cluster in these high risk areas by spreading its risk exposure geographically. W1,W3,O4,05 - Adhere to policy with higher premium retention rate to fund maintaining more manpower dedicated to claims processing and be in a position to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers. AIC has a retention rate that is lower than the average of its key competitors and the industry. It should try to increase its retention rate to increase its 108

premium revenue.

The additional premium revenue can then be used to augment the

manpower allocated to claims processing in proportion to the growth of the company in gross premium revenues. This will help the company avoid stifling growth because of delays in the settlement of claims. This will also allow the company to increase its claims

processing capacity in response to the growing number of insurance buyers that the company will be serving as it continues to expand its distribution network and extend its reach to even more insurance buyers. W2,T3,T4 / W2,O4,O5 - Sell a portion of the available-for-sale financial assets to fund expansion of existing network of branches and offices and reach more insurance buyers. AIC has the second largest asset base in the industry. It has more than Php 11 billion in managed assets Php 4,266,208,612 of which is in the form of available-for-sale financial assets. The company can sell a portion of its AFS and use the proceeds to expand its existing network of branches and offices. This will increase the companys existing presence in the geographic areas where there are currently only few branches and offices and allow the company to reach more potential insurance buyers.

2 Market Development Strategies S2,S3,O1 - Establish partnerships with umbrella organizations and associations of overseas recruitment agencies such as the Philippine Association of Service Exporters, Inc. (PASEI) to create sales and marketing opportunities coursed through them or their activities. The company can try to connect and establish links with overseas recruitment agencies through umbrella organizations and associations. Partnering with these organizations will provide AIC with the opportunity to reach a large number of member agencies. The company needs to focus on establishing links with these recruitment agencies since these entities will be the ones actually paying the premiums for the insurance coverage of the overseas Filipino workers that will be sent abroad. W1,O3 - Adhere to policy with premium higher retention rate to fund venturing into non-life microinsurance. AIC can offer its existing product array to the lower income market and 109

micro to small enterprises. The company can use the additional premium revenue from its higher retention rate to fund its foray into this new market segment that it currently does not yet serve. This will allow AIC to generate more total premium revenue and improve its competitive position relative to its key competitors.

3 Product Development Strategies S2,O1 - Offer new packaged non-life insurance products specifically tailored to address the needs of agency-hired migrant workers. AIC can package together a set of its existing products that will address the requirements of agency-hired migrant workers as well as comply with Insurance Commissions regulations related to R.A. 10022. It can then brand this new product and market it to insurance buyers as specifically customized for the needs of agency-hired migrant workers.

4 Horizontal Integration Strategies W2,T3 - Sell a portion of the available-for-sale financial assets to acquire some of the smaller players in the industry such as Empire Insurance Co. which has already expressed that it is looking for a buyer. AIC can sell a portion of its large asset base to fund the acquisition of some of the smaller non-life insurance companies. This will help increase its capacity in terms of underwriting, policy issuance, and claims processing. Empire Insurance Co. has already expressed to the Insurance Commission that it is willing to cease operations if it is unable to find a potential buyer for the company. AIC can perform due diligence and look into acquiring controlling interest in Empire Insurance Co. or other companies in a similar predicament.

5 Cost Leadership Strategies S1,S4,T3,T4 - Decrease premium rates without exceeding minimum set by Insurance Commission and agreed upon by PIRA members. The company can try to decrease

premium rates further without violating minimums set by the Insurance Commission and any 110

of its agreements with other PIRA members.

However, it should be mentioned that

considering the strong rivalry in the industry, this may only result in lower premium revenues once other players match the lower rates. Strategies such as this are partly the reason why the Insurance Commission was forced to impose minimum rates to ensure solvency and financial stability of insurance companies.

6 Forward Integration Strategies S4,S5,T3,T4 - Sell a portion of the available for sale financial assets to fund the incorporation of a new joint venture company with a large bank that will then venture into bancassurance. This joint venture should be between AIC and one of the larger banks in

the country that already has an extensive branch network. This new joint venture company can then venture into bancassurance to sell AICs non-life insurance products utilizing the banks branch network. The Bangko Sentral ng Pilipinas requires that a bank own 5% of the resulting entity so that it may sell its products and services using the banks network of branches. Establishing a bancassurance partnership will help AIC catch up with BPI/MS and Malayan and also allow the company to reach a greater number of potential insurance buyers.

7 Financial Strategies W1,W3,O4,05 - Adhere to policy with higher premium retention rate to fund maintaining more manpower dedicated to claims processing and be in a position to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers. AIC has a retention rate that is lower than the average of its key competitors and the industry. premium revenue. It should try to increase its retention rate to increase its

The additional premium revenue can then be used to augment the

manpower allocated to claims processing in proportion to the growth of the company in gross premium revenues. This will help the company avoid stifling growth because of delays in the settlement of claims. This will also allow the company to increase its claims 111

processing capacity in response to the growing number of insurance buyers that the company will be serving as it continues to expand its distribution network and extend its reach to even more insurance buyers. W1,O3 - Adhere to policy with higher premium retention rate to fund venturing into non-life microinsurance. AIC can offer its existing product array to the lower income market and micro to small enterprises. The company can use the additional premium revenue from its higher retention rate to fund its foray into this new market segment that it currently does not yet serve. This will allow AIC to generate more total premium revenue and improve its competitive position relative to its key competitors. W1,T1 - Adhere to policy with higher premium retention rate to help cover the potential increase in claims costs for the motor line. AIC has a premium retention rate that is lower than the average of its key competitors and the industry. It should try to increase its

retention rate to increase its premium revenue. This will allow the company to catch up with its key competitors in terms of net earned premiums and also help cover any increase in losses due to claims.

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7.2 Strategic Position and Action Evaluation (SPACE) Matrix

Conservative FS 9 8 7 6 5 4 3 2 1 -2 -1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9 ES 1 2 Aggressive

X: Y:

1.00 2.67

CA

-7

-6

-5

-4

-3

IS

Defensive

Competitive

For FS use: +1 (w orst) to +6 (best) in rating each variable FINANCIAL STRENGTH (FS) Strong financial position w ith a high capacity for risk as measured by a netw orth of Php 6.35 billion in 2010 w hich is ranked no. 1 in terms of netw orth by the Insurance Commission. A Gross Premium grow th rate of 18.28% in 2010 that is higher than the average of its key competitors w hich is 12.54% and higher than the industry grow th rate of 13.52%. Pioneer AIC posted the 2nd highest CAGR of 7.41% from 2006 to 2010. A Retention Rate of 34.87% in 2010 that is below the average of its key competitors w hich is 48.37% and below the industry average of 63.13% Total Average INDUSTRY STRENGTH (IS) There is strong rivalry among competitors in the nonlife insurance industry Large minimum capital requirement imposed by the Insurance Commission of Php 125 million w hich w ill be increased to Php 175 million by 2011 and up to Php 500 million by 2015 in order to ensure the financial stability of insurance companies The Global Insurance Center projects the continued grow th in popularity and acceptance of the bancassurance model. In 2010, BSP review ed 23 bancassurance applications and approved 22. Bancassurance extends the distribution netw ork of insurance companies by allow ing them to sell insurance products in bank branches of bancassurance partners. Total Average RATINGS

For ES use: -1 (best) to -6 (w orst) in rating each variable ENVIRONM ENTAL STABILITY (ES) Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for Agency-Hired Migrant Workers Total Average COM PETITIVE ADVANTAGE (CA) Good risk management w ith a claims ratio of 41.86% w hich is better than the average of key competitors and the industry average of 44% A high quality of products and services as XYZ Mag confirmed in a survey conducted by Euromoney in 2010 w ith insurance buyers as respondents. Respondents w ere asked to rank insurance companies in order of quality. The company received 4 aw ards including "Best Insurer in the Philippines" and "Best Insurer in Asia". Significantly few er branches and offices spread throughout the country compared to some of its key competitors such as Malayan and BPI/MS. Ongoing digital data migration, manual turn-aroundtime monitoring, and lack of manpow er are contributing to a decline of more than 25 percentage points of the performance of the company's claims process in terms of total amount of claims processed compared to claims incurred during the year. Total Average
1.00 2.67

-2

-1

-1 -4 -1.33

1 12 4.00

-2

-1

-4

1 12 4.00

-5 -12 -3.00

X - Axis (CA average + IS average) Y- Axis (ES average + FS average)

Based on the analysis, AIC falls within the Aggressive quadrant. This means that AIC is in an excellent position to use its internal strengths to take advantage of external opportunities,

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overcome internal weaknesses, and avoid external threats. The recommended strategies for the aggressive profile are market penetration, market development, product development, backward integration, forward integration, horizontal integration, and diversification. 7.3 Internal-External Matrix

TOTAL IFE RATING

2.75
IFE = 2.75 EFE= 2.70 Strong 3.0 to 4.0 Average 2.0 to 2.99 Weak 1.0 to 1.99

High 3.0 to 4.0

I TOTAL EFE RATING

II

III

2.70

Medium 2.0 to 2.99

IV

VI

Low 1.0 to 1.99

VII

VIII

IX

According to the IE Matrix, AIC falls within the average to medium cell specifically designated as V. This indicates that it can be best managed with hold and maintain strategies such as market penetration and product development. 7.4 Grand Strategy Matrix Future Market Growth (Rapid or Slow) RAPID Future Market Growth: Faster than GDP GDP for 2011 is forecasted to grow by 5.0% by the Institute for Development and Econometric Analysis while it is forecasted to grow by 4.9% by Swiss Re Economic 114

Research & Consulting. This indicates that GDP growth will most likely fall within the 4.9% to 5.0% range. On the other hand, the size of the non-life insurance market is forecasted to grow by 8.6% in 2011 in terms of real premiums according to Swiss Re68. In addition, the non-life insurance industry posted a compound annual growth rate of 5.9% from 2001 to 2010. In this light, the non-life insurance industry will most likely grow faster than GDP in 2011. Examining the growth rate of the non-life insurance industry and the GDP growth rate from 2001 to 2010 indicates an industry with rapid growth. Generally, for the past 10 years whenever gross premium revenues register positively GDP also registers positively. It can also be surmised that a negative to 3% growth rate such as those recorded for 2003, 2004, 2006, and 2007 can be considered slow growth for the industry. In addition, the growth rates for the industry during these years were also lower than the growth rate of GDP. On the other hand, a 7% to 19% growth rate can be considered rapid growth for the industry. Considering the mean average growth rate for the industry from 2001 to 2010 is around 7.6%, the non-life insurance industry seems to be a rapid growth industry. It is also worth noting that insurance penetration in the Philippines (insurance as a percentage of GDP) was only 1.04% in 2010 according to the Key Insurance Indicators document published by the Insurance Commission69. As shown in the table below taken from the economic research of Allianz, the 1.04% insurance penetration in the Philippines is relatively low compared to other countries. This means there is still a lot of room for growth for the local insurance industry.

68

Swiss Re Economic Research & Consulting January 2011 Insurance Commission / Key Insurance Indicators 2006-2010

69

115

CHART 7.4-A

Source: Allianz Economic Research

Competitive Position of Your Firm (Strong or Weak) WEAK AIC is currently in a weak competitive position with only 7.37% market share compared to the market leader, Malayan, which has 14.49%. Prudential, ranked second, has 9.89% while BPI/MS, ranked third, has 9.59%. AIC lags behind all three of its key competitors. In addition, the companys EFE score of 2.70 and IFE score of 2.75 are just slightly above average. Looking at the CPM, AIC seems to lag behind the market leader in terms of investment portfolio management, network of offices and branches, prompt settlement of claims, and premium revenue generation.

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RAPID MARKET GROWTH Quadrant II Market development Market penetration Product development Horizontal integration Divestiture Liquidation Quadrant I Market development Market penetration Product development Forward integration Backward integration Horizontal integration Concentric diversification STRONG COMPETITIVE POSITION 1. 2. 3. 4. 5. 6. Quadrant III Retrenchment Concentric diversification Horizontal diversification Conglomerate diversification Divestiture Liquidation 1. 2. 3. 4. Quadrant IV Concentric diversification Horizontal diversification Conglomerate diversification Joint ventures

1. 2. 3. 4. 5. 6.

1. 2. 3. 4. 5. 6. 7.

AIC
WEAK COMPETITIVE POSITION

SLOW MARKET GROWTH

AIC falls within QUADRANT II because of the rapid market growth and weak competitive position of the firm. The recommended strategies are market development, market penetration, product development, horizontal integration, divestiture, and liquidation.

7.5 Boston Consulting Group (BCG) Matrix TABLE 7.5-A

Brand Market Share 0.11 0.27 0.04 0.04 Leader Market Share 0.31 0.27 0.09 0.07 Relative Brand Sales Brand % Market Market Value (000's) Profit Growth Share Php Share Rate 0.35 1,157,280 13% 3% 1.00 1,112,349 63% 10% 0.44 348,763 20% 20% 0.57 481,000 3% 17% 1%

Product Category Fire Marine Casualty Motor Others

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Question Marks (Fire, Casualty) Based on the BCG Matrix, the Fire and Casualty lines of AIC have relatively low market shares in high-growth markets. The recommended strategies are intensive strategies such as market penetration, market development, and product development or sell. It should be mentioned that in the insurance industry having the capacity to spread risk exposure to different product categories provides stability and long term profitability. Spreading risk exposure to many product categories helps the company manage potential losses due to claims. In this light, it may not be prudent to decide to sell simply based on relative market share and market growth rate. Stars (Marine, Motor) According to the BCG Matrix, the Marine and Motor lines have relatively large market shares in high-growth markets. AIC is the market leader for the Marine market. The company is particularly strong in the Marine Hull line under the Marine Category where it is no. 1 and its closest rival, Malayan, only generates 1/6 the amount of gross premium revenues that it does. The motor line currently generates the most amount of premium revenue for the

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industry. Thus, similar to the other major players in the industry, AIC tries to grab as much market share from this line as it can. The recommended strategies for stars are backward integration, forward integration, horizontal integration, market penetration, market development, and product development. 7.6 Summary of Strategies

SUMMARY OF STRATEGIES
Strategies Market penetration Market development Product development Backward integration Forward integration Horizontal integration Diversification Divestiture Liquidation Retrenchment Financial SWOT 1 1 1 1 1 BCG 1 1 1 1 1 1 1 SPACE 1 1 1 1 1 1 1 IE 1 1 GRAND 1 1 1 TOTAL 5 4 5 2 3 4 1 2 1 0 1

1 1 1

The summary of strategies suggests that the most attractive strategies for AIC to pursue are market penetration, product development, market development, and horizontal integration. 7.7 Quantitative Strategic Planning Matrix (QSPM)
KEY FACTORS WEIGHT Opportunities O1. Enactment of RA 10022 has led to the Compulsory Insurance Coverage for AgencyHired Migrant Workers O2. The Global Insurance Center projects the continued growth in popularity and acceptance of the bancassurance model. In 2010, BSP reviewed 23 bancassurance applications and approved 22. Bancassurance extends the distribution network of insurance companies by allowing them to sell insurance products in bank branches of bancassurance partners. O3. 91.4% or 710,822 of the total 780,437 business enterprises operating in the Philippines are micro enterprises. According to PIRA estimates, the local microinsurance market is potentially worth Php 2 billion with around Php 1.8 billion still untapped. O4. Real GDP is forecasted to grow at a rate of 5.0% in 2011, 4.8% in 2012, and 4.7% in 2013. Growth in GDP indicates growth in overall production of final goods and services within the country and this can translate into more goods and services that will require insurance coverage. Market Penetration AS TAS Product Development AS TAS Market Development AS TAS Horizontal Integration AS TAS

10%

0.2

0.4

0.3

0.1

15%

0.6

0.15

0.45

0.3

10%

0.2

0.4

0.3

0.1

15%

0.6

0.3

0.45

0.15

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O5. The number of motor vehicles in the country is forecasted to grow to around 7.5 million in 2011, 8.5 million in 2012, and 9.5 million in 2013. Threats T1. Motor vehicle related traffic accidents are on the rise. Vehicles involved in traffic accidents has increased from 7,267 in 2007 to 15,750 in 2009 and road accident related deaths is currently growing at 4.2% per annum. T2. Graft, corruption, and other irregularities at the Land Transportation Office are starting to endanger systems vital to insurers. T3. There is strong rivalry among competitors in the non-life insurance industry T4. Based on the Family Income and Expenditure Survey of 2009, insurance expenditure as a percentage of total family expenditure is decreasing. Insurance expenditure which was at 1.88% in 2006 decreased to a smaller share of only 1.69% in 2009 that translated to around Php 6.4 billion less premium revenue for the insurance industry.

10%

0.4

0.3

0.2

0.1

10%

0.3

0.2

0.4

0.1

5% 15%

2 4

0.1 0.6

4 1

0.2 0.15

3 2

0.15 0.3

1 3

0.05 0.45

10% 100%

0.4

0.2

0.3

0.1

Strengths S1. A high quality of underwriting that helps manage risk and reduce the claims ratio from 53.19% in 2009 to 41.86% in 2010. The company's claims ratio is better than the industry average of 44.49%. S2. Account management personnel who contribute to a premium revenue growth rate that has been increasing in the past 5 years. The company posted a growth rate of 3.43% in 2007, 4.55% in 2008, 11.76% in 2009, and 18.28% in 2010 as well as the 2nd highest CAGR of 7.41% compared to key competitors from 2006 to 2010. S3. A high quality of products and services as confirmed in a survey conducted by XYZ Magazine in 2010 with direct insurance buyers as respondents. Respondents were asked to nominate insurance companies in order of quality. The company received 4 awards including "Best Insurer in the Philippines" and "Best Insurer in Asia". S4. Strong financial position with a high capacity for risk as measured by a networth of Php 6.35 billion in 2010 which is ranked no. 1 in terms of networth by the Insurance Commission. S5. Good investment management that supplements premium revenue by generating an investment income ratio of 22.78% in 2010 which is the second highest compared to its key competitors. Weaknesses W1. Product line reinsurance operations that have inadvertently resulted in a decreasing premium retention rate for the past 3 years which is counter to the company's standing policy to protect and maintain its retention rate. The company has the lowest retention rate compared to key competitors and its retention rate is lower than the industry average.

20%

0.8

0.4

0.6

0.2

15%

0.6

0.3

0.45

0.15

15%

0.6

0.3

0.45

0.15

5%

0.2

0.1

0.15

0.05

5%

5%

0.2

0.1

0.15

0.05

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W2. Significantly fewer branches and offices spread throughout the country compared to some of its key competitors such as Malayan and BPI/MS. W3. Ongoing digital data migration, manual turn-around-time monitoring, and lack of manpower are contributing to a decline of more than 25 percentage points of the performance of the company's claims process in terms of total amount of claims processed compared to claims incurred during the year. W4. An ineffective cost management strategy that results in general expenses as a percentage of revenue of 28.9% which is higher than all of its key competitors. Total Weight

15%

0.45

0.3

0.15

0.6

15%

0.6

0.3

0.15

0.45

5% 100%

0.2

0.1

0.15

0.05

Sum Total Attractiveness Score

7.05

4.2

5.1

3.15

Based on the QSP Matrix, market penetration is the most attractive strategy for AIC to pursue with a sum total attractiveness score of 7.05. On the other hand, product development received a total score of 4.2, market development received 5.1, and horizontal integration received 3.15.

8. STRATEGIC OBJECTIVES AND RECOMMENDED STRATEGIES 8.1 Recommended Revised Vision and Mission Recommended Vision Statement To be ranked in the top 3 of the non-life insurance industry in the country by 2020 Recommended Vision Statement Evaluation
Parameter Yes / No Yes Why

Does it clearly answer the question: What do we want to become? Is it concise enough yet inspirational?

It clearly states the objective of becoming an organization that is ranked in the top 3 of the non-life insurance industry.

Yes

It can motivate employees to strive to achieve the objective of becoming one of the top 3 in the industry. Employees will want to be a part of an organization that is one of the top 3. The company is currently only ranked no. 4 in the industry and still has a lot of catching up to do to become one of the top 3.

Is it aspirational?

Yes

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Does it give clear indication as to when it should be attained?

Yes

The objective should be attained by the year 2020.

Recommended Mission Statement

Were in the business of affording our clients peace of mind by providing insurance
protection to individuals and corporations not only in the Philippines but in Asia as well. As a Filipino enterprise, we bring value to our people, clients, stakeholders, and to our nation. We utilize tools, technology, and other means that: enhance individual and organizational capability, competence and productivity optimize resources and increase efficiencies drive quality, consistency and professionalism, and propagate best practices Synergy is our strength. Service is our soul.

Recommended Mission Statement Evaluation

Parameter Yes / No Yes If yes, which part of the statement

1. Customers

It was mentioned in affording our clients peace of mind by providing insurance protection to individuals and corporations not only in the Philippines but in Asia as well and in we bring value to our people, customers, stakeholders and to our nation. Considering that insurance is offered to the general public, the statement seems to be specific enough. It mentions the type of entities and their country of origin. It was mentioned in affording our clients peace of mind by providing insurance protection . The statement specifies insurance protection and also provides the company with some flexibility in terms of what type and how it will be provided. It was mentioned in individuals and corporations not only in the Philippines but in Asia as well. The company currently only operates in the Philippines and Chinas Special Administrative Region of Hong Kong. However, it may opt to expand international operations in the future in consideration of the agreement for the ASEAN Free Trade Area that will take effect in 2015. It was mentioned in We utilize tools, technology, and other means . This statement is specific enough considering the fast pace of change in the technology industry. The company tries to keep abreast with new

2. Products & services

Yes

3. Markets

Yes

4. Technology

Yes

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developments by adopting different new technologies such as the internet, data storage management systems, and workflow systems. 5. Concern for survival, growth, profitability Yes It was mentioned in enhance individual and organizational capabilit y, competence and productivity, optimize resources and increase efficiencies, and drive quality, consistency and professionalism, and propagate best practices. All of these contribute to ensuring survival, growth, and profitability of the company. It was mentioned in consistency and professionalism, and propagate best practices. This indicates the companys values and aspirations. It was mentioned in Synergy is our strength. Service is our soul. This becomes the foundation upon which the company intends to build relationships with brokers, agents, and direct clients. It was mentioned in we bring value to our people and enhance individual and organizational capability, competence and productivity. This underscores how the company values its people and how it will help them grow. It was mentioned in we bring value to our people, clients, stakeholders, and to our nation. This shows that the company intends to contribute and provide value to the community and the nation.

6. Philosophy

Yes

7. Self-concept

Yes

8. Concern for employees

Yes

9. Concern for nation building

Yes

8.2 Recommended Strategic Objectives Based on the analysis of external and internal factors, the strategic issues that AIC faces include the low level of insurance penetration in the country, high dependency on the broker and agent distribution channel, decreasing premium revenue per insurance buyer, and large disparity between the size of its distribution network and the growing network of key competitors such as Malayan and BPI/MS. The company also has to contend with protecting its profitability in the face of rising costs and low premium rates. Its decreasing premium retention rate and the decreasing performance of its claims process can also have long-term implications if not rectified at the soonest possible opportunity. The following three main objectives will help AIC address the issues identified above:

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Increase Gross Earned Premiums to Php 4.47 billion, increase Net Earned Premiums to at least Php 2.16 billion, and increase Net Income to 315 million by the end of 2014. (Financial)

Increasing premium revenue will allow the company to fund further growth and also help ensure its capacity to cover any sudden increases in losses due to claims. Increasing gross premium revenue also allows the company to increase in rank since it is the primary basis for industry ranking by the Insurance Commission. This objective will address several strategic issues. In striving to increase the gross premium revenue the company will spread its risk exposure geographically and among a greater number of insurance buyers. Considering that premium revenue per insurance buyer seems to be decreasing due to the strong rivalry that is pushing premium rates down and the smaller share of insurance expenditure based on the FIES of 2009, this objective will help the company compensate by increasing the number of insurance buyers it currently serves. In addition, the increase in retained premium will help cover expenses and losses due to claims. These financial objectives will help the company remain profitable in the face of rising costs and decreasing premium revenue. TABLE 8.2-A
Estimated 2011 Gross Earned Premiums Growth Rate Market Share 2,921,689,765 7% 7.36% 2012 3,175,242,063 8.68% 7.43% Projected 2013 3,644,600,633 14.78% 7.93% 2014 4,470,279,725 22.65% 9.04%

Increase market share to 9.04% by the end of 2014 by expanding the companys network of brokers and agents and enabling partner organizations to cross-sell products. (Marketing)

Increasing market share will bring more premium revenue that will support its current strategies and also ensure stability of the company by allowing it to spread its risk exposure over a greater number of insurance buyers. The insurance industrys low

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penetration indicates a significant amount of room for growth. The objective of increasing market share allows AIC to grab its share of a growing industry. To remain competitive and attain its objective of becoming one of the top 3 in the industry, AIC will need to constantly strive to increase its market share to be at par with its key competitors who will most likely be trying to do the same.

Expand distribution network by engaging in a bancassurance partnership with a large bank and establishing 53 bancassurance branches by the end of 2014. (Operations)

Expanding its distribution network through bancassurance will help support its sales and marketing efforts and help the company achieve its financial and marketing objectives. By expanding its network, AIC will be able to decrease its dependency on the broker and agent distribution channel. The company will also be able to reach more insurance buyers which will in turn help it increase its premium revenues, better spread its risk exposure, and secure its position as one of the market leaders. Some of AICs key competitors such as Malayan and BPI/MS have already ventured into bancassurance partnerships to extend their reach. The objective of expanding its distribution network through bancassurance will allow AIC to more effectively compete and not be left behind by its key competitors.

8.3 Recommended Business Strategies Based on the QSP Matrix, the most attractive strategies for AIC fall under market penetration. The top 2 suitable market penetration strategies based on the SWOT Analysis are listed below. One financial strategy was also included to help support the 2 market penetration strategies. 1. S3,S4,O2,O4 - Establish a bancassurance partnership with a large bank that has an extensive network of existing branches. AIC can help augment its existing distribution

network by partnering with a large bank for purposes of cross-selling its array of non-life

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insurance products. This will allow partner bancassurance bank branches to serve as AICs additional sales outlets or marketing channels. This will entail stationing non-life insurance sales personnel at the different bank branches.

By partnering with a bank, the company will be able to leverage on the banks network of branches to significantly step-up its marketing and sales efforts without the significant costs associated with setting up a branch of its own. This will provide AIC access to the existing network of clients of the bank. Products of the bank such as its loan product can be linked to AICs insurance products. For instance, if a client of the bank decides to take out a loan to purchase a motor vehicle then the client may be encouraged to insure the motor vehicle through one of AICs motor line insurance products. This type of cross-selling of products offers potential clients of the bank a more complete set of solutions and also helps both the bank and AIC to augment its existing revenue generating capacity. With a bancassurance partnership, the bank receives 30% of the premium revenue and AIC benefits by being able to extend its reach on top of the additional premium revenue it will be able to generate. This will also allow AIC to be less dependent on its other distribution channels which makes it a more stable company.

2. S2,S3,T3,T4 - Expand network of brokers and agents to increase reach and connect with more insurance buyers in order to compensate for the smaller premium revenue per insurance buyer. AIC has a network of 34 branches and offices strategically spread

throughout the country. The company can utilize these branches and offices as well as its account management personnel in the head office to establish links with more brokers and agents. This will also have a multiplier effect since each broker and agent can bring in more than one direct client. The company should also ensure that branches and offices have the necessary authority and resources to implement this strategy.

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Brokers and agents have played and continue to play an important role in the insurance buying process. As a non-life insurance company, AIC should ensure that this distribution channel is not neglected. The company should continue its efforts in cementing its links with brokers and agents and also try to look for opportunities to connect and establish links with even more brokers and agents. AICs Agent Development and Servicing department as well as its Product Line divisions should be constantly scanning for potential new brokers and agents whose services can be tapped to sell and market the companys array of products. One possible source of relevant information is the Insurance Commissions list of newly accredited and licensed brokers and agents. Another potential lead can be the list of

insurance companies that have expressed their willingness to cease operations due to their inability to comply with the increasing minimum capitalization requirements mandated by the Insurance Commission. AIC can try to encourage and convince brokers and agents loyal to these companies to switch over and sell AIC products instead. Expanding its existing

network of brokers and agents will also allow the company to grow and meet its targets while the bancassurance partner branches are not yet operational.

3. W1,W3,O4,05 - Adhere to a policy with higher premium retention rate to fund maintaining more manpower dedicated to claims processing and be in a position to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers. AIC has a retention rate that is lower than the average of its key competitors and the industry. premium revenue. It should try to increase its retention rate to increase its

The additional premium revenue can then be used to augment the

manpower allocated to claims processing in proportion to the growth of the company in gross premium revenues. This will help the company avoid stifling growth because of delays in the settlement of claims. This will also allow the company to increase its claims

processing capacity in response to the growing number of insurance buyers that the company will be serving as it continues to expand its distribution network and extend its reach to even more insurance buyers. 127

The prompt settlement of claims is a critical success factor in the non-life insurance industry. The companys performance in processing claims will dictate how it will be perceived by its existing client base and by any potential insurance buyer. This highlights the importance of addressing the decreasing performance of its claims process. The additional premium revenue from a higher retention rate can be used to address this problem. Moreover, a higher retention rate will also make more premium revenue available for covering expenses and losses due to claims. 8.4 Recommended Organizational Strategies The recommended business strategies will necessitate the implementation of several changes in AICs current organizational structure. To be able to venture into

bancassurance, the Bangko Sentral ng Pilipinas requires that the partner bank own 5% of the insurance company. In this light, AIC will have to sell 5% of its 93.73% share of CBA Assurance Corporation to the partner bank70. CAC is a subsidiary of ABC Insurance

Corporation that focuses on the Special Lines set of packaged insurance products. CAC is currently under the Motor and Special Lines Division of AIC. CAC will have to be transferred to the Branches Division of AIC and become the organizational unit responsible for handling bancassurance operations. This will allow the head of the Branches Division to ensure synergy between AICs own branches and the new bancassurance branches which will be under the operation and control of CAC. Selling 5% of the shares of CAC to the bank will still leave AIC with 88.73% or an overwhelming majority of the shares of stock. In addition, using CAC as the joint venture entity between AIC and the bank allows the company to avoid pouring the required minimum capital of more than Php 175 million into a totally new entity and having that new establishment accredited and authorized by the Insurance Commission to transact insurance business in the country. The approval process for a totally new insurance company may entail a more significant amount of time to accomplish.
70

Securities and Exchange Commission (www.sec.gov.ph)

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The sooner AIC is able to ramp up its bancassurance operations the less time there will be for its competitors to increase the disparity in the size of the distribution network between AIC and its rivals. CAC will incur the costs of operating the bancassurance branches but these costs will be offset by the companys 10% share of the premium revenue that will be genera ted. AIC will receive 60% share of the premium revenue from the bancassurance branches, CAC will receive 10%, and the partner bank will receive 30%. As shown in the table below, CAC will actually profit from becoming AICs vehicle for bancassurance. TABLE 8.4-A
Estimated CAC Estimated CAC Total Expenses Total Revenue (Bancassurance) (Bancassurance) 2012 2013 2014 2,100,000 12,030,000 21,390,000 2,228,074 34,721,816 87,677,796

Estimated CAC Profit / Loss (Bancassurance) 128,074 22,691,816 66,287,796

TABLE 8.4-B
Partner Bank's Share 6,684,221 104,165,448 263,033,389 Total Gross Premiums (Bancassurance) 22,280,736 347,218,160 876,777,962

AIC's Share 2012 2013 2014 13,368,442 208,330,896 526,066,777

CAC's Share 2,228,074 34,721,816 87,677,796

Other organizational units within AIC will also have to contribute to ensure the success of the strategies. The Organizational Development and People Management Division will have to facilitate the transfer of CAC from the Motor and Special Lines Division to the Branches Division. The Human Resources Administration and Agents Development and Servicing departments will have to provide qualified personnel to staff the new bancassurance branches. The Branches Division will have to ensure that all processes and structures are in place to support the new bancassurance branches. The Marketing Services and

Communications Department will have to plan and execute activities that will drum up the launching of the new bancassurance branches. Proper equipment and supplies should also be provided to the new bancassurance branches by the Office Administration Department.

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The different organizational units within AIC will have to align their individual unit goals with the new strategies, objectives, and vision and mission of the company to ensure the success of the recommended strategies. 8.5 Financial Projections 8.5.1 Basis and Assumptions General Assumptions Recommended business strategy #1 which entails setting up a bancassurance partnership will result in the establishment of 5 bancassurance branches by the end of 2012, 29 bancassurance branches by the end of 2013, and 53 bancassurance branches by the end of 2014. The premiums generated by each bancassurance branch will be divided amongst three entities, namely, ABC Insurance Corporation, CBA Assurance Corporation, and the partner bank. AIC will get 60%, CAC 10%, and the partner bank will get 30%. AICs growth from 2012 to 2014 will be in accordance with its compound annual growth rate from 2007 to 2011 of 8.22%. Each established bancassurance branch will contribute around Php 10,694,753.24 per annum by 2012 and this amount will grow in proportion to the companys growth as measured by its compound annual growth rate of 8.22% from 2007 to 2011. The gross premium contribution per branch was estimated by determining the arithmetic mean of the gross premium contribution of AICs existing own branches and then getting 60% of that amount. Since only 3 quarters of the current fiscal year has transpired, 2011 figures were obtained using internal estimates provided by the company. Recommended business strategy #2 will allow the company to sustain its current compound annual growth rate of 8.22% from 2012 to 2014. Recommended business strategy #3 will increase the companys current premium retention rate of 34.87% to 48.37%. This will put the company at par with the

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average premium retention rate of its key competitors and result in a significant increase of net earned premiums. Income Statement Established bancassurance branches will increase the companys gross earned premiums on top of the projected growth rate of 8.22% and result in an even faster pace of growth. Net Earned Premiums will grow in proportion to gross earned premiums Commission Income will grow in proportion to reinsurers share of gross earned premiums Investment Income will remain constant from 2012 to 2014 Benefits and Claims and Commission Expense will grow in proportion to net earned premiums General Expenses will grow at the rate of the forecasted inflation rate of 4.5%71 Income Tax will grow in proportion to gross earned premiums. However, it should be mentioned that it is assumed that AIC will continue to benefit from lower income tax due to its Philippine Economic Zone Authority (PEZA) registration that grants the company the option of paying a special lower rate of tax on gross income. Balance Sheet Short-term Investments, Financial Assets, Deferred Acquisition Costs, and Insurance Contract Liabilities will grow in proportion to gross earned premiums Insurance Receivables will grow based on maintaining days receivable in proportion to gross earned premium Reinsurance Assets will grow in proportion to reinsurers share of gross earned premiums Investment Properties will grow in proportion to net earned premiums

71

International Monetary Fund World Economic Database / Forecasted Inflation Rates 2011

131

Based on data for previous accounting periods, the depreciation of the Property and Equipment account is offset by the acquisition of new equipment. However, Property and Equipment increases due to the increasing value of the land asset. In accordance with this principle, Property and Equipment will be forecasted to grow at the rate of increase of the value of real estate prices in the Makati central business district area. Real estate prices are forecasted to grow at a rate of 5.4%72.

There will be no additional investments in a subsidiary Net pension asset will grow in proportion to salaries, wages, and benefits Insurance Payables will grow in proportion to benefits and claims Trade & Other Payables will grow in proportion to General Expenses Other Liabilities will serve as the balancing figure Common Stock & Other Equity will remain constant

8.5.2 Projected Income Statement for 2012 to 2014

ESTIMATED 2011 REVENUES Gross earned premiums Reinsurer's share of gross earned premiums Net earned premiums Commission Income Investment Income Subtotal revenues BENEFITS, CLAIMS, AND EXPENSES Benefits and claims General expenses Commission expense Subtotal benefits, claims, and expenses Income before income tax Provision for (benefit from) income tax NET INCOME 426,480,382 423,134,621 428,939,322 1,278,554,325 161,301,668 9,725,917 151,575,751 Sales Growth 642,886,059 442,175,679 646,592,720 1,731,654,458 195,605,993 10,569,959 185,036,034 8.68% 737,916,320 462,073,585 742,170,893 1,942,160,797 239,293,602 12,132,392 227,161,210 14.78% 905,090,213 482,866,896 910,308,653 2,298,265,762 330,357,692 14,880,968 315,476,725 22.65% 2,921,689,765 1,902,911,595 1,018,778,170 213,456,404 207,621,420 1,439,855,994 3,175,242,063 1,639,513,082 1,535,728,981 183,910,050 207,621,420 1,927,260,451 3,644,600,633 1,881,862,957 1,762,737,676 211,095,303 207,621,420 2,181,454,399 4,470,279,725 2,308,196,334 2,162,083,391 258,918,643 207,621,420 2,628,623,454 2012 PROJECTED 2013 2014

72

Global Property Guide / Philippines February 1, 2011

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8.5.3 Projected Balance Sheet for 2012 to 2014

ESTIMATED 2011 ASSETS Cash & cash equivalents Short-term investments Insurance receivables Financial assets Reinsurance assets Deferred acquisition costs Investment properties Property and equipment Depreciation Investments in a Subsidiary Net Pension Asset Total assets LIABILITIES & EQUITY Liabilities Insurance contract liabilities Insurance payables Trade & other payables Other liabilities Total liabilities Equity Common stock & other equity Retained earnings Total equity Total liabilities & equity 5,258,154,775 1,002,430,422 6,260,585,197 11,538,056,498 5,258,154,775 1,187,466,456 6,445,621,231 12,673,352,823 5,258,154,775 1,414,627,666 6,672,782,441 13,902,717,230 5,258,154,775 1,730,104,391 6,988,259,166 15,869,016,955 3,731,293,040 888,675,199 254,937,302 402,565,760 5,277,471,301 4,055,104,944 1,339,608,855 266,409,480 566,608,314 6,227,731,592 4,654,523,263 1,537,627,426 278,397,907 759,386,193 7,229,934,789 5,708,998,891 1,885,974,733 290,925,813 994,858,352 8,880,757,789 219,909,591 206,325,464 811,651,494 5,097,112,992 2,753,165,730 135,347,580 755,551,931 1,441,374,651 (44,912,654) 151,079,781 11,449,939 11,538,056,498 758,695,544 223,285,417 882,088,849 5,516,095,680 2,372,076,161 147,093,416 1,138,935,865 1,519,208,882 (47,337,938) 151,079,781 12,131,164 12,673,352,823 764,956,684 241,639,478 1,012,477,637 5,969,518,745 2,722,712,193 168,836,501 1,307,291,316 1,601,246,162 (49,894,186) 151,079,781 12,852,920 13,902,717,230 955,544,894 261,502,244 1,241,853,006 6,460,213,185 3,339,538,770 207,086,170 1,603,456,306 1,687,713,455 (52,588,472) 151,079,781 13,617,618 15,869,016,955 2012 PROJECTED 2013 2014

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8.5.4 Projected Cash Flow Statement for 2012 to 2014

ESTIMATED
2011 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustment for depreciation Changes in operating assets & liabilities Decrease (increase) in: Insurance receivables Reinsurance assets Deferred acquisition costs Net pension asset Increase in: Insurance contract liabilities Insurance payables Trade & other payables Net cash generated from (used in) operations Interest paid Income tax paid Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of / additions to: Financial Assets Investment Properties Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITY Increase (decrease) in notes payable NET INCREASE (DECREASE) IN CASH CASH AT BEGINNING OF YEAR CASH AT END OF YEAR (135,000,000) (242,543,224) 462,452,815 219,909,591 538,785,952 219,909,591 758,695,544 6,261,140 758,695,544 764,956,684 190,588,210 764,956,684 955,544,894 (351,639,580) (52,109,152) (403,748,732) (418,982,688) (453,423,065) (383,383,935) (168,355,451) (802,366,623) (621,778,516) (490,694,441) (296,164,989) (786,859,430) (9,055,137) 296,205,508 (9,725,917) 1,341,152,575 (10,569,959) 628,039,655 (12,132,392) 977,447,640 257,341,034 61,290,441 17,582,599 305,260,645 323,811,904 450,933,656 11,472,179 1,350,878,492 599,418,319 198,018,571 11,988,427 638,609,615 1,054,475,629 348,347,308 12,527,906 989,580,032 (55,978,245) (189,881,231) 9,334,696 (642,972) (70,437,356) (130,388,787) 381,089,569 11,745,836 (681,226) (350,636,031) 21,743,084 (721,756) (229,375,369) (616,826,577) 38,249,669 (764,698) 161,301,668 44,912,654 195,605,993 47,337,938 239,293,602 49,894,186 330,357,692 52,588,472 2012

PROJECTED
2013 2014

The projected financial statements show growth in gross earned premiums amounting to Php 1,548,589,961, growth in net earned premiums amounting to Php 1,143,305,221, and growth in net income amounting to Php 163,900,974. The increase in gross earned premiums is amplified by the increasing premium contribution of bancassurance branches from 2012 to 2014. The projected financial statements also show the significant increase in net earned premiums due to the higher premium retention rate that helps drive the increase in net income. It should also be noted that the companys networth increased by as much

as Php 727,673,969 which can indicate a higher capacity to take on additional risk exposure. The networth of an insurance company is often times used to gauge its financial strength.

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8.6 Recommended Departmental Programs and Actions Recommended Business Strategy #1: Establish a bancassurance partnership with a large bank that has an extensive network of existing branches. AIC will need to establish a partnership with one of the larger universal banks in the country that already has an existing extensive network of branches. To perform initial cursory

assessment of potential banks, an interview was arranged and conducted with a branch manager of Chinabank. Based on the discussions it seems that Chinabank is one potential partner. It currently has over 400 branches nationwide and is targeting to have as many as 500 branches by the end of 2012. Chinabank currently does not have a bancassurance partner for non-life insurance. It only has a bancassurance partnership with Manulife for life insurance. During the course of the interview it was also determined that the typical revenue split scheme involves 70% of the revenue going to the insurance company and 30% to the bank. Another potential bank partner is Eastwest Bank which targets expanding its existing 117 branches to 300 within 3 years. The bank is keen on increasing its net income so offering to engage in bancassurance as a vehicle to achieving that goal may help entice it to form a partnership with AIC73. AIC can offer to sell to the bank 5% of the shares of its subsidiary CBA Assurance Corp. (CAC). This will allow the company to comply with the requirements for bancassurance of the Bangko Sentral ng Pilipinas (BSP) and allow AIC to start selling its insurance products through the banks branch network. Once the bancassurance partnership has been

finalized, AIC will then need to seek the approval of both the BSP and the Insurance Commission. There should be no problems in seeking the approval considering that CAC is already accredited and licensed by the Insurance Commission to transact insurance business in the country. Once the bancassurance partnership has been approved by the governing authorities, AIC can then begin to setup and launch bancassurance branches at a rate of 1 per month. Assuming the partnership was finalized and approved within the 1st six

73

The Philippine Star / EastWest Bank Eyes 300 Branches in 3 years September 3, 2011

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months of 2012, this leaves AIC with half of the year for selecting and setting up bancassurance branches. One month is allotted to the selection of which bank branches to target first. The remaining 5 months of the year will be dedicated to launching 1 bank assurance branch per month for a total of 5 branches by the end of 2012. Considering that branches situated in the Metro Manila area usually generate more revenue, AIC should try to target opening the first 5 bancassurance branches in and around this area. At the rate of 1 branch a month for 2012 and 2 branches per month for 2013 to 2014, the company will be able to setup and launch an additional 24 branches a year for 2013 and 2014 to reach a total of 59 operational bancassurance branches by the end of 2014. The proposed phasing of branches and timeline factor in a learning curve that enables establishing branches at a faster pace for 2013 and 2014. Proposed Timeline for 2012 Activities: TABLE 8.6-A
Jan Feb Mar Apr May Jun Jul Form and Finalize Bancassurance Partnership Acquire Approval from IC and BSP Select and Prepare Target Bank Branches Setup and Launch Bancassurance Branches * * 1 branch per month for 2012 Aug Sep Oct Nov Dec

Phasing of Bancassurance Branches: TABLE 8.6-B

No. of No. of Branches Operational Established Branches 2012 2013 2014 Total 5 24 24 53 5 29 53

Each bancassurance branch will be staffed by one bancassurance sales officer who will be responsible for the following:

136

Cross-selling of AIC products to bank clients Preparation of proposals and quotations Evaluation of the insurance requirements of potential clients Providing assistance to existing clients with claims Providing assistance in the collection of premiums Coordination and submission of regular reports to AIC and the partner bank

Moreover, to qualify for the position applicants should possess good communications skills as well as sales and marketing skills.

The different facets of the company will need to work together to ensure that this business strategy succeeds and is accomplished on schedule. The functional units under the

companys operations, marketing, and finance will all need to contribute. The proposed actions and programs as well as the entities responsible and the target timeline are outlined in the following table.

Operations
Action / Program Create, negotiate, and sign a joint venture agreement with one of the large universal banks in the country such as Chinabank which already has an extensive existing network of branches. Who CEO First Vice President of Legal Department Vice President for Business Development First Vice President of Legal Department When January to March 2012

Have the bancassurance joint venture agreement approved by the Insurance Commission and Bangko Sentral ng Pilipinas Ensure organizational structures and processes are in place to facilitate synergy between own branches and bancassurance branches.

April to June 2012

First Vice President of Branches Division for Bancassurance Branches Supervisor of Human Resources Admin Dept.

Starting April 2012

Interview and hire qualified personnel for staffing requirements of new bancassurance branches

Starting April 2012

137

Ensure sales personnel that will later be assigned to bank branches have been trained and prepared for licensing and accreditation. Accredit and assign new sales personnel assigned to bank branches of partner bank.

Senior Assistant for Training Administration of Training Dept. Staff Assistant for Agent Licensing of Agents Development & Servicing Dept. First Vice President of Branches Division for Bancassurance Branches Senior Assistant of Agents Development & Servicing Dept. Assistant Manager of Property Administration Dept.

Starting May 2012

Starting June 2012

Ensure partner bank's personnel are familiar with new procedures as well as AIC's products and services.

Starting July 2012

Support new sales personnel assigned to bank branches of partner bank.

Starting August 2012

Ensure new bancassurance branches are established and prepared for operations in accordance with corporate policies and regulations. The assistant manager will also be responsible for coordinating with other third party entities. Ensure new bancassurance branches are supplied with all necessary office equipment and furniture.

Starting August 2012

Senior Assistant for Office Equipment of Office Admin Dept. Staff Assistant for Office Supplies of Office Admin Dept. Senior Assistant of Information Technology Dept. Senior Vice President of Branches Division

Starting August 2012

Ensure new bancassurance branches are supplied with all necessary office supplies.

Starting August 2012

Install, configure, and support information systems of new bancassurance branches.

Starting August 2012

Monitor and evaluate performance and progress of new bancassurance branches. The Branches Division Head will also be responsible for ensuring synergy between bancassurance branches and the company's own branches. Establish, develop, and maintain links with bank personnel and direct clients to build relationships that will generate premium revenue. Handle sales and marketing of products and services within bancassurance branches

Starting August 2012

Bancassurance Sales Officer

Starting August 2012

Marketing
Action / Program Plan marketing activities for the launching of new branches and offices. Who Marketing Assistant of Market Services & Communications Dept. When Starting April 2012

138

Provide marketing materials and support to new sales personnel assigned to bank branches. The marketing assistant will also be responsible for the execution of marketing activities for the launching of new bancassurance branches.

Marketing Assistant of Marketing Services & Communications Dept.

Starting June 2012

Finance
Action / Program Record, monitor, and collect insurance receivables from partner bank. Who Staff Assistant for Collection Intermediaries of Collection Department When Starting August 2012

Recommended Business Strategy #2: Expand network of brokers and agents to increase reach and connect with more insurance buyers. The broker and agent distribution channel is critical to the sustainability of AICs growth as a non-life insurance company. Brokers and agents play an important role as intermediaries to direct clients. In some cases, they even act as decision makers in the insurance buying process. This highlights the need to ensure this channel is not neglected even while the company begins to setup up an additional channel in the form of a bancassurance partnership. The business strategy of expanding the existing network of brokers and agents will help fuel the continued growth of the company in accordance with its compound annual growth rate of 8.22% from 2007 to 2011. This growth can only be achieved by further cultivating the companys links with brokers and agents. AIC needs to accomplish two main goals to ensure the success of this business strategy, namely, retain the support of its existing network of brokers and agents and add new entities to the existing network. Thus, the company will have to strengthen its existing relationships as well as attract and encourage new entities to join its network. To accomplish these goals, AIC can improve its service to brokers and agents by decreasing the turn-around-time for commission payments from the existing 4 to 5 days to just 2 days. The prompt settlement of commissions will

139

encourage brokers and agents to favor transacting with AIC rather than with its competitors. This can be accomplished by having the Accounting Division work with the Process Review & Documentation Department in instituting improvements in the commission payment process. Aside from helping retain its existing network of brokers and agents, this will also attract potential additions to the network once it becomes known that the company processes commission payments quickly. AIC should also design, develop, and implement a new web-based portal for brokers and agents. The new portal will facilitate better communication and coordination between the company and its network of brokers and agents. It will also help further strengthen the relationship with brokers and agents because of the added service and differentiate AIC from its key competitors. The new portal should provide information about commissions, pending balances, latest news and announcements, top performing brokers and agents, new and existing products and services, and latest industry related research. The portal should have a facility for posting and receiving messages that will augment the existing communication channels between the company and the brokers and agents. The portal should have a secure access that prevents unauthorized entry and should also be accessible through portable devices such as netbooks, laptops, and internet enabled mobile phones. This

means the portal will be accessible to all brokers and agents 24/7 regardless of the current geographic location. The new portal can be designed, developed, and implemented from January to June of 2012 by the companys IT Non-life Applications Development Department. This will require the assignment of one project manager and 3 application developers to accomplishing the task. Beta testing and end user training can be conducting in the month of June 2012. The new portal can then be launched by July of 2012 through a joint activity with all concerned parties including the network of brokers and agents. The event could be timed so that the launch coincides with the activity for giving awards to top performing brokers and agents.

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Proposed Timeline for Application Design, Development, and Implementation: TABLE 8.6-C
ACTIVITY Information Gathering Systems Requirement Specification Application Design & Devleopment Unit & Dependencies Testing Overall Systems Testing User Acceptance Testing End User Beta Testing & Training Month 1 Month 2 Month 3 Month 4 Month 5 Month 6

Staffing Requirements: TABLE 8.6-D

Position Project Manager Application Developer Total Staff No. 1 3 4

The company needs to be more aggressive in terms of expanding its network of brokers and agents. One way to accomplish this is to constantly and actively search for brokers and agents that have been newly licensed and accredited by the Insurance Commission. The companys liaison to the Insurance Commission can assist in this process. The company can also try to gather competitive intelligence regarding smaller insurance companies that will be closing down due to non-compliance with the increased minimum capitalization requirement. It can then encourage and invite the brokers and agents loyal to these

companies to instead start offering and selling AICs products and services. The proposed actions and programs as well as the entities responsible and the target timeline are outlined below.

141

Operations
Action / Program Establish, develop, and maintain links with brokers that have been newly licensed by the Insurance Commission. Who Vice President / Line Head Manager / Assistant Manager for Account Servicing of Line Dept. Vice President of Agents Development & Servicing Dept. Manager for Accounts Servicing of AD&S Insurance Commission Liaison of Agents Development & Servicing Dept. Vice President / Line Head Vice President of Agents Development & Servicing Dept. Assistant Vice President of Process Review & Documentation Manager for Applications Project Management of IT Non-life Applications Development Dept. First Vice President / Line Head Vice President of Agents Development & Servicing Dept. Manager for Applications Project Management of IT Non-life Applications Development Dept. When Starting January 2012

Monitor and track list of newly licensed brokers and agents and update Line Heads and Manager of Agents Development & Servicing Dept.

Starting January 2012

Gather competitive intelligence regarding smaller insurance companies that will be closing down due to non-compliance to the increased minimum capitalization requirement. Entice, encourage, and invite brokers and agents loyal to those companies to shift to AIC.

Starting January 2012

Assist in investigating potential improvements in the commission payment process for brokers and agents to ensure faster turn-around-time.

Starting January 2012

Design, develop, and implement a new web-based portal for brokers and agents to be hosted on the company's existing IT infrastructure.

January to June 2012

Assist the IT Non-life Applications Development Dept. in crafting the Requirements Specification document for the new web-based portal for brokers and agents. Facilitate initial end user beta testing.

January to June 2012

Train Line, Accounting, and Agents Development & Servicing Dept. personnel in using the Content Management System for the new web-based portal for brokers and agents.

June 2012

142

Maintain and administer new web-based portal for brokers and agents

Senior Assistant for IT Network/Systems Administration of IT Operations Dept. First Vice President / Line Head Vice President of Agents Development & Servicing Dept.

Starting July 2012

Inform and encourage use of new web-based portal for brokers and agents.

Starting July 2012

Marketing
Action / Program Launch new web-based portal for brokers and agents through a joint activity with concerned parties. Who Marketing Assistant of Market Services & Communications Dept. When Starting July 2012

Finance
Action / Program Shorten turn-around-time of commission payment to 2 days from the current 4-5 working days. Who Senior Vice President of Accounting Division Senior Assistant for Commission of Accounting Division When Starting January 2012

Regularly update and maintain accounting related information using the back-end content management subsystem of the new web-based portal.

Starting July 2012

Recommended Business Strategy #3: Adhere to a policy of maintaining a higher premium retention rate to support more manpower dedicated to claims processing and be in a position to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers.

143

AICs premium retention rate of 34.87% is lower than all of its key competitors and lower than the industry average of 63.13%74. It is prudent for an insurance company to avoid too much as well as too little of its risk exposure. Ceding too much will adversely affect its profitability by decreasing its net earned premiums which is in turn used to cover claims costs and other expenses. On the other hand, ceding too little can expose the company to an unmanageable amount of risk and lead to large losses due to claims. This underscores the importance of maintaining a premium retention policy and ensuring adherence to it by reinsurance personnel. The proposed premium retention rate of 48.37% will allow AIC to be at par with its key competitors since this is their average retention rate. With a higher premium retention rate the companys net earned premiums will significantly increase. This will in turn contribute to increasing its net income and improve the companys profitability. It will also provide additional premium revenue that can then be allocated to augment its existing claims processing personnel. As shown in the IFE Matrix, the performance of the companys claims process has declined. One of the main reasons for the decline is the lack of manpower dedicated to claims processing. This problem needs to be addressed to

ensure that the company will be able to successfully implement the other two mentioned business strategies. Moreover, by addressing this problem the company will help ensure that its growth is sustainable. The prompt settlement of claims is a critical success factor for non-life insurance companies and it affects the companys relationship with existing clients as well as potential new insurance buyers. With the additional premium revenue generated from adhering to a higher premium retention rate, AIC should hire, train, and maintain additional claims processing personnel. This will provide the company with the necessary capacity to handle the commensurate increase in claims that will stem from growth in gross premiums and number of insurance buyers. To ensure adherence to the policy, product line heads, reinsurance operations personnel, and accounting personnel will have to work together and monitor reinsurance

74

Insurance Commission / Key Insurance Indicators 2006-2010

144

activities coursed through both treaty and facultative agreements. Monitoring should begin at the start of 2012 but the process of hitting the target retention rate should be more gradual and spread throughout several months but not exceeding the first four months of the year. Slight variance from the target will be acceptable considering the nature of reinsurance operations. The Internal Audit Department under the Accounting Division can assist in The proposed actions and programs as well as the entities

ensuring compliance.

responsible and the target timeline are outlined below. Finance

Action / Program Monitor and evaluate reinsurance business and corresponding retention rate. Compare the companys current retention rate with the retention rate of key competitors which was at 48.37% in 2010. Who Vice President of Specialized Accounting Dept. Vice President of Internal Audit Dept. Senior Vice President of Accounting Division When Starting January 2012

Ensure adherence to the retention rate policy and that company policies and financial guidelines regarding risk management are followed. Retention rate of the company should be at par with the average of its key competitors. Increase budget allocation for claims personnel of Line Divisions and Branches Division.

Starting January 2012

Starting January 2012

Operations
Action / Program Ensure that treaty agreements help protect and maintain the company's premium retention rate. Who Assistant Vice President of Reinsurance Dept. When Starting January 2012

145

Monitor and ensure product line reinsurance personnel adhere to retention rate policy. Submit reports to Internal Audit Dept.

Senior Vice President Marine & Aviation Division Senior Vice President Non-Marine Division Senior Vice President of Motor and Special Lines Supervisor of Human Resources Admin Dept.

Starting January 2012

Interview and hire additional personnel for claims processing of Lines and Branches Divisions.

Starting January 2012

146

9. STRATEGY EVALUATION, MONITORING, AND CONTROL 9.1 Strategy Map

Financial To achieve AICs vision, the company needs to accomplish its financial objectives of increasing its gross earned premiums and net earned premiums. Increasing gross earned premiums will help the company improve its ranking since the Insurance Commission ranks non-life insurance companies based on this. On the other hand, increasing net earned premiums by protecting its retention rate will allow the company to generate more premium revenue that can be used to cover expenses and losses due to claims. It will also help increase the companys resulting net income. Customer To attain the companys financial objectives, AIC needs to ensure it addresses the needs of its customers. This will help the company retain its current customers as well as attract new ones.

147

Internal To ensure the companys profitability and sustains its growth trend, AIC needs to settle claims promptly, effectively manage its risks, and strengthen its distribution network. Promptly settling claims will help the company retain its existing customer base and also attract new customers. Effectively managing its risk exposure protects the company from huge losses due to claims. Extending its reach by expanding its distribution network will allow the company to reach more insurance buyers and also spread its risk exposure geographically. Learning and Growth The growth of AIC as well as the sustainability of its growth greatly depends on its human resources. This underscores the need to ensure employees are satisfied and that they are provided with opportunities for growth. It is also a prudent course of action to start developing future leaders of the company to ensure continuity and sustained growth.

148

9.2 Balanced Scorecard

149

150

9.3 Contingency Planning 9.3.1 Downside Potential Events Negotiation or approval of the bancassurance partnership takes longer than expected Explore possibility of setting up new branches owned by AIC to ensure it does not get left behind by key competitors in terms of premium revenue generating capacity Aggressively seek traditional partnerships with banks Form additional partnerships with auto shops and dealers Explore possibility of buying smaller players that will enable AIC to still increase its distribution network Have the Process Review and Documentation department work with the Branches division to investigate, evaluate, and implement recommendations that will make the process of establishing branches more efficient and less time consuming Allocate more personnel to processes that are critical to establishing the bancassurance branches Provide additional sales and marketing training to bancassurance personnel Try to establish more branches to compensate for revenue shortfall Study the possibility of transferring bancassurance operations of the underperforming branch or branches to a new bank branch Re-evaluate the companys capacity to fund the recommended strategies in light of higher claims cost Defer implementation plans or adjust schedule of targets if necessary

Fall short of establishing target number of bancassurance branches or fall behind schedule

Premium revenue generated per bancassurance branch falls short of expectations

A calamity occurs that causes losses due to claims to spike

9.3.2 Upside Potential Events Negotiation or approval of the bancassurance partnership is accomplished ahead of schedule Actual capacity and pace of setting up bancassurance branches exceeds expectations and targets Adjust schedule of targets to begin establishing bancassurance branches earlier

Increase target number of bancassurance branches without exceeding the estimated optimum ratio of own branches to bancassurance branches of around 8:1. This ratio is based on Malayan which has been successful in terms of maintaining prompt settlement of claims with 42 own branches and 356 bancassurance branches.

151

Premium revenue generated per bancassurance branch exceeds expectations

Re-assess selected set of bank branches to target and consider focusing more on areas where existing bancassurance branches are posting higher revenues. However, clustering of risks in one area should still be avoided.

-- END OF PAPER --

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X. REFERENCES 1. David, Fred R. Strategic Management: Concept and Cases. 13th Edition. 2010. 2. Securities and Exchange Commission for Audited Financial Statements of AIC Insurance Corp., Malayan Insurance Co. Inc., Prudential Guarantee and Assurance Inc., and BPI/MS 3. Insurance Commission Annual Reports 2004 to 2009, Key Insurance Indicators 2004 to 2010, Non-life Ranking Based on Gross Premiums, Net Premiums, Networth, Paid-up Capital, and Assets, Circulars 05-2011, 21-2010, 26-2010, 30-2010, and 35-2010, Guidelines for RA 10022, List of Accredited Associations, Brokers, Agents, and Ranking of Insurance Brokers Based on Premiums Produced 4. Philippines Insurers and Reinsurers Association for 2011 PIRA Fact Book, PIRA News 1st and 2nd Editions. 5. Institute for Development and Econometric Analysis for Industry Analysis: Life, Non-life, and Pre-need 2010, Economic Trends, Economic Briefings, and Economic Forecasts. 6. National Statistics Office. Family Income and Expenditure Survey. 2006 and 2009, Annual Survey of Philippine Business and Industry 2008, 2011 Philippines in Figures 7. Bangko Sentral ng Pilipinas. Selected Economic Indicators. 2000 2011. 8. National Economic and Development Authority. 2011 Midyear Economic Briefing. August 8, 2011. 9. Department of Trade and Industry. MSME Statistics. 2011. 10. Philippine Overseas Employment Administration. Overseas Employment Statistics. 2011. 11. Land Transportation Office. Number of Motor Vehicles Registered. 2008 2010. 12. XYZ Magazine. XYZ Magazine Insurance Survey 2010. 13. Asian Development Bank. Regional Road Safety Program. 2010. 14. Presidential Task Force on Climate Change. Climate Change in the Philippines. 2011. 15. International Monetary Fund. Forecasted Inflation Rates. 2011. 16. International Association of Insurance Supervisors. A Primer on Non-life Insurance Ratios. 2011. 17. Transportation Science Society of the Philippines. 17th Annual Conference. 2009.

153

18. A.M. Best. Special Report on the Philippine Life and Non-life Industry. April 18, 2011. 19. Swiss RE Economic Research and Consulting. Insurance industry led by double digit growth in emerging Asia. January 2011. 20. Pulse Asia. Graft and Corruption in Government Agencies. March 2011. 21. Philippine Daily Inquirer News. Stradcom Earned P2 Billion Using LTO Data. October 7, 2011. 22. The Manila Times. Stradcom to begin layoffs in LTO units starting September. August 29, 2011. 23. Internet World Stats. Internet Usage. 2010. 24. www.malayan.com 25. www.AIC.com 26. www.bpims.com 27. www.prudentialguarantee.com 28. www.insurance.gov.ph 29. www.census.gov.ph 30. www.XYZMagazine.com 31. www.neda.gov.ph 32. pids.gov.ph 33. www.pirainc.org 34. www.sec.gov.ph 35. www.bsp.gov.ph 36. The Philippine Star. EastWest Bank Eyes 300 Branches in 3 Years. September 2011. 37. Global Property Guide. Philippines. February 1, 2011. 38. Manila Bulletin. BSP to fast-track bancassurance approval. January 18, 2011. 39. ABS-CBN News. LTO Chief Faces New Corruption Charge. June 16, 2011. 40. Asian Development Bank. Domestic Saving Rate. 2010. 41. Philippine Star. Insurers Struggle to Meet New Capital Requirements. May 24, 2011. 42. Allianz. Economic Research & Corporate Development Working Paper. 2010. 154

XI. APPENDIX

155

ABC Insurance Corporation

PIONEER INSURANCE & SURETY CORPORATION STATEMENTS OF FINANCIAL POSITION

2010 ASSETS Cash and Cash Equivalents (Notes 4, 9, 31 and 32) Short-term Investments (Notes 5, 31 and 32 ) Insurance Receivables - net (Notes 6, 29, 30, 31 and 32) Financial Assets (Notes 7, 9, 29, 30, 31 and 32) Financial assets at fair value through profit or loss Available-for-sale financial assets Loans and receivables Accrued Income (Notes 8, 31 and 32) Deferred Acquisition Costs (Notes 10 and 30) Reinsurance Assets (Notes 11, 15, 30 and 31) Investment Properties (Notes 12) Property and Equipment - net (Notes 13 and 30) Investments in a Subsidiary and an Associate (Note 14) Net Pension Asset (Note 19) Other Assets P =462,452,815 192,091,485 755,673,249 440,808,597 4,266,208,612 38,456,203 3,838,636 126,012,884 2,563,284,499 703,442,779 1,367,528,132 151,079,781 10,806,967 65,861,310 P =11,147,545,949

December 31 2009 =516,085,344 P 194,218,119 525,602,158 424,021,598 4,297,972,274 34,526,084 1,907,815 139,879,884 1,880,021,019 519,767,570 1,297,883,976 101,079,781 16,345,851 48,214,776 =9,997,526,249 P

LIABILITIES AND EQUITY Liabilities Insurance contract liabilities (Notes 15, 31 and 32) Insurance payables (Notes 16, 29, 31 and 32) Trade and other payables (Notes 17, 31, and 32) Notes payable (Notes 18, 31 and 32) Deferred reinsurance commissions (Note 10) Deferred tax liabilities - net (Note 26) (Forward) P =3,473,952,006 827,384,758 237,354,703 135,000,000 76,030,935 288,814,101 5,038,536,503 =2,690,484,023 P 634,895,340 230,926,678 320,000,000 67,583,411 239,647,454 4,183,536,906

*SGVMC114934*

-2December 31 2009

2010 Equity Capital stock - P =100 par value Authorized, issued and outstanding - 3,000,000 shares Paid-in surplus Revaluation surplus on property and equipment (Note 13) Revaluation reserve on available-for-sale financial assets (Note 7) Revaluation reserve on available-for-sale financial assets transferred to an affiliate (Notes 7) Cumulative translation adjustments Retained earnings Appropriated for catastrophic losses Unappropriated (Note 21)

P =300,000,000 72,500,000 697,029,095 3,860,311,134 248,822,539 79,492,007 28,928,246 821,926,425 6,109,009,446 P =11,147,545,949

=300,000,000 P 72,500,000 580,353,944 3,883,060,471 200,229,307 65,990,408 28,928,246 682,926,967 5,813,989,343 =9,997,526,249 P

See accompanying Notes to Financial Statements.

*SGVMC114934*

PIONEER INSURANCE & SURETY CORPORATION STATEMENTS OF INCOME

Years Ended December 31 2009 2010 REVENUES Gross earned premiums Reinsurers share of gross earned premiums Net earned premiums (Notes 15 and 21) Commission income (Note 10) Investment income (Note 22) Foreign currency exchange gain - net Other income - net BENEFITS, CLAIMS AND EXPENSES Gross insurance contract benefits and claims paid (Notes 15 and 23) Reinsurers share of gross insurance contract benefits and claims paid (Notes 15 and 23) Gross change in insurance contract liabilities Reinsurers share of gross change in insurance contract liabilities Net benefits and claims General expenses (Note 24) Commission expense (Note 10) Interest expense (Notes 16 and 18) Provision for impairment losses (Notes 6 and 7) Foreign currency exchange loss - net INCOME BEFORE INCOME TAX PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 26) NET INCOME (Note 28)
See accompanying Notes to Financial Statements.

P =2,720,185,713 1,771,670,968 948,514,745 198,734,673 207,621,420 8,177,033 240,159 1,363,288,030

=2,299,824,733 P 1,446,919,455 852,905,278 180,792,665 182,555,725 258,382 1,216,512,050

1,660,727,583 (1,345,267,778) 803,104,815 (721,497,876) 397,066,744 393,951,735 399,356,095 14,835,116 1,706,983 1,206,916,673 156,371,357 9,055,137 P =147,316,220

1,197,398,582 (721,448,800) 837,767,021 (860,042,655) 453,674,148 370,993,051 349,351,023 16,696,052 887,911 1,191,602,185 24,909,865 (6,972,700) =31,882,565 P

*SGVMC114934*

PIONEER INSURANCE & SURETY CORPORATION STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31 2009 2010 NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) Net change in fair value of available-for-sale financial assets (Note 7) Change in revaluation surplus on property and equipment (Note 13) Change in cumulative translation adjustments TOTAL COMPREHENSIVE INCOME (LOSS)
See accompanying Notes to Financial Statements

P =147,316,220

=31,882,565 P

25,843,895 117,358,389 13,501,599 156,703,883 P =304,020,103

(78,571,344) 46,496,506 (9,822,495) (41,897,333) (P =10,014,768)

*SGVMC114934*

PIONEER INSURANCE & SURETY CORPORATION STATEMENTS OF CASH FLOWS

Years Ended December 31 2009 2010 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Depreciation and amortization (Notes 13 and 24) Interest expense (Notes 16 and 18) Dividend income (Note 22) Gain on sale of available-for-sale financial assets (Notes 7 and 22) Fair value gains on financial assets at fair value through profit or loss (Notes 7 and 22) Interest income (Note 22) Unrealized foreign currency exchange loss - net Fair value gains on investment properties (Notes 12 and 22) Operating income (loss) before changes in working capital Changes in operating assets and liabilities: Decrease (increase) in: Insurance receivables Loans and receivables Accrued income Deferred acquisition costs Reinsurance assets Net pension asset Increase in: Insurance contract liabilities Insurance payables Trade and other payables Deferred reinsurance commissions Net cash generated from (used in) operations Interest paid Income tax paid Net cash provided by (used in) operating activities (Forward) P =156,371,357 42,625,386 14,835,116 (3,939,116) (5,765,657) (11,520,909) (20,218,125) 24,801,970 (100,415,023) 96,774,999 (230,071,091) (3,930,119) (2,201,139) 13,867,000 (683,263,480) 5,538,884 783,467,983 192,489,418 6,428,025 8,447,524 187,548,004 (14,835,116) (6,488,743) 166,224,145 =24,909,865 P 40,605,463 16,696,052 (1,892,030) (1,913,087) (32,986,478) (17,987,246) (13,519,657) (65,997,600) (52,084,718) (47,266,690) (306,060) 41,026 9,484,116 (770,477,082) (7,408,939) 713,439,153 21,773,469 33,193,762 (9,411,268) (109,023,231) (16,696,052) (3,233,397) (128,952,680)

*SGVMC114934*

-2Years Ended December 31 2009 2010 CASH FLOWS FROM INVESTING ACTIVITIES Interest received Dividends received Acquisitions of/additions to: Available-for-sale financial assets Financial assets at fair value through profit or loss Property and equipment Investment properties Investment in a subsidiary and an associate Proceeds from sale/maturities of: Financial assets at fair value through profit or loss Available-for-sale financial assets Property and equipment Decrease (increase) in: Short-term investments Other assets Net cash used in investing activities CASH FLOWS FROM A FINANCING ACTIVITY Increase (decrease) in notes payable NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 4)
See accompanying Notes to Financial Statements.

P =20,699,677 3,781,044 (8,000,000) (125,180,433) (42,933,074) (904,286) (50,000,000) 110,272,798 71,320,052 1,607,448 2,126,634 (17,646,534) (34,856,674) (185,000,000) (53,632,529) 516,085,344 P =462,452,815

=18,315,703 P 1,869,652 (11,000,000) (142,158,236) (45,415,358) (7,995,000) 117,138,467 137,916,078 1,276,601 (118,212,178) 2,849,765 (45,414,506) 134,000,000 (40,367,186) 556,452,530 =516,085,344 P

*SGVMC114934*

Malayan Insurance Co. Inc.

Prudential Guarantee and Assurance Inc.

Bank of the Philippine Islands & Mitsui Sumitomo Insurance Corp.