2017 Nat Re Chairperson’s and CEO’s Message to Stockholders

Dear Stockholders,

We kicked off 2017 with bright prospects for your Company, Nat Re, as prompted by these key dynamics in play.

First, we were still riding on the growth momentum of our milestone year in 2016 wherein we saw new highs in our performance brought on by big changes we made in the past four years.

Another factor was the industry experts’ encouraging outlook on the year’s reinsurance growth in emerging markets. Reinsurers in these markets, particularly those in Asia, were anticipated to propel the increase in reinsurance premiums.

The Philippines again was seen to be one of the best performers in Asia with GDP growth prospects above six percent. We deemed this to also augur well for your Company’s business as the benefits of this quick-paced economic expansion, spurred by the boost in government construction spending, were expected to spill over to the local insurance industry. In fact, the year 2017 was a remarkable one for the Philippine insurance industry with life and non-life insurance segments growing their assets, premiums earned, net worth, and paid-up capital at double-digit rates.

But even with this reassuring backdrop, Nat Re’s results were not as good as one would hope. Global insured losses from catastrophe events reached USD144 billion, the highest-ever recorded in a single year. The highest losses came from three hurricanes–Harvey, Irma, and Maria (HIM)–that struck the US and the Caribbean in quick succession. Natural catastrophes spared the Philippines in 2017 but large single fires affected the local non-life industry.

However, we were able to effectively safeguard your Company from severe losses. Because of significant improvement in our portfolio diversification and our limited exposure to US and North American risks (as compared to that of global reinsurers) we were able to minimize the effects of major disasters and deliver our fourth straight year of positive net income.

We are pleased to report that in 2017 we generated PHP50 million in net profit on the back of underwriting profit of PHP204 million due to favorable life loss experience and case reserve development.

Our combined ratio dipped slightly to 102% from 99% the previous year. However, we still outperformed most global reinsurers many times our size: they reported an average combined ratio of 107% in 2017.^[1] While many global competitors continued to release reserves, in 2017 your Company continued to increase both net premium and net claim reserves. As a result of controlled business growth we also managed to improve our expense ratio to 13%.

We recorded gross written premiums above the PHP3 billion mark and grew our net written premiums by 40% year-on-year. We also posted a total comprehensive income of PHP401 million, a reversal of the PHP54 million total comprehensive loss the year before.

We have maintained our robust balance sheet strength. We are ahead of schedule with your Company’s capital already beyond the regulator’s minimum net worth requirement of PHP1.3 billion by 2021. As of end-2017, our regulatory capital adequacy ratio was at 257%^[2] well-above the minimum set by the regulators.

We developed our leadership bench strength and welcomed Allan Santos as Chief Operating Officer to lead the standardization of systems and processes to match global best practice.

Turning now to developments in our business units, our life business’ net written premiums swelled by 49% in 2017 brought on by the growing market for mortgages, employee benefits, and investment products. By the year’s end our life gross written premiums peaked at PHP978 million. In 2017 we also added three clients to the list of those whose reinsurance programs we lead. We provided to our customers reinsurance services such as training on group life & health underwriting and pricing, and started development on Nat Re’s now operational web-based life underwriting manual.

Meanwhile, our non-life business is seeing improving profitability as we move towards balancing domestic exposures with geographically spread foreign risks. Because of our diversified portfolio we have significantly reduced our vulnerability to Philippine natural catastrophes and lessened the potential volatility of Nat Re’s underwriting results. Locally, the non-life business closed sixteen new contracts, increased shares in twenty-nine renewal contracts, and secured new overall lead reinsurer positions with two companies. Growth was tempered by prudence as 2017 also saw reduced shares in contracts with poor profit potential.

Our investments unit posted PHP255 million in realized income driven in part by the bullish equity market. We also recorded a healthy comprehensive investment income of PHP604 million in 2017, a 275% growth from the previous year.

Enterprise Risk Management strengthened, further evidenced by Nat Re’s  capital adequacy, retrocession purchases, reduction of portfolio concentration, and improved pricing and reserving.  We documented and established a risk management framework which defines our structures and guidelines and our risk appetite and tolerances.

To help our most valuable resources transform our firm into a more customer-centric organization, we conducted a comprehensive review and revision of our organizational structure, our department charters, our role profiles, our performance management system, and our employee engagement activities.  To invigorate our workforce, our human resources team continued to provide our employees with more training opportunities and bring in young blood in various units such as analytics, investments, and accounting. We are confident that our deepening bench of talent will attract even more of these individuals into our organization.

In the finance division, we streamlined the collections and accounts settlement processes which will, in the long run, improve our operational efficiency and significantly lower our risk. Since 2014 we have been cleaning up our receivables, recoveries, and payables, resulting in positive net cash flow in 2017.

We pursued an initiative to improve the Nat Re image so we can effectively convey to the public the positive changes in your Company and encourage prospective and current clients to do more business with us. One important tangible aspect of this image is our office which has undergone a total renovation. We also engaged consultants who provided helpful insight as we updated our corporate mission, vision, values, brand differentiation, and value proposition.

Here at Nat Re we believe that with our burgeoning expertise of emerging markets and the tried-and-tested practices of global reinsurance we can help our clients accomplish their roadmaps to competitiveness. This is why we endeavor to create meaningful and lasting relationships with our partners, and find ways to share with them our industry knowledge and build their capabilities.

Since 2015 we have been ensuring greater visibility to our stakeholders by conducting regular client visits and organizing fora such as our Annual Life and Non-Life Technical Forum. In 2017 we held our first ever CEO Forum where we gathered together CEOs and Board Chairs of our client companies and curated for them compelling content to aid them in their decision-making.

We amended your Company’s articles of incorporation to include among our secondary purposes consultancy, advisory, technical, and other related services in furtherance of the insurance and reinsurance business. With this we can further expand our role in the development of the industry and put our empirical knowledge to good use by taking part in (re)insurance-related partnerships. A case in point is Nat Re’s appointment as local project manager in Oasis Loss Modelling Framework’s project to create the first catastrophe model for flood in the Philippines.

Here at Nat Re we also uphold the value of sustainability, which is our profound understanding of our shared responsibility to the larger society, the national economy, and the global environment. We spent a good part of 2017 shaking hands and having discussions with key influencers in the sphere of disaster risk financing and insurance, and participating in national fora here and abroad as resource speakers. We do these to make known to our partners what we bring to the table as a good corporate citizen, and to encourage more discussions on concrete initiatives we can take.

We are also among the signatories—and the only one from the Philippines—of the global insurance industry’s first statement on marine insurance and another statement against tobacco. It is also a first to have our CEO elected as a Co-Chair of the Board of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles of Sustainable Insurance, which is a global partnership between the international organization and the finance sector. As it has been in previous years we continued supporting Gawad Kalinga on its disaster resilience efforts.

Moving forward, we will endeavor to transform your Company into a customer-centric organization. We will keep strengthening our technical expertise and leveraging the latest technology so we can operate more efficiently and deliver fast and convenient service.

We will aim to operate at global best practices so we can elevate our status as a rising reinsurer in emerging markets. We will continue to be disciplined and smart with our underwriting, increase capital allocation in high-margin lines of business, give low priority to low-margin lines of business, and improve portfolio diversification. We will work on standardizing and documenting our policies and procedures and strengthening our risk management capabilities. Ultimately, we hope to gain more recognition from international agencies and add to the PRS A Plus Rating from PhilRatings which we received in 2017.

Finally, we will diligently prepare for and carefully navigate through the volatile economic, political, and regulatory environment where reserving and capital standards are expected to be elevated and new reporting standards will be introduced.

We thank you for putting your faith in our leadership, our management, and our workforce. We see significant opportunities ahead for Nat Re and we look forward to reporting to you our progress over the coming years.