2018 Nat Re Chairman’s and CEO’s Message to Stockholders

Dear stockholders,

It is our pleasure to present to you the financial statements and achievements of your Company Nat Re for the year 2018 under the leadership of your new President and Chief Executive Officer, Mr. Allan Santos. This year is particularly noteworthy for your Company as we celebrated forty years of Nat Re serving as a partner for growth of the Philippines’ insurance industry.

To put some context behind our performance in this milestone year, allow us first to report on developments in the Philippine national economy and the domestic and international reinsurance and insurance sectors.

The Philippines’ GDP expanded 6.2% in 2018, outpacing the growth of most ASEAN nations, India, and China. The economy’s expansion was once again driven by the boom in the industry and service sectors, and the national government’s spending on infrastructure. Under the P8-9 trillion Build Build Build program which runs until the year 2022, the government has lined up seventy-five big-ticket infrastructure projects to help promote interconnectivity, generate jobs, and spur greater growth.

While our economy’s performance was bright in 2018, the reinsurance industry globally did not fare as well. Fitch Ratings determined 2018 to be a challenging year for the industry, particularly non-life, due to high losses from catastrophes, competitive premium rates, and an unfavorable interest rate environment. Globally, 2018 turned out to be the fourth most costly year for the insurance industry with cyclones in the US and Japan, the earthquake in Indonesia, and wildfires in California contributing to worldwide losses. The year 2018 also marks the third consecutive year of catastrophe losses exceeding USD200 billion.

Philippine insurers were not spared from large losses. Natural disasters such as super typhoon Mangkhut (Ompong) and several large fires in commercial establishments inflicted substantial losses on our non-life industry.

However, despite 2018 being very costly for insurers, we are pleased to report that Nat Re delivered favorable operating results. Through more prudent underwriting and risk management, we minimized the negative effects of the year’s biggest natural catastrophes.

We are pleased to report that in 2018 we generated P149 million in net income, an 80% increase over 2017; this marks our fifth straight year of delivering positive net income. These results are on the back of underwriting profit of P153 million, making 2018 our fourth straight year of positive underwriting profits. Financial results were also buoyed up by P389 million in realized investment income, up 53% year-on-year despite a volatile period for the global economy and the financial industry.

We recorded a total combined ratio of 108%, higher than last year’s due to a slightly elevated technical combined ratio. However, we registered an expense ratio of only 14%, the lowest your Company has had in the last five years.

For 2018, our top-line figures also improved and even exceeded their targets. Gross written premiums totaled P3.68 billion, up 15% from 2017, while net written premiums reached P2.58 billion, growing at 9.0%.

Our net worth of P4.8 billion as of end-2018 is significantly higher than the Insurance Commission’s minimum requirement of P3.0 billion by the end of 2022. Our Capital Adequacy Ratio as of the end of the year was 288%, well-beyond the 100% minimum required by the regulator.

The credit rating agency A.M. Best rated your Company’s Enterprise Risk Management “Appropriate”, recognizing that our risk management capabilities have strengthened in recent years. To build our capabilities further, we launched a Risk and Control Assessment exercise, a process for us to better understand our operating environment, and identify, assess, mitigate, and monitor our risks and controls.

On governance, the Institute of Corporate Directors recognized Nat Re as among the top-performing Philippine publicly-listed companies under the 2017 ASEAN Corporate Governance Scorecard (ACGS). Less than 20% of the two hundred and forty-five companies listed on the local bourse were given this prestigious recognition for exemplary corporate governance practices.

This year, we infused valuable talent into almost every level of our organization. The Nat Re Board appointed Allan Santos as the new CEO, Christian Ladoux as the Chief Underwriting Officer, and Tisha Darvin as the Head of Data Administration and Analytics. Mr. Ladoux oversees the life and non-life reinsurance business lines while Ms. Darvin oversees the pricing, reserving, capital modelling, catastrophe risk management, and data administration functions. We also hired two members of the analytics team, three underwriters, and an internal auditor.

Non-life gross written premiums expanded 15.6% to P2.6 billion owing to our fast-growing foreign business. We have improved our bottom line by exiting or reducing shares in unprofitable treaties and growing the proportion of profitable non-fire lines from 49% to 57% of our non-life domestic portfolio.

Overall, we now have a portfolio heavily weighted towards more profitable treaties from small and medium-sized companies with relatively lower catastrophe exposures. To improve our geographic diversification, we entered into a reciprocal arrangement with an A-rated global reinsurer where we are able to participate in their treaties covering risks all over the globe.

Our non-life team pursued other initiatives which well positions our non-life business for future profitable growth. We signed a bond treaty with a global reinsurer which will allow Nat Re to tap into the growing demand for bonds capacity in the Philippines. We also initiated discussions with industry representatives on the creation of the first reinsurance facility for sabotage & terrorism insurance.

Gross written premiums from our life business breached the billion-peso mark in 2018. This represents a 13.4% growth from a year ago and is almost double the premiums we generated four years ago. This expansion was driven by the fast growth of mortgage redemption insurance, credit life and employee benefits, and by our deliberate efforts to serve mutual benefit associations and cooperatives and to better support inclusive insurance. A notable milestone this year is our treaty with an Egyptian life insurance firm, which is our first direct life reinsurance transaction outside the Philippines in more than a decade. Our life business also ended the year with strong bottom-line figures, with underwriting income exceeding P200 million.

We continued to develop value-added services for our life clients and launched the Nat Re Online Risk Manual, the first and only web-based life underwriting tool that accounts for unique Philippine market conditions. We also offered various training seminars on underwriting, claims, and pricing.

Both our life and non-life teams organized Nat Re’s 4th Annual Technical Forum, or ATF, which was again very well-received. Attended by over a hundred representatives from our client companies, the ATF was an avenue for discourse on the emerging agriculture, sabotage & terrorism, and financial lines and on the global and local trends on medical insurance. We also hosted our CEO Forum which encouraged discussions on talent and technology among CEOs and Chairpersons of our client companies.

Nat Re’s support divisions continued to provide invaluable support to our business units.

We enhanced our performance management system and developed a performance-based incentive program. We implemented new communication channels as well to encourage more open communication between employees and senior management.

We bolstered the operational efficiency of our life reinsurance division by implementing SICS, a globally standardized, end-to-end solution for assumed and ceded reinsurance administration. We also improved the efficiency of our cash collections, leading to cash and cash equivalents reaching P1.16 billion, almost double that of 2013.

Lastly, we completed your Company’s rebranding and unveiled the new Nat Re brand, a tangible representation of our new aspirations for Nat Re.

As the country’s national reinsurer, we understand the important part we play in the development of the Philippines’ insurance industry. With this in mind, we pursued various initiatives in 2018 to further deliver on this very important role.

We formally launched the Oasis project which will develop the first open-access catastrophe model for flood in the Philippines. Nat Re is the project manager of this pioneering project, which involves stakeholders from industry, the academe, and government.

The Board of Trustees of the Philippine Insurers and Reinsurers Association, or PIRA, also elected Nat Re CEO Allan Santos as its Chairman for 2019, providing another avenue for us to play a more impactful role in pursuing industry initiatives. To foster collaboration among reinsurers in ASEAN, our CEO also chaired the first Reinsurance Working Committee meeting of the ASEAN Insurance Council or AIC.

We re-evaluated our corporate social responsibility priorities and decided to engage new partners. This year, for instance, we co-funded the development of the earthquake alert mobile application of the AIC’s Catastrophe and Risk Management in ASEAN (CARMA).

We are very proud of our achievements in 2018. Our gains challenge us to see how we can achieve more in the coming years.

Moving forward, we will set our sights on stepping up as the Philippines’ national reinsurer. We will foster stronger relationships with our clients, especially the domestic insurance companies, and endeavor to deliver relevant reinsurance solutions and value-added services. We will aim to develop profitable growth opportunities in the domestic market by developing new products and by maximizing our entitlement to a 10% mandatory offer. We will also create reinsurance facilities for the sharing of risks within the local industry, thereby increasing national retention and improving self-reliance.

To allow us to better manage this expected growth in our business, we will continue to develop internal capabilities and encourage a high-performance culture in our organization. We will continue to refine our pricing and portfolio management capabilities to encourage growth, reduce portfolio volatility, and lower the costs of obtaining protection for our portfolio.

As always, we thank you, our stockholders, for putting your trust in your Board of Directors, your management, and your workforce over the past forty years. We would also like to take this opportunity to thank our employees for their hard work and commitment to continue to build Nat Re.

We look forward to your continued support for our various initiatives in the coming years.