CHAIRMAN AND PRESIDENT'S REPORT

     In our collective memories here at the Malayan Group, 2006 has gone down as the year in which extreme challenges and uncertainties came from two basic fronts: natural and socio-political. On one hand there were the two devastating typhoons that hit the country, Milenyo and Reming, while on the other was the political instability brought about by the current administration’s highly contested attempt to change the Philippine Constitution.

     The Malayan Group braced itself against this backdrop and maintained its dominance as the leading non-life insurance group of companies in the country. New developments in our corporate structure have likewise strengthened our organization as a sound and stable business entity.

     Achieving success on a consistent basis is certainly no easy task, compounded as it is with the extreme volatility of our operating environment. The economy was favorable enough for business in general, more than in the last three years. Growth was pegged at 5.4%, aided by a recovery of agriculture and exports, rapid growth of remittances and tax revenue, and successive growth in manufacturing, construction and service sectors.

     Nevertheless, 2006 was a strenuous year for all of us in the industry. AM Best reaffirmed its very good financial strength rating of B++ to Malayan Insurance. Notwithstanding the non-life insurance industry garnering a “negative financial strength” outlook from Standard & Poors, Malayan Insurance was given a BB (stable) rating, reflecting the company’s strength and stability on its 76th year of operation. Standard & Poors found the Philippine insurance industry marked by inadequate capitalization and reserving, lack of industry consolidation, insufficient professional expertise, and weak regulatory environment.

     The industry too has been experiencing a persistent soft market and intense competition, characterized by continuing drop in premium rates. Fire rates, for example, fell by 20% for industrial risks to as much as 50% for some commercial and high-rise risks in 2006. In this year too, the whole industry recorded receiving less premiums while incurring greater risk exposures. Overall premium growth was a mere 8% while the gross risks covered grew by 30%.

     Compounding this difficulty was the increase in EVAT and taxes from local government such as Manila and Makati. Taxes now go as high as P.28 centavos for every one peso of premium in the case of fire insurance alone.

PERFORMANCE HIGHLIGHTS

     Faced with these uncertainties, we at the Malayan Group are focusing our energies on strengthening our resources to comply with the new and stricter capital requirements of the Insurance Commission. We welcome this move as a major step to rationalize the fragmented non-life segment, and this is essential if the industry is to grow.

    We’re pleased to report that Malayan Insurance Group generated P5.9 billion in gross premiums written last year, or 4.84% increase from 2005 figure. Our net retained premiums grew by 4.19%. Increases in our expenses, benefits and claims were offset by the significant performance of our assets.

    The most extreme challenge to the Group, arguably, came when the country was beset by two of the most destructive typhoons in recent history: Milenyo and Reming. Settling the claims proved to be extremely difficult, as a majority of clients were unable to provide the adequate claims documents amidst the harrowing devastation. Malayan even initiated unusual procedures just to facilitate payment, such as sending the head of the underwriting group and other top corporate heads to Bicol to personally hand over the insurance payments to the affected clients, all to help alleviate their suffering. This shows the lengths that we will go to, the personal touch that we are ready to perform, just to fulfill our obligations to our valued policyholders.

    On the larger corporate side of things, the Malayan Insurance and Bankers Assurance Corp. solidified its strength when it was appointed as cooperative partners of Zurich Financial Services of Switzerland. This partnership allows us now to serve the non-life insurance requirements of the local corporate clients of this global insurance group. Likewise, international accounts of Zurich Financial Services may be able to gain access to our facilities and infrastructure.

    Another significant milestone during this year in review was the creation of a single reinsurance company in the country that took place when National Reinsurance Corporation of the Philippines merged with Universal Malayan Reinsurance Corp. The new entity, National Re, is now able to gain the capital strength to anticipate strategic and competitive changes in the local and regional reinsurance markets, take advantage of increased retention and market penetration, and provide above-market returns to shareholders.

CORPORATE SOCIAL RESPONSIBILITY (Click here to view CSR images)

    In gratitude for all the blessings we continue to receive, we resolved to intensify our efforts towards helping the community and uplift the lives of our fellow Filipinos who are most in need. This is what we primarily commemorate in this year in review.

    One of our longest Corporate Social Responsibility (CSR) project, in its sixth year already, is our Street Education Project (SEP) Basic Literacy Numeracy Class. Through the efforts of our volunteer-employees, we have already made a difference in the lives of more than 130 street children. We are now pleased to report that last year, this program gained the accreditation of the Department of Education (DepEd). Through the DepEd’s Alternative Learning System, we were able to introduce educational modules that the kids need to finish for them to have the opportunity to go back to studying in a formal learning institution.

    A lot of other supportive endeavors were conducted throughout the year for the benefit of these children – ranging from donation drives, fun outings, art workshops, mini-Olympic competitions, and many other truly worthwhile projects that display the high level of caring and concern of our employees. Such acts truly make all of us proud to be part of the family of the Malayan Group.

    We also partnered with Couples for Christ for the yearlong program called Kabalikat Malayan, Pondo Kabuhayan. This is a broadrange CSR project for us because we managed to involve also our policyholders, who donated a small percentage out of the cost of their policies when they renewed their comprehensive fire and motorcar insurance. Done on a quarterly basis, the donation amounted to P1.3 million, which the Couples for Christ helped to support the Gawad Kabuhayan livelihood development program of Gawad Kalinga.

FOCUS ON 2007

    2007 looks set to be another good year for the Philippines, though there are several downside risks. A strong peso, accompanied by softening external demand, will impact on Philippine export growth, while domestic politics poses a threat to greater fiscal consolidation and the progress of key economic reforms. Despite these risks, the medium-term economic outlook is stable, and we expect the country to achieve average annual growth of 4.7% during our forecast period, to 2011.

    Real Gross Domestic Product (GDP) growth came in above expectations in 2006, supported by robust inflows of remittances from overseas workers and healthy foreign direct investment. We expect these inflows to remain strong, with economic growth this year further supported by higher government spending and infrastructure investment, which will help to offset the projected easing in export growth.

    In our industry, we note that the Insurance Commission’s (IC) encouragement of micro-insurance will be to our advantage as we have already made significant inroads in the rural banking sector and forged partnerships with several rural banks. We are way ahead of the competition in this respect, since we have been marketing our Todo Asenso product since 2005. This is one important avenue towards helping the IC achieve its intention of increasing the number of people who actually have insurance, from 13% of the population to 20% in the next year or so.

    Moreover, we will continue to come up with new and relevant products and identify market opportunities for further growth, ever driven as we are by the spirit of innovation, the competence, commitment and professionalism of our people, and the stability and financial strength of our organization.

    With our deepest sincerity, we thank you all – our clients, agents, brokers, employees, officers and stockholders – for another fruitful year of being the leading non-life insurance company in the country. Backed by your confidence and support, we will continue our exemplary service and realize greater returns for all our benefit.