Notes to Financial Statements - Administered Funds



GOVERNMENT SERVICE INSURANCE SYSTEM

ADMINISTERED FUNDS

NOTES TO FINANCIAL STATEMENTS

(All amounts in Philippine Peso unless otherwise stated)

1. GENERAL INFORMATION

The Administered Funds are the funds that the GSIS is mandated by law to administer, other than the pension fund. As enumerated in Section 34 of Republic Act (RA) 8291, otherwise known as “The Government Service Insurance System Act of 1997”, the other administered funds of the GSIS are the following:

▪ General Insurance Fund;

▪ Employees’ Compensation Insurance Fund;

▪ Barangay and Sanggunian Officials’ Insurance Fund; and

▪ Property Replacement Fund.

The General Insurance Fund is composed of the following businesses: (a) general insurance business; (b) optional life insurance business; and (c) pre-need insurance business.

A separate set of financial statements is prepared for the aforementioned funds to clearly distinguish the financial position, financial performance and cash flows of the administered funds from those of the Social Insurance Fund.

The accompanying financial statements of the GSIS were authorized for issue by the GSIS management represented by the President and General Manager and the Senior Vice President – Controller Group on 30 April 2009.

2. UPDATE ON NEW COMPUTERIZED SYSTEM

1. Integrated loans, membership, acquired assets and accounts management system (ILMAAAMS)

The ILMAAAMS is designed to handle and process all data requirements in four major areas that form the core of GSIS operations: membership, loans origination and administration, acquired assets, and accounts management. Its main objective is to have a concrete grasp on the concept of “one member view”.

The system facilitates the automatic posting of financial data to the members’ accounts on a transaction level. As a result, the GSIS has drastically quickened the pace by which it administers membership accounts from loans processing to the identification of delinquent members – by integrating its financial requirements in all processes of loan granting, premium billing, and loan and premium collection.

ILMAAAMS can integrate with the general ledger system of the FIS (FI-GL). Transactions like loan granting and collections etc are automatically reflected in the general ledger. There is seamless communication between these two systems.

At present, posting periods from January 1997 to December 2008 in the SAP are still open due to the on-going updating of members’ accounts.

2. Financial information system (FIS)

The FIS is designed to capture the recording of all the financial transactions from the source or feeder systems. These feeder systems have implementation environments different from that of the FIS subsystems. Financial data from various feeder systems are either automatically extracted and uploaded to FIS through interface program or generated in excel format known as SAP prescribed template with pre-defined accounting entries and manually uploaded to FIS through upload program.

The following are the GSIS’ feeder systems and how the data from these systems are currently fed to the FIS:

a. General insurance information system (GIIS)

GIIS is an oracle-based system application designed for the computerized processing of non-life insurance transactions for underwriting, reinsurance and claims.

The underwriting process includes issuance of certificate of cover, policy contract and bill for various lines of business such as fire, motor car, floater, marine cargo, marine hull, engineering, aviation, personal accident, miscellaneous and bonds. The reinsurance process includes the distribution of business to reinsurers, whether facultative or treaty, and the corresponding issuance of binders. Processing of claims includes recording of reported losses and the final adjustment of claims for all lines.

Once the interface program that will enable GIIS to connect to FIS becomes fully operational, accounting entries will be automatically generated and recorded in the FIS on a per transaction basis.

At present, all general insurance claims, underwriting and reinsurance transactions are uploaded to FIS through manually-prepared templates provided by the Housing and Insurance Group (HIG).

b. Technistock portfolio management system (TPMS)

The TPMS is a portfolio management solution which was customized to fit the back-office portfolio requirements of the Investment Management Office. It captures transactions involving equities as well as local and foreign fixed-income securities. It also handles accruals, maturities, amortizations of bond and premiums and mark-to-market valuations of equities. The system generates a SAP-prescribed template with predefined accounting entries in excel format for batch uploading to FIS.

c. Real and other properties owned and acquired (ROPOA) and Leasing manager

The ROPOA Manager is a system used for monitoring and recording the acquisition, administration and disposition of acquired assets covering big ticket accounts.

The Leasing Manager on the other hand, is a system that creates the records for the accrued rental receivables on occupied properties for big ticket accounts that were previously covered by cancelled DCS and occupied foreclosed properties after the expiration of the redemption period.

Both systems generate file with predefined accounting entries in excel format. The file is saved in a specified storage directory and extracted for batch uploading to FIS.

d. Claims and pensions administration system (CPAS)

CPAS is a comprehensive application system that will consolidate all information and processing requirements of members’ claim, pension, retirement and dividend under the new open system platform (SAP).

The CPAS is designed to provide online facility for inquiry, processing and computation of optional, pre-need and employees’ compensation (EC) claims. It can integrate with the general ledger system of the FIS. Completed transactions of claims and pensions will be automatically reflected in the general ledger. The CPAS Project will be implemented in 2009.

At present, all optional, pre-need and EC claims are uploaded to FIS through manually-prepared templates based on the monthly abstract of disbursed claims extracted by the ITSG from the mainframe.

The GSIS is still in a transition period due to the recent implementation of the new systems, thus the financial statements for CY2008 were prepared manually based on the readily available data from the SAP and feeder systems.

3. RECORDING OF COLLECTIONS AND DISBURSEMENTS IN FIS

1. Collections

a. Collections thru the Financial Information - Cash Desk (FI-CD) facility of ILMAAAMS

Effective October 13, 2008, all collections pertaining to loans and contributions were processed thru the FI-CD of ILMAAAMS where transactions are automatically recorded simultaneously in the general ledger and subsidiary ledger.

b. Collections thru the Cash Receipts and Management System (CRMS)

All collections pertaining to Social Insurance (SI) accounts not covered by the FI-CD, investments and other miscellaneous transactions are processed thru the CRMS. Collections done thru the CRMS are uploaded to FIS through the use of templates.

c. Collections covered by Letter of Authority (LOAs)

All collections pertaining to investment maturities and interests and all fund transfers from other bank accounts are covered by LOAs. Collections that are covered by LOAs were uploaded to FIS through manually prepared templates based on the manually processed LOAs.

Effective December 2008, all LOAs covering incoming collections were prepared in the SAP where transactions are automatically recorded in the FI-GL.

2. Disbursements

All disbursements pertaining to general insurance, investments, and other miscellaneous transactions from January to May 2008 were uploaded to FIS through manually prepared templates based on the manually-processed disbursement vouchers and LOAs.

In June 2008, the Accounts Payable (AP) Module, one of the subsystems of the FIS was implemented. The subsystem provides automated support in processing the miscellaneous disbursements of the GSIS. It generates disbursement checks and provides accounting information.

Effective October 2008, all LOAs covering miscellaneous disbursements and fund transfers to other bank accounts were prepared in the SAP where transactions are automatically recorded in the FI-GL.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Basis of preparation of financial statements

The accompanying financial statements for the Administered Funds (AF) are prepared in accordance with the Philippine Financial Reporting Standards (PFRS) and reporting practices prescribed by the Insurance Commission.

2. Cash and cash equivalents

Cash includes cash on hand and in banks. Cash equivalents are short - term and highly liquid investments with original maturity of less than three months, are readily convertible into cash and are subject to an insignificant risk of change in value. These include special savings deposits and time deposits.

3. Loans and accounts receivable

Loans and accounts receivable are stated at the outstanding balance reduced by unearned income, and allowance for estimated uncollectible accounts.

Allowance/provision for probable losses is established for estimated losses on the principal portion of private loans and receivable accounts based on management’s evaluation of the probability of collection.

4. Interest receivable

Interest income on unpaid premiums, loans and investments already earned but uncollected are recognized in the books.

An interest of two per cent per month is charged/accrued on unremitted Employees’ Compensation‘s premium contributions as of balance sheet date and classified as non-admitted assets. Income is recognized only upon collection.

5. Revenue recognition

The major sources of operating revenues of the AF are insurance premiums, interest income on premium arrearages, dividends from investments, interest income from loans, and other miscellaneous income.

Revenues are recorded using the accrual method which provides for the recognition of income in the books when earned regardless of when it is received, and expense when incurred regardless of when it is paid.

For the ECIF, income and expenses are recognized only upon collection and disbursement, respectively. Accrual on income is classified as non-admitted assets.

6. Administrative and operating expenses

This account pertains to the contribution made by the GSIS to the Employees’ Compensation Commission (ECC) and the Occupational Safety and Hazard Commission (OSHC), to be drawn from the ECIF, as its share in administrative expenses.

Investments

Investments are classified in the following categories at initial recognition based on the purpose for which they are acquired.

a. Held for trading (HFT) or Fair value through profit or loss (FVPL)

These are financial assets acquired principally for the purpose of generating profit from short-term fluctuations in price or dealer’s margin.

These are initially recorded at cost and are revalued at fair values every reporting date. Any difference between the cost and the fair value is recorded as appreciation or depreciation of the fair value of investments in the Statement of Revenues and Expenditures.

Investments in equity securities - stocks traded are classified as HFT or FVPL and as such, these are recorded at initially cost and are revalued every month-end.

b. Held-to-maturity investments (HTM)

These are financial assets with fixed or determinable payments and fixed maturities. They are carried at amortized cost using the effective interest method and are classified as non-current assets.

Investments in Foreign Currency and Peso Denominated Bonds are classified as Held-to-Maturity and as such, these are recorded at cost, duly adjusted periodically through the amortization of premiums or discounts.

c. Available-for-sale (AFS)

AFS financial assets are acquired and held indefinitely for long-term capital appreciation or are not classified as (a) loans and receivables (b) held-to-maturity investments or (c) financial assets of fair value thru profit and loss. They are included in the non-current assets unless GSIS intends to dispose of the investments within 12 months of the balance sheet date.

These assets are initially recognized at cost and are subsequently valued at fair values. Unrealized gains and losses arising from changes in fair values are recognized in equity.

d. Loans and receivables

These are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as non-current assets.

They are initially recognized at cost and subsequently carried at amortized cost, net of allowance for uncollectible accounts.

Investments in subsidiaries

The System practices the equity method in Investments in shares of stocks in which it holds at least 20 per cent ownership or where it has the ability to exercise significant influence over the companies’ operating and financial affairs.

Equity method prescribes the initial recognition of the investment at cost but subsequently increased by the share in net earnings (or decreased by the share in the net loss) and extraordinary items and prior period adjustments of the investee/subsidiary.

e. Investments in non-traded stocks

Non-traded stocks are valued at cost, net of allowance for impairment in value.

7. Investment property

Investment property pertains to land or a building or part of a building or both, held to earn rentals or for capital appreciation or both.

These consist of real property that were previously the subject of mortgage loan, individual real estate loan, commercial-industrial loan, lease-purchase agreement, or deed of conditional sale, which were either foreclosed or cancelled or dacioned by former owners in favor of the System.

a. Fair valuation model

In compliance with Philippine Accounting Standard (PAS) 40, the GSIS applies fair value model consistently on its investment property, whereby the assets were initially recorded at cost (consisting of the purchase price and any directly attributable expenditures), then subsequently valued at fair values.

Gains or losses from changes in fair values are recognized during the period in which they occur.

b. Selling price

In November 2007, the GSIS Board of Trustees thru Board Resolution No. 167 approved the computation of the new selling price of acquired housing units and lots for disposition by applying the higher of 70 per cent of the current market values (CMV) of the said acquired properties; and book value plus 50 per cent of the rental receivables of the acquired property.

8. Foreign currency translations

Foreign currency-denominated income and expenses are translated into Philippine Pesos based on the Philippine Dealing System Weighted Average Rate (PDSWAR) exchange rate prevailing on transaction dates.

Foreign currency-denominated assets and liabilities are translated into Philippine Pesos based on PDSWAR prevailing at the end of the interim reporting period. At the end of the reporting year, foreign currency - denominated assets and liabilities are translated to Philippine Peso using the exchange rate provided by the Insurance Commission.

Gain or Loss from foreign exchange transactions and revaluation of foreign currency-denominated assets and liabilities are credited to or charged against current operations.

9. Actuarial reserves

Actuarial reserve requirements for the mandated obligation of the System are computed monthly by the GSIS Actuarial Group based on certain assumptions which are in accordance with generally accepted principle of actuarial valuation.

Actuarial reserves are set up/appropriated out of the Surplus representing the accumulated earnings of the administered funds.

Non-admitted assets

Assets of the GIF like prepaid expenses, supplies and materials in stock, receivables from reinsurers and from ceding companies are classified as Non-Admitted Assets. Contingent assets arising from deficit cases of the Optional Life Insurance Business are likewise classified as Non-Admitted Assets. The foregoing classifications are pursuant to Section 179 of the Insurance Code.

Due from Reinsurers account refers to losses recoverable from reinsurance policies. On the part of the GSIS, reinsurer’s shares on losses are recognized as income and a receivable from the reinsurers.

Reinsurance premiums for all policies exceeding one year cover shall be recorded as prepaid reinsurance premium and are recorded as expense on the following year until expiry of the policy.

Starting CY 2006, all accrual on EC Fund (premium and interest) are classified as non-admitted assets.

10. Funds held in trust (FHIT)

Funds Held In Trust account of the AF consists of the following:

▪ Cash collateral for performance bonds, surety bonds, judicial bonds

▪ Premium reserve for inward reinsurance under treaty agreements

5. ACCOUNTING FOR NON-LIFE INSURANCE BUSINESS

Unearned premiums

Pursuant to the provisions of Section 213 of the Insurance Code and the Regulatory Accounting Principles and Practices (RAPP) prescribed by the Insurance Commission, the GSIS maintains a reserve for unearned premiums on its policies in force which is charged to liability. Except for marine cargo risks, such reserve is equal to 40 per cent of the gross premiums, less returns and cancellations of all policies or risks in force. For marine cargo risks, reserve is equal to 40 per cent of the premiums written during the last two months of the calendar year.

6. CASH AND CASH EQUIVALENTS

This account consists of the following:

| |2008 |2007 |

|Cash on hand and in banks |533,898,131 |594,835,954 |

|Cash equivalents - |  | |

|High-yield short-term placements (HYSTP) |4,173,231,713 |- |

| |4,707,129,844 |594,835,954 |

| | | |

7. CONTRIBUTIONS AND PREMIUMS RECEIVABLE

The account represents all premiums and contributions earned but not yet collected as at December 31, 2008, as follows:

| |2008 |2007 |

|Premiums receivable from: | | |

|General insurance business |1,494,394,161 |912,753,341 |

|Optional life insurance business |295,645,402 |98,133,070 |

|Barangay and sanggunian officials’ insurance fund |281,249,189 |281,249,189 |

|Pre-need insurance business |228,497,372 |237,376,616 |

| |2,299,786,124 |1,529,512,216 |

| | | |

1. General insurance premiums receivable

General insurance premium contributions pertain to non-life insurance covers of government properties/assets from any risk that may occur on specified period of time. These include fire and allied perils, including sabotage and terrorism, engineering insurance, suretyship and covers classified under marine and casualty.

Pursuant to Section 5 of Republic Act No. 656 (otherwise known as the “Property Insurance Fund” enacted on June 15, 1951), every government unit, except municipalities below first class, is required to insure its properties with the Property Fund against any insurable risk therein provided and pay the premiums thereon which shall not exceed the premiums charged by private insurance companies.

Premium Receivable for all policy contracts (except for Bonds, which is on a cash basis) is recognized based on the date of billing.

Premium receivable consisting of earned and unearned premiums are recorded at gross amount. Unearned premium is calculated at 40 per cent of Premium Receivable account, net of Reinsurance Expense (pursuant to Section 213 of the Insurance Code of the Philippines). This unearned portion shall be recognized as earned during the subsequent periods until expiry of the policy.

2. Optional life insurance premiums receivable

Optional life insurance premiums vary according to the classification of risks, determined as applicable by the GSIS, after considering risk factors (age, health condition, family history, occupation, moral hazard, among others) and the corresponding amount of insurance applied for.

Optional life insurance premiums are paid directly by the insured member, if retired or separated from service, or through salary deduction if still in the service.

3. Pre-need insurance premiums receivable

Pre-need insurance premiums are recognized in the books upon sale of policies. The marketing activities for this product have been stopped since 1998. Movements in the existing balance of the Pre-need premium receivable account pertain to collection and adjustments resulting from the cleansing process being done on the account.

4. Employees’ compensation insurance premiums receivable

Employees’ Compensation Insurance (ECI) is an insurance coverage compulsory for all employers, both in the public sector and the private sector. There is no employee’s share in the premium payment.

ECI premiums (income and/or receivable) represent all government employers’ monthly contribution for each of their respective employees computed at one per cent of the monthly basic salary of the covered employee or P100, whichever is lower. Pursuant to ECC Memo-Circular No. 02-04-235, dated April 11, 2002, the maximum limit of monthly contributions of the Public Sector to the ECI Fund was raised from P30 to P100 per month. This increase in premium started in January of CY 2003, per GSIS Memo-Circular No. 1-2002, dated July 15, 2002.

Starting in 2006, income is recognized only upon collection and claims are recognized as expenses only upon payment. The balance of premiums receivable forwarded to 2007 has been classified as Non-admitted assets.

Priority of payment

Beginning 2003, GSIS implements the policy of prioritization of payment on ECI claims. Prioritization necessitates the classification of agencies whether in good standing or with delinquent accounts. Agencies of good standing are given priority in the payment of ECI claims and benefits.

8. LOANS AND INVESTMENTS - NET

Total investment of the AF is composed of (1) loans and, (2) investments in marketable securities and fixed- rate debt instruments.

1. Loans

As at December 31, 2008, investment in loans is broken down as follows:

| |2008 |2007 |

|Policy loans |1,623,209,448 |1,802,263,220 |

|Private loans – net |69,298,368 |57,944,817 |

| | 1,692,507,816 |1,860,208,037 |

| | | |

2. Investments

As at December 31, 2008 the Administered Funds have investments in financial assets broken down as follows:

| |2008 |2007 |

|ROP bills |4,248,230,740 |8,055,497,088 |

|ROP notes and bonds-HTM |3,406,177,915 |2,070,703,061 |

|Stocks traded –available-for-sale |2,571,635,167 |1,327,907,246 |

|Externally managed funds-global |906,632,906 |- |

|Stock traded-held for trading |160,771,720 |253,197,012 |

|Stocks non-traded |2,143,840 |2,143,840 |

|ROP notes and bonds-HFT |- |4,001,556,432 |

| |11,295,592,288 |15,711,004,679 |

| | | |

a. Investment in externally managed funds-global

The Board of Trustees in its Resolution No. 155 dated October 25, 2007 approved the hiring of ING Investment Management (ING IM) and Credit Agricole Asset Management (CAAM) as global fund managers of GSIS with the following objectives:

▪ Assist the GSIS to invest in global financial instruments through sufficient diversification among asset classes and geographically; and

▪ Provide GSIS with consistent investment returns with capital preservation and sufficient liquidity over a three-year period.

b. Foreign-currency denominated Republic of the Philippines (ROP) bonds

The foreign-currency denominated ROP bonds in the total amount of P58.387 billion were reclassified from HFT or FVPL to HTM.

Due to the current financial crisis resulting to market volatility, the Philippine Financial Reporting Standard Council (PFRSC) has approved last October 29, 2008 the immediate adoption of the amendments to PAS 39, reclassification of financial assets from HFT to HTM.

The Bangko Sentral ng Pilipinas (BSP) came out with the Guidelines on the Reclassification of Financial Assets between categories under Circular Nos. 626 and 628 dated October 23 and 31, 2008, respectively. BSP allowed financial institutions to look back anytime between July 1, 2008 and November 14, 2008 for the purpose of selecting the effective date of their reclassification.

GSIS has selected the date August 31, 2008 to reclassify its FCY ROPs from HFT to HTM, resulted to a net unrealized gain of P0.143 million.

9. INVESTMENT PROPERTY

Investment property includes acquired assets carried at fair values broken down as follows:

| |2008 |2007 |

|Manila International Airport Terminal |6,286,340,000 |6,053,805,000 |

|Manila Hotel |2,860,959,469 |2,860,959,469 |

| |9,147,299,469 |8,914,764,469 |

| | | |

10. OTHER ASSETS

The Other Assets account is composed of the following:

| |2008 |2007 |

|Due from reinsurer |845,672,632 |779,883,089 |

|Income receivable |690,649,130 |519,053,036 |

|Notes receivable |526,110,750 |- |

|Paintings and tapestries |54,012,354 |54,012,354 |

|Accounts receivable for deficit cases |2,270,501 |2,296,997 |

|Contingent asset – COA disallowance |158,635 |158,635 |

|Other receivable – agencies with MOA |- |111,700,028 |

|Sundry accounts receivable |642,871,727 |643,278,624 |

| |2,761,745,729 |2,110,382,763 |

| | | |

11. LIABILITIES

This account is composed of the following:

| |2008 |2007 |

|Current liabilities | | |

|Claims and losses payable |1,547,612,176 |1,764,975,591 |

|Due to reinsurers |1,254,672,974 |1,008,568,312 |

|Dividend payable |153,542,011 |248,361,855 |

|Other current liabilities | | |

|Provision for unadjusted claims |1,165,458,329 |885,732,560 |

|Sundry accounts payable |226,308,628 |148,947,414 |

|Funds held in trust |66,490,624 |64,366,659 |

|Pre-need insurance expense payable |- |62,557,905 |

| |1,458,257,581 |1,161,604,538 |

| |4,414,084,742 |4,183,510,296 |

|Non-current liabilities | | |

|Interest payable on advances from other funds |102,355,960 |457,483,016 |

|Deferred credits |1,068,066,401 |943,497,603 |

| |5,584,507,103 |5,584,490,915 |

| | | |

Deferred credits

This account includes unearned premiums equivalent to 40 per cent of the gross premium of certain non-life policies in force of the General Insurance business.

Non-life insurance policies normally cover a period of one year. For policies whose period of coverage is more than one year, the excess on 365 days is recorded as Unearned Premiums account. This unearned portion is recognized as earned during the subsequent period until expiry of the policy.

Pursuant to the provisions of Section 213 of the Insurance Code and the Regulatory Accounting Principles and Practices (RAPP) prescribed by the Insurance Commission, the GSIS maintains a reserve for unearned premiums on policies in force. Except for marine cargo risks, such reserve is equal to 40 per cent of the gross premiums, less returns and cancellations, of all policies or risks in force. For marine cargo risks, reserve is equal to 100 per cent of the premiums written during the last two months of the calendar year.

12. RESERVES

As of December 31, 2008, the actuarial reserves requirement amounted to P17.937 billion while the actual reserves set-up was P16.519 billion or a variance of P1.418 billion.

The variance pertains to Pre-Need and Employee Compensation Insurance reserve deficiencies amounting to P0.801 million and P0.617 million, respectively.

For Pre-Need, the actuarial reserve set-up was less than the actuarial reserve requirement due to the continuous payment of claims and benefits to the policy holder claimants despite the discontinued selling and marketing of this product since 1998 which resulted to the depletion of the fund.

For ECIF, no reserve is set up for the year since the fund uses the cash basis in recording income and expenses. Reserves previously set-up were closed to surplus account.

| |Actuarial Reserve |Actual Reserve Set up |Deficiency |

| |Requirement | | |

| | | | |

| | | | |

|Pre-need business |7,660,875,356 |6,859,492,498 |801,382,858 |

|Optional life insurance business |4,894,471,535 |4,894,471,535 |- |

|General insurance business |4,765,089,271 |4,765,089,271 |- |

|Employees compensation insurance fund |616,872,065 |- |616,872,065 |

| |17,937,308,227 |16,519,053,304 |1,418,254,923 |

| | | | |

The reserves for Optional Life policies in force are computed using the mean reserve formula. This formula assumes that the entire premium for the calendar year was paid at the beginning of that policy year. The amount presented above is net of P130.286 million representing the net deferred premiums for 2008.

As at December 31, 2008, Reserves for the General Insurance Business consist of the following:

| | |Amount |

|Reserve for losses | |1,044,736,921 |

|Reserve for contingencies | | |

|Contingencies |3,643,016,063 | |

|Additional Reserve for contingencies |77,336,287 | |

|Total Reserve for contingencies | |3,720,352,350 |

| | |4,765,089,271 |

| | | |

As at December 31, 2008, additional reserve for contingencies amounting to P77.336 million is set-up to provide for probable losses from litigations involving the general insurance business broken down as follows:

| |Amount |

|United Overseas Bank of the Phil. Vs. Teledyne and GSIS | 57,000,000 |

|RP v. Western Guaranty Corp. v. GSIS |8,336,287 |

|Malayan Towage and Salvation Corp. v. NPC and GSIS |5,000,000 |

|Hon. Reyes, etc. and Pan United Shipyard v. GSIS |3,300,000 |

|Liquigaz Phil. Corp. v. Laguna Gas, GSIS, et. Al |3,000,000 |

|Marcelia Iturralde v. GSIS |500,000 |

|Alex Siasoyco v. PNB and NASECO, et al |150,000 |

|Philbert Iturralde v. GSIS |50,000 |

| |77,336,287 |

| | |

13. PRF SINKING FUND

This account consists of the amount appropriated and remitted by the National Government for the restoration of damaged government properties. The Fund shows negative balances of P857.050 million in 2008 and 2007. Said balance includes claims for losses amounting to P884.537 million in 2008 and 2007.

14. REVENUES FROM INSURANCE - NET

This account is broken down as follows:

| |2008 |2007 |

|Revenue from insurance | | |

|General insurance premium |4,615,981,961 |4,479,594,859 |

|Employee compensation insurance premium |1,829,417,451 |2,160,335,388 |

|Optional insurance premium |877,393,435 |733,373,436 |

|Commission on reinsurance |208,058,943 |207,377,269 |

|Pre-need insurance premium |7,765,701 |25,923,260 |

|Interest on premium arrearages |2,087,041 |12,656,080 |

|Gain/(Loss) on foreign exchange |(6,582,962) |2,816,232 |

| |7,534,121,570 |7,622,076,524 |

|Insurance expenses | | |

|Reinsurance expense |2,717,657,291 |3,028,860,562 |

|Extra remuneration |31,154,060 |59,569,861 |

|Commission expense |22,712,901 |11,779,131 |

|Loss on foreign exchange |388,394 |- |

|Bad debts expenses |- |179,320,551 |

|Pre-need insurance expense |- |- |

| |2008 |2007 |

| | | |

|Recovery/Collection fee |- |1,525,800 |

|Service fee |- |334,747 |

|Other insurance expense |2,729,467 |3,261,778 |

| |2,774,642,113 |3,284,652,430 |

| |4,759,479,457 |4,337,424,094 |

| | | |

15. REVENUES FROM LOANS AND INVESTMENTS - NET

This account consists of the following:

| |2008 |2007 |

|Loans | | |

|Interest on policy loans |142,686,358 |234,519,127 |

|Service income |7,374,788 |11,668,955 |

| |150,061,146 |246,188,082 |

|Investments | | |

|Interest on advances to/from funds |934,290,975 |586,930,910 |

|Interest on ROP notes and bonds |931,015,256 |692,994,477 |

|Gain on sale of stocks |711,578,075 |6,764,571 |

|Interest on ROP bills |571,259,237 |513,579,213 |

|Gain/(Loss) on foreign exchange |356,664,064 |(21,608,380) |

|Gain/(Loss) on sale of bonds |(6,575,081) |25,100 |

|Unrealized gain/(loss) – Held for trading |(18,298,430) |(725,249,373) |

|Dividends on stocks |3,621,369 |32,621,327 |

|Other Investment revenue |195,442,370 |31,613,529 |

| |3,678,997,835 |1,117,671,374 |

|Investment expenses | | |

|Interest on advances to/from funds |579,163,919 |- |

|Expenses on eCard |- |2,421,559 |

|Investment fees and others |- |500 |

|Provision for probable losses |- |188,916,685 |

| |579,163,919 |191,338,744 |

| |3,249,895,062 |1,172,520,712 |

| | | |

16. REVENUE FROM INVESTMENT PROPERTY

This account consists of the following:

| |2008 |2007 |

|Rental from Investment Property |24,000,000 |23,911,458 |

|Gain/(Loss) on valuation of Investment Property |232,535,000 |- |

| |256,535,000 |23,911,458 |

| | | |

17. OTHER REVENUES

This account consists of the following:

| |2008 |2007 |

|Interest on savings deposits |2,309,603 |72,982 |

|Loss on recoveries |1,715,491 |7,036,200 |

|Service income |84,659 |3,860,189 |

|Interest on other receivables |- |8,698 |

|Others |348,940 |4,896,963 |

| |4,458,693 |15,875,032 |

| | | |

18. CLAIMS AND LOSSES PAID

This account consists of the following:

| |2008 |2007 |

|Optional Life Insurance |385,652,560 |656,643,603 |

|Pre-need Insurance |253,444,999 |210,220,170 |

|Employee Compensation Insurance |46,565,916 |65,879,355 |

|General Insurance |363,535,088 |659,940,461 |

| |1,049,198,563 |1,592,683,589 |

| | | |

19. GSIS FEES AND COMMISSIONS

This account consists of the following:

| |2008 |2007 |

|Marketing commission |1,098,675,079 |1,042,593,659 |

|Administration fee |979,166,878 |680,185,635 |

|Management fee |182,941,745 |216,008,464 |

| |2,260,783,702 |1,938,787,758 |

| | | |

Pursuant to Board Resolution No. 49 of CY 2004, the Social Insurance Fund is entitled to administration fee, marketing commission and management fee being the administrator of the General Insurance business (GI), the Optional Life Insurance business (OLI), the Pre-Need business (PN), and Employees Compensation Insurance Fund (ECIF), as follows:

▪ Ten per cent administration fee based on the three businesses’ respective gross income;

▪ Ten per cent management fee on ECIF based on its total premium collections; and

▪ Twenty per cent marketing commission based on gross premium earned of GI business and OLI business.

20. ADMINISTRATIVE AND OPERATING EXPENSES

This account consists of contributions to other government offices amounting to P36.700 million in 2008 and P39.179 million in 2007.

21. EXEMPTION FROM TAX

Pursuant to Section 39 of RA 8291, the GSIS, its assets, revenues including all accruals thereto, and benefits paid are exempted from all taxes, assessments, fees, charges or duties of all kinds.

22. NON-ADMITTED ASSETS

Pursuant to Section 179 of the Insurance Code certain assets are classified and presented as non-admitted assets which consist of the following:

| |2008 |2007 |

|Due from reinsurers |345,306,563 |345,306,563 |

|Prepaid expenses |10,353,174 |12,641,212 |

|Due from ceding companies |103,943 |103,943 |

|Contingent asset – deficit cases |81,286 |81,286 |

|Suspense account |(67,667,446) |(67,667,446) |

| |288,177,520 |290,465,558 |

| | | |

Due from Reinsurers refer to losses recoverable from insurance companies. On the part of the GSIS, reinsurer’s shares on losses are presented as contra claims expense account and a receivable from the reinsurers.

Prepaid expenses refer to the unexpired portion of the premiums on the excess-of-loss insurance cover provided by a private insurance company under an excess of loss treaty agreement. This is an insurance cover for the retention of the GSIS. Paid reinsurance premiums for all policies exceeding one year cover shall be recorded as prepaid reinsurance premium and are recorded as expense on the following year until expiry of the policy.

23. CONTINGENT LIABILITIES

At present, there are lawsuits and claims against the GSIS that are either awaiting decisions by the courts or are subject to settlement agreements.

Reserve for Contingencies for the General Insurance business has been increased in December 2008 by as much as P77.336 million to provide for probable losses from litigations involving the general insurance business.

24. EVENTS AFTER THE BALANCE SHEET DATE

On March 30, 2009, the GSIS experienced the first crash of its database management system software or the IBM-DB2 software, in its unstable, corrupted state. The second incident occurred on April 2, 2009. The GSIS experienced eight system crashes in two months. About 90 per cent of the GSIS’ operations were adversely affected by the crash. Thousands of loans and claims of GSIS members could not be processed, membership records could not be updated, transactions could not be recorded, and a sizeable data in the GSIS database were either corrupted or lost temporarily. During system crashes, the G-W@PS kiosks were rendered off-line. The GSIS has suffered at least P5 billion in actual damages as a result of the system crashes.

On June 3, 2009, the GSIS filed a civil case against IBM Corporation, IBM Philippines and Questronix Corporation as it asked the court to order these companies to pay the GSIS the amount of P100 million in damages.

The GSIS has implemented various measures for data recovery and upgraded its back-up systems. The GSIS has assured all its members and pensioners that the integrity of all its data has not been compromised. For every step of a process, records are preserved and kept in perpetual storage. The GSIS is currently implementing migration to Oracle database system software.

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