Lonpac Insurance Bhd

FINANCIAL STRENGTH RATING

On 16 September 2009, A.M. Best re-affirmed Lonpac’s Best’s Financial Strength Rating of A- (Excellent) and an issuer credit rating (ICR) of “a-”. The outlook for both ratings is stable. The ratings reflect Lonpac’s adequate capitalisation and its ability to manage profitable growth. The ratings also recognise the Company’s wide distribution platform and sound spread of business composition.

EARLY ADOPTION OF FRS 139: FINANCIAL INSTRUMENTS – RECOGNITION AND MEASUREMENT

The Malaysian Accounting Standards Board (“MASB”) had announced its plan in August 2008 to bring Malaysia to full convergence with International Financial Reporting Standards by 1 January 2012. The move will help place Malaysia’s capital market and companies on the same level playing field with international markets. As part of a phased convergence, the MASB announced that the effective date for applying Financial Reporting Standard 139: Financial Instruments – Recognition and Measurement (“FRS 139”) will be 1 January 2010.

The Group has early adopted FRS 139 for the annual period beginning on 1 January 2009. The early adoption of FRS 139 has resulted in a change in the accounting policy relating to the classification and measurement of financial assets. The accounting policies relating to these financial assets changed from 1 January 2009 are disclosed in Notes 2(f) and 2(g) to the financial statements on pages 188 to 191.

Business Operations Review

UNDERWRITING

In 2009, Lonpac’s underwriting team continue to underwrite risks selectively. Risks that are deemed hazardous in nature such as wood base and garment industry were thoroughly assessed before accepting the risks.

In assisting the underwriters to further manage the risk underwritten by the Company, Lonpac’s risk management surveyors play an important role in conducting surveys and loss control services to assist the underwriters to have in depth understanding of the risks and at the same time provide our clientele loss prevention recommendations. We have beefed up our team risks surveyors with a majority of them having an engineering background to cater for the increase in the volume of industrial and commercial risks insured by the Company.

The use of business tools such as the Lonpac’s Business Intelligence system and the Insurance Services Malaysia (“ISM”) market intelligence system have further assisted the underwriters to understand the trend and market experience in enabling Lonpac to underwrite a ‘preferred’ risk at a ‘right’ price.

The prudential standard of risk acceptance produced positive results. Lonpac achieved higher underwriting surplus of RM97.6 million for the financial year ended 31 December 2009, an increase of RM22.6 million or 30% from RM75 million recorded last year.

The Company continued to register positive growth and the total number of policies issued for 2009 increased to 1,038,194 from 914,351 in 2008, registering an increase of 13.5%. The underwriting staff’s productivity have also improved with an average of 12,661 policies issued per staff as compared to 11,875 recorded in 2008.

Process efficiency continues to be the focus to ensure Lonpac’s customers received the highest delivery standard. This year, we have developed and launched E-Insurance immediate policy generation and printing process where Lonpac’s E-Insurance users are able to print policies at source immediately upon submitting their proposals via the web based E-Insurance system. The system not only reduces policy delivery time to the intermediaries and insureds but would also allow the option to select the relevant documents that they wish to print, thus reducing the unnecessary print wastages and at the same time be more environmental friendly.

In April 2009, we launch an enhanced E-Marine system which allows and caters for our intermediaries’ corporate clients to transact their marine insurance business directly with us. The corporate direct access reduces the work flow and waiting period. This improvement resulted in a more efficient process for the corporate clients to have their marine insurance transactions processed in an instance. Apart from the corporate client access, enhanced E-Marine system had also included a new copy function, where frequent users can use the earlier submitted electronic proposals as a template for future submission making future submission easier without the need to repeat the users data entry process.

To increase Lonpac market share for Personal Accidentinsurance business, a new Personal Accident product, FlexiCare PA was launched in May 2009. Growing marketdemands for comprehensive coverage that extend to cover children at affordable price were the theme for Lonpac’s FlexiCare PA plan. The main features of the product include coverage to insured’s children at no additional cost if both parents are insured under one policy and it provides double indemnity compensation benefits if accidental death or permanent disablement occurred outside the country.

Lonpac will continue to research and develop products to cater to the current requirements of the insuring public, both the retail consumers as well as the corporate clientele.

BUSINESS DEVELOPMENT

The financial crisis which was triggered by the subprime mortgage backed securities in the United States of America had far reaching impact on the global financial system and Malaysia’s economy is not spared from the ill effects of this unprecedental economic challenges. Despite operating in a highly competitive market its wholly-owned subsidiary Lonpac Insurance Bhd managed to achieve a higher gross premium income of RM675.2 million, an increase of 17.5% as compared to the preceeding year. Net premium income also rose from RM376.3 million to RM437.9 million or 16.4%.

In line with Lonpac’s continuous effort to provide effective and efficient services to the policyholders, brokers and intermediaries, two branch offices namely, Klang and Sibu were added to the operation. This expansion increased our network to 21 offices consisting of 3 Regional Offices and 16 branches in Malaysia, a branch in Singapore and an associated insurance company in Cambodia.

In addition to the above, the Group continues to optimize its delivery channels and introduced more value added convenience to its policyholders through:

Agency

The agency force continues to be the main distribution channel with a gross premium production of RM280 million achieved during the year under review. This represents a growth of 18.1% (RM237 million) in total gross written premium when compared against the last financial year. Total number of agents as at 31 December 2009 was 1,388.

The Masterclub, an elite grouping of agents where Lonpac recognises and honours our crème de la crème of agents, was launched in 2006 with a membership of only 16. This recognition is effective and has shown great promise as it doubled to 32 members in 2009. We shall continue to review the benefits and recognition accorded to this elite group of agents to further enhance its membership and productivity with a view to generate profitable premium income.

In this context, we have introduced three classes of Masterclub membership with effect from 1 January 2010 to motivate agents to further increase their contributions and create a differentiation in the quality of our agents. These 3 different Masterclub Membership are Titanium Masterclub, Platinum Masterclub and Gold Masterclub. This loyalty and motivational programme provides the impetus for agents to further improve their performance as benefits and rewards are directly linked to accomplishment. The Titanium Masterclub is the most prestigious elite club and is only eligible for agents who are able to achieve and maintain a minimum level of profitable premium income.

The endeavour to increase agency force is not limited to numbers but also its profitability. Lonpac has embarked on developing non-motor based agents and a well balanced portfolio business to enhance underwriting profit for the Company. We are promoting and encouraging “singleprincipal” agents, to create loyalty and cementing the partnership for a lasting mutual benefits.

Lonpac acknowledges the undeniable importance of agents as our business partners and persistently strives to arm our agents with relevant technical knowledge and soft skills to further raise their level of excellence. To meet the demand of the softening market, coupled with keen competition from other insurance companies, we provide our agents continuous trainings, seminars and workshops to face the challenges of the competitive and changing insurance environment.

The Annual Agency Convention which saw 128 agents attending was held from 24 to 26 April 2009 in Penang. The tagline “Forging Partnership” was specifically chosen as Lonpac believes that agents are its long-term business partners. The Company’s performance, mission and vision were shared with the participants and staff to synchronise the objective on working hand-in-hand. Agents fromdifferent market place were able to exchange views and ideas on customers’ needs and apply suitable strategies to increase productivity.

Moving forward into 2010, Lonpac will aggressively address strategies in anticipation of stiff competition in the fast changing insurance environment. The relentless pursuit for expansion in agency force will continue in addition to grooming current and future agents to be insurance professionals.

Financial Institutions

The Financial Institution (“FI”) Department’s premium production which is mainly derived from the Public Bank Berhad (“PBB”) Group contributed a total gross premium of RM174 million in 2009 registering a premium growth of 12.6% compared with the preceding year of RM154.5 million.

During the year, we initiated several business development strategies with PBB to maintain and enhance its insurance services to PBB’s clientele. Amongst them was the proposed attachment of Lonpac Insurance’s personnel at PBB Branches to provide sales and technical support service to PBB and our mutual customers. Our insurance personnel will provide advice to targeted SMEs/ SMIs clientele of PBB on the protection provided by a comprehensive and a professionally arranged insurance package. This provides an opportunity to Lonpac to increase premium production from both the existing mortgaged properties and related clienteles. This initiative is expected to contribute positively in the coming years.

Lonpac is also working closely with PBB’s Trade Finance, Corporate Banking & Hire Purchase Divisions to tap into various classes of insurance businesses, such as Marine Cargo for cargo shipments, Fire on commercial and industrial properties and Private Motor on hire purchases with PBB.

The reinsurance business from PBB’s partnership with Takaful Operators for the provision of syariah compliant policies for the clientele of Public Islamic Bank Bhd, a wholly-owned subsidiary of PBB, has also contributed to the premium growth of Lonpac.

Lonpac is committed to continuously provide excellent services to PBB’s customers by conducting an exercise to review the sum insured on all mortgaged residential and shop-house properties above 10 years to ensure adequacy of sum insured and also review the insurable perils for all commercial properties. These review exercises are expected to provide PBB’s customers with relevant and adequate insurance coverage providing them with peace of mind and at the same time contribute positively to FI’s fire portfolio in 2010.

Lonpac will continue to improve and enhance its delivery systems to meet the ever changing needs of its customers. More structured training programmes will be conducted in 2010 to equip PBB’s extensive base of Marketing & Sales team with technical knowledge to further compliment our service commitments to our mutual customers.

Broking

The broking market in 2009 continued to remain soft and competitive despite the implementation of the ‘Risk-Based Capital’ (“RBC”) regime by Bank Negara Malaysia (“BNM”) on 1 January 2009 to improve financial prudency & resilience in the general insurance industry. However, continued aggressive competitions from brokers, insurers and re-insurers for premium growth in a global recessionary period have added downward pressure on the general premium rates & terms in 2009. Hence, renewal premiums for most sectors of insurance businesses in 2009 continued to erode, especially for larger premium businesses under the industrial Large & Specialised Risks (“LSR”), Independent Power Plants (“IPP”), large Marine Open Cover (“MOC”) for cargoes, specialised liabilities like Directors & Officers (“D&O”) Liability and Professional Indemnity (“PI”) policies. Premiums for new large infrastructure, commercial offices & residential projects businesses are extremely competitive under the current soft market environment. Government stimulus packages designed to expand and protect the economy from the global financial crisis via large scale infrastructure related developments have yet to be materially reflected in premium growth in 2009.

Despite the difficult environment the Broking Department recorded a total gross premium growth of 29.8% in 2009 amounting to RM83.8 million compared with 2008 of RM64.6 million. Broking constitute 12.4% of the total business portfolio.

Most major renewal businesses were successfully secured though some with reduced premiums. New businesses were also successfully secured, both directly and on coinsurance sharing basis, from our broking partners in sectors such as industrial LSR risks; fire risks on hotels, resorts, residential and other commercial properties, engineering project risks, specialised D&O and PI risks, Foreign Workers Compensation Scheme and other general accident risks.

Our sterling financial position supported by international A.M. Best Co. rating of A- (Excellent) coupled with the Euromoney award as the Best Insurer 2009 in Malaysia are promoting us positively as the preferred Insurer in the general insurance market both locally and also internationally.

Our strategic affiliation with Chubb Multinational Risk Group and their Outstanding Affiliate Service Awards 2007 & 2008 are testimonies of our outstanding service standards & practices. All these international awards and affiliation have assisted us to secure large local and multi-national risks.

The broking insurance market in 2010 is expected to be more competitive and risks premiums are expected to erode further. Hence, broking business in 2010 would be very challenging and require great prudence in selection and underwriting risks from the broking market. We shall continue building on our competitive advantages in providing effective risks solutions in targeted risks sectors of insurance businesses with more selected broking partners that have good track records and share our business philosophy and practices.

CLAIMS

We are honoured to be awarded the “Best Insurer in Malaysia” by Euromoney that included the award of being “Best Insurer for Claims Resolution, Malaysia” in 2009. Such achievements were made possible through our continued commitment and drive to deliver excellent claim services to ensure legitimate claims are paid promptly and equitably.

We are committed to maintain a high level of customer satisfaction, minimising loss exposure and delivering strong operating results.

Apart from the above, we constantly ensure that claims are managed efficiently from the moment of its initial notification to the final settlement or resolution. Lonpac ensures that the process is kept as simple as possible to facilitate the smooth and efficient settlement of claims. Where necessary, cost curbing measures are implemented without compromising quality.

As the efficiency of the claims process have a direct impact on loss adjustment exposure, combined ratios and overall underwriting profitability; it is a challenge to ensure that the claims process is not undermined by cumbersome systems, labour intensive workflows and inability to respond to changes.

We always provide quick yet effective solutions to reduce the claims management cycle from the date of claims registration to settlement. The benefits would minimise expenses and claims leakages resulting in higher staff productivity and cost saving.

To achieve this, we have a team of dedicated and experienced personnel who are specialised in the various classes of insurance to provide effective advice to our policyholders/ claimants. This includes prompt attendance to customer complaints and acknowledging their feedback to help us to continuously improve our service further.

In addition, an equally important responsibility is to protect our stakeholders’ interests that require us to carry out detailed investigations into any suspicious claims to weed out fraud. Adjusters or experts in the relevant fields are engaged to carry out such investigations when necessary.

Whenever possible, we would also provide risk improvement measures to policyholders to assist them to reduce the possibility of claims. This will benefit the client as business interruptions to our clients are kept to a minimal level.

Claim processes and workflow are subjected to periodic planned audits to ensure compliance with regulations set by both the regulatory authorities as well as our own benchmark requirements.

One of our main objectives is to continuously improve our claims settlement ratio and we are constantly reviewing our claims settlement practices to achieve this. The productivity of the Claims Department is also measured by the number of claims settled per claims staff during the year. In 2009, the average number of claims settled by each claims staff was 1,036 as compared to 1,008 in 2008, indicating an improvement in our service.

CUSTOMER SERVICE

At Lonpac, great emphasis is placed on customers’ confidence and satisfaction. Towards this end, we continuously undertake initiatives to enhance customer service standards. Lonpac always maintain its excellence in customer service as a foundation of its growth strategy. The Group relentlessly endeavour to provide innovative products and services, economical pricing coupled with its commitment to continuously raise the bar of customer service standards to ensure that the Group could position itself ahead of the competitors in the competitive insurance market.

A Customer Service Centre was officially opened in 2004 as a one-stop centre which handles the insurance needs of our customers. A Complaints Unit had also been established to serve as a platform to measure customer’s satisfaction and provide fast response to the complaint.

Our E-Insurance system has enabled us and our agents to issue E-Cover Notes for the customers remotely. We have also implemented an enterprise output solution to enable digital assembly of our insurance policies and distribution via multiple distribution channels efficiently. These measures have helped us reduce the time in processing policies issuance and speed up delivery process.

Lonpac E-Assist and Home-Assist are 24-hour value added services that provide services pertaining to car breakdown and referral services on home inconveniences respectively.

In 2009, a Customer Relationship Management (“CRM”) system was launched to enhance customer service and build customer relationship for significant customer loyalty and retention. The system enables an integrated and consistent view of customer details where customer issues, requests or complaints can be managed easily.

To nurture the culture of excellence in customer service throughout the LPI Group, trainings for employees are provided on technical skills and professional development. This is to ensure that staff are well equipped with technical competencies to provide customer with professional services of excellent quality.

INFORMATION AND COMMUNICATION TECHNOLOGY

With rising expectations to be more responsive and nimble to the needs of our customers, Information and Communication Technology (“ICT”) is increasingly seen as a crucial enabler in achieving our corporate mission. Despite the economic slowdown, we continued to focus our efforts to strengthen our ICT platform through the process of enhancing and deploying new systems and technologies in pursuit of service excellence and operational efficiency.

The ICT strategies are monitored by a steering committee that examines all major projects and proposals to ensure that the business objectives are aligned and met. A committee represented by a hybrid team of senior management, audit and IT personnel is formed to review and propose recommendations in streamlining the workflow and processes of IT systems including internet web-based systems to improve efficiency and ultimately reduce costs. The internet web-based systems provide an alternative delivery channel to our agents, policyholders and prospective customers for online insurance services within a secured and user-friendly environment.

Web-based systems such as the E-Insurance system are constantly being reviewed and upgraded. Some of the initiatives undertaken are the implementation of the Foreign Worker Insurance Guarantee (“E-FWIG”) system and the Foreign Worker Compensation Scheme (“E-FWCS”) system. Intermediaries are able to print the insurance guarantee and submit proposals on foreign worker compensation scheme at their convenience via our E-Insurance system. With the enhancement on the E-Marine system, intermediaries’ clients can now access our E-Insurance system to issue marine certificate immediately and this is in line with our agents’ services improvement initiatives.

Through the immediate generation of policies system, intermediaries are now able to enjoy the benefits in printing policy schedules and other relevant documents online via our E-Insurance upon submission of the proposals.

In November 2009, we launched the fees protection scheme system for our Singapore branch. With this system, Singapore’s private education institutions are able to buy insurance to secure their students’ course fees at Lonpac Singapore’s E-Insurance website.

The Customer Relationship Management (“CRM”) system mooted in year 2008 to improve customer services and to build customer relationships for significant customer loyalty and retention was launched this year for Motor, Fire and Personal Accident classes of business. With this system, an integrated and consistent view of customer details is made available to all departments. Customer issues, requests or complaints can be managed easily where information can be entered, stored and accessed by employees in different departments. The customer database serves as a campaign activity database in which the customer contact information can be utilised for designing and executing targeted marketing campaigns.

As part of our IT strategic plan, we are embarking on building a company’s portal website (“E-Portal”) which offers a policyholders portal and a new look of the current corporate website. The E-Portal will also include workflow management, collaboration between work groups, and policy-managed content publication. Apart from providing online insurance services, the web portal will offer other services such as personalised websites for intermediaries, events calendaring, email, news and stock prices.

With the help of the Business Intelligence (“BI”) system that was first implemented in 2007, users are empowered to track, understand and manage vital business information in our operational systems, therefore providing us with a better understanding of our customers and business. Plans have been put in place to review the current requirements and upgrade the current BI tools for better performance, greater flexibility and functionality.

The branches Wide Area Network (“WAN”) is restructured by implementing dual link infrastructure to provide higher performance and scalability to support our mission critical applications which are currently running on multiple application platforms. The upgrade of Lonpac’s branches network bandwidth improves the network performance of branches network connections to Head Office in delivering the best value and reducing network congestion from occurring in the existing primary link. Users are able to enjoy optimal network bandwidth performance with better application segregation and higher speed. This dual link network infrastructure has provided better fault tolerance to the branches.

In an age of mobile technology, blackberry enterprise solution was introduced to allow the senior management team to access the corporate emails wirelessly through the use of handheld devices. This enabled the decision makers to remain responsive while on the move.

With the rapid growth of data in the Document Management System (“DMS”), a cost effective archiving system is implemented to archive the historical data from the primary data storage and move to a less expensive secondary storage. The archiving solution has the flexibility to archive data based on any specific period as required to optimise the data performance and storage size.

Continued efforts have been put in place to enhance the security and reliability of data and systems. The systems and policies are regularly being reviewed for any securities vulnerabilities and new updates. Firewalls are replaced with latest technologies integrated with intrusion prevention features to provide application and infrastructure protection at gigabit speeds to mitigate any intrusion or security breaches that may have significant impact to the business.

Our traditional web content filtering system is replaced by a more advanced web content filtering appliance to provide maximum security for our growing complex network. The new web content filtering solution implemented provides the capabilities to have full control over the internet usage, while at the same time providing web security to prevent threats for causing damage within the network. This form of control and security can effectively assure that the internet access provided to users is not misused and any access to the internet is secured.

Besides, the web content filtering appliance delivered better internet surfing speed with the help of its caching technology and high-speed antivirus/ malware scanning by reducing websites response time thus optimising the bandwidth.

The protection of data assets is critical in Lonpac as valuable data travels freely across various environments such as the removable storage devices and the USB memory sticks. In this aspect, Lonpac has implemented a scalable, enterprise-wide security solution that prevents unauthorised access to these endpoints by using strong access control and powerful encryption. The endpoint encryption solution has flexible centralised policy to provide comprehensive data protection, whilst encryption and authentication are transparent to the end user and performed with minimal performance impact, leading to no degradation in system performance.

One of the Green IT initiatives in our pipeline to implement is virtualisation across and within the data centres. The virtualisation initiatives will begin with server consolidation and extending to storage virtualisation resulting in less demand for power and space, thus removing redundancies and maximising values.

In fulfillment of our corporate social responsibility and mission, we will continue to endeavour on building a firm ICT foundation for high quality services and support within an Eco IT environment. .

Outlook For 2010

OUTLOOK FOR THE INSURANCE INDUSTRY

The performance of the insurance industry is expected to remain healthy despite the uncertainties in the financial market. The factors supporting a positive outlook for future growth in the insurance industry are in place. The stimulus package valued at RM60 billion announced by the Government on 10 March 2009 is expected to generate demand and strengthen growth prospect for the domestic economy. The supportive conditions prevailing in the international reinsurance market also augurs well for the industry. Healthy operating results underpinned by improved underwriting surplus reaped from greater economies of scale and efficient utilisation of capital provides a positive outlook for 2010.

The implementation of the Risk Based Capital (“RBC”) on 1 January 2009 continues to sharpen the focus on the need to align capital requirement with risks profile. The Capital Adequacy level serves as an indicator of the insurers’ financial resilience. This new method of measuring solvency margin has presented expanded opportunities to the insurers that are adequately capitalised. An effective risk management and good capital management plan will provide the much needed competitiveness to face the challenges ahead