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ANN
UAL R
EPOR
T 2005
Meritz Tower, 825-2, Yeoksam-dong,
Gangnam-gu, Seoul, Korea
(postal code 135-080)
Telephone : 82-2-3786-2114
Facsimile : 82-2-3786-2115
www.Meritzfire.com
Act on Innovation,Creating the New Paradigm
ANNUALREPORT 2005
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Shareholder Information
Establishment October 1, 1922
Head Office Meritz Tower, 825-2, Yeoksam-dong, Gangnam-gu, Seoul, Korea
(postal code 135-080)
Tel.82-2-3786-2114, Fax.82-2-3786-2115
Website www.meritzfire.com
Paid in capital KRW 42.9 billion
Total number of stocks 85,800,000 shares
Investor Relations Investor Relations Department
Tel. 82-2-3786-1037, Fax. 82-2-3786-1040
Status of Affiliates
Acquisition date Equity ratio(%)
Meritz Securities Nov. 24, 2005 28.78
PT. Asuransi Hanjin Korindo Nov. 18, 1998 51.00
Contents
01 Who We Are and What We Do
02 Financial Highlights
04 A Message to Shareholders
07 Board of Directors
08 Commitment to Our Stakeholders
16 Building Strong Momentum
17 Management Goals for FY2006
18 Meritz Fire Core Management
23 Business Overview
34 Financial Section
35 Management’s Discussion & Analysis
45 Financial Statements
54 Notes to Financial Statements
109 History in Brief
110 Organization
111 Shareholder Information
Who We Are and What We Do
Act on Innovation, Creating the New Paradigm
Meritz Fire and Marine Insurance, Korea’s oldest non-life insurer, has enjoyed steady growth over its 84-year-long history,
while being fully committed to satisfying the varied needs of our customers and promoting the welfare of society overall.
Recently, the Company adopted a new CI to create the positive momentum to establish itself as a new industry leader in
response to the new economic paradigms of accelerating globalization and market liberalization. Furthermore, we are
now housed in our Meritz Fire headquarters in Gangnam, a prime business and residential district of southeast Seoul,
thereby laying the groundwork for another takeoff. We will thus persevere in our efforts to remain at the forefront of the
non-life insurance sector, while striving to maximize customer satisfaction.
Establishing a Solid Profit StructureStrong and stable Inspired by customers An eye for the future
www.meritzfire.com1
Financial Highlights
*Par value was changed from KRW 5,000 to KRW 500
as a result of 10:1 stock split as of February 2006.
Financial Highlights 2
(KRW in billions)
Total Assets
FY2003 FY2004 FY2005
2,332
2,676
3,110
(KRW in billions)
Direct Premiums Written
FY2003 FY2004 FY2005
1,5441,695
1,877
(KRW in billions)
Net Income
FY2003 FY2004 FY2005
2021
26
200
150
100
FY2003 FY2004 FY2005
12.011.011.5
193.1179.1185.5
106.3105.3106.2
Solvency Margin Ratio(%) Combined Ratio(%)
Adjusted ROE(%)
50
200
150
100
Jul.1, 2005Apr.1, 2005 Oct.1, 2005 Jan.1, 2006 Mar.31, 2006
230.81
186.11
138.47
Meritz Fire
Non-Life Insurance Industry
KOSPI
Relative Stock Performance to KOSPI (2005. 4. 1 ~ 2006. 3. 31)
50
300
250
350
(KRW)
Share Price
FY2003 FY2004 FY2005
1,7301,980
4,570
(KRW)
BPS
FY2003 FY2004 FY2005
3,438
3,9074,092
Earned premiums written \ 1,604 \ 1,392 \ 1,204 $ 1,644
Direct premiums written 1,877 1,695 1,544 1,923
Net premiums written 1,593 1,413 1,208 1,632
Incurred losses 1,315 1,147 984 1,347
Net operating expenses 391 321 298 401
Net increase in catastrophe reserve 12 12 11 12
Underwriting income (114) (87) (88) (117)
Investment income 150 126 120 154
Operating income 36 38 32 37
Non-operating income (3) (12) (3) (3)
Net income 26 21 20 27
Adjusted net income(1) 38 33 31 39
Total assets 3,110 2,676 2,332 3,187
Invested assets 2,555 2,260 2,027 2,618
Non-invested assets 555 416 305 569
Total liabilities 2,880 2,449 2,134 2,951
Total shareholders’ equity 230 227 198 236
Net assets \ 351 \ 335 \ 295 $ 360
DESCRIPTION FY2005 FY2004 FY2003 FY2005(2)
(1) Adjusted net income = Net income + Net increase in catastrophe reserve
(2) Korean won amounts for FY2005 are converted into U.S. dollars at \ 975.9 per US$1.00, the basic exchange rate of Mar. 31, 2006.
KRW in billions US$ in millions
www.meritzfire.com3
I am very pleased to report that the Company achieved strong
financial results in FY2005, while at the same time building positive
momentum for our sustained growth in the years ahead.
As we look back at FY2005, it was in many respects the most
momentous year of the company’s 84-year history. Meritz Fire &
Marine Insurance carried out a full-scale overhaul of both
“hardware” and “software” sides of our operations, enabling us to
respond more effectively to the evolving business environment and
move ahead in our effort to build a better future.
To leverage our hardware strengths, we changed our name from
Oriental Fire & Marine Insurance to Meritz Fire & Marine
Insurance, moved our headquarters to Gangnam, the business and
residential center of southern Seoul, and acquired Meritz
Securities as a subsidiary. Through these moves we have
Through our core management ideals - “ethical management, customer satisfaction management,
employee satisfaction management, sharing management and profit-based management” - we remain
strongly committed to maximizing corporate value and shareholder returns.
A Message to
Shareholders
A Message to Shareholders 4
President & CEO
Myung-Soo, Wohn
established a strong platform for a new take-off.
Meritz Fire & Marine Insurance also employed aggressive measures
to upgrade “software.” With profit-driven growth as our core
management strategy, we initiated internal reforms to consolidate
our financial strength. Moreover, to maintain the highest global
standards in our management practices, we have fully implemented
ethical and transparent management initiatives that will improve
performance.
The change and innovations we have implemented in FY2005
include the creation of the Marketing Division to enhance insurance
operations, strengthening CRM programs, realignment of
distribution channels, and upgrading IT infrastructure. At the same
time, we streamlined our organization to maximize efficiencies,
while developing new management strategies tailored specifically
for each business line.
Meritz Fire & Marine Insurance declared ethical management as
our guiding management philosophy at a management strategy
meeting attended by all Company officers. In reinforcing internal
controls, we introduced an advanced accounting management
system which would yield more practical results.
These innovative measures helped Meritz Fire & Marine Insurance
turn in an excellent performance for FY2005. Direct premiums
written expanded 10.7% in FY2005 over a year earlier to KRW 1,876.9
billion. Although commercial and motor coverage, which was
expected to record low profitability, slowed due to prudent
underwriting policies, profitable long-term lines recorded an
impressive 28.1% increase, resulting in the industry’s highest
growth rate in this segment for two consecutive years.
Furthermore, net income rose 25.1% (KRW 5.3 billion) year-on-year
in FY2005 to KRW 26.4 billion, comparing favorably with a 5.5% rise in
FY2004. As a result, return on equity improved 1.0 percentage point
to 12.0%.
In FY2005, our asset segment continued its brisk performance of
previous years, with total assets and invested assets rising 16.2%
and 13.0%, respectively, amounting to KRW 3,110 billion and KRW
2,554.6 billion. Adjusted shareholders’ equity grew 4.8% (KRW 15.9
billion) over the previous year to KRW 351.1 billion. Of special note,
our solvency margin ratio - one of the key indices for measuring a
non-life insurer’s financial soundness - surged 14.0 percent points
in FY2005 over a year earlier to 193.1%.
www.meritzfire.com5
A Message to Shareholders 6
Our improved financial status was duly recognized by the securities
market and reflected in the stellar performance of Meritz Fire &
Marine Insurance stock during the year. As of FY2005 year-end, our
share price had soared 130.8% to KRW 4,570 from KRW 1,980 at the
end of the previous fiscal year, exceeding the industry’s average
growth rate of 86.7%.
By product line, the company recorded strong growth in profitable
long-term lines in FY2005 amidst intense market competition. We also
made major strides in expanding distribution channels through
business alliances with the Seoul Metropolitan Government, home
shopping outlets and convenience stores, as well as commercial banks.
In the area of auto coverage, where profitability has lagged in recent
years, our focus was on profit-oriented growth, which involved
reinforcing underwriting and patrol services for auto policyholders.
This led us to overcome unfavorable market conditions and
strengthen our profit base.
In FY2006, Meritz Fire & Marine Insurance will harness best
practices and innovative marketing strategies to achieve maximum
profit growth. As part of our overall management goals for the year,
we will upgrade agency management and revise marketing
strategies, such as beefing up target marketing aimed at small and
medium-sized commercial and industrial customers. By
institutionalizing “no-default sales” to ensure policyholders fully
understand and consent to the terms of their contracts, we expect to
further enhance our management transparency and competitive
strength.
In the year under review, our priority was to develop strategies and
measures in response to the evolving business environment. This year
we will put these into practice and pursue the limits of our potential.
Through our core management ideals -ethical management,
customer satisfaction management, employee satisfaction
management, sharing management and profit-based
management- we remain strongly committed to maximizing
corporate value. In so doing, I wish to thank you for your continued
interest and support.
MMyyuunngg--SSoooo,, WWoohhnn
President & CEO
Company headquarters is now housed in
MERITZ TOWER with adoption of new CI.
www.meritzfire.com7
Board of Directors
EXECUTIVE DIRECTORS
NON-EXECUTIVE DIRECTORS
�Myung-Soo, Wohn
- President & CEO
- Senior Managing Director & CIO of
Samsung Fire & Marine Insurance
- Senior Managing Director & COO of PCA
Life Insurance
� Joong-Gwan, Oh
- Auditor General
- Chief of the Bureau of Consumer Protection
at Financial Supervisory Service
- Team manager of the Bureau of Settlement
at the Consumer Protection Center
� Hyung-Jun, Kim
- Outside Director
- Senior Managing Director at Winnet
Ventures, Inc.
- Consulting Director at Deloitte
- Korea Partner of IBM Business Consulting
& Service
� In-Joon, Kim
- Outside Director
- Director of Jeil Products Ltd. / CEO of IFS
Co., Ltd.
- Professor at the Graduate School of
Management in Korea Advanced Institute of
Science & Technology
� Jae-Won, Shim
- Outside Director
- Chief of the Department of Non-life
Insurance at the Insurance Supervisory
Board
- Standing auditor at Lucky Life insurance
company
� Sung-Chul, Hong
- Outside Director
- Incumbent CEO of ‘BestHome’
- CEO of Seoul F&B
� Jung-Ho, Cho
- Chairman
- Incumbent Chairman & CEO of Meritz
Securities
8
Establishinga SolidProfitStructure
Sustaining profitable growth
Commitment to Our Stakeholders
www.meritzfire.com9
16%DOUBLE-DIGIT TOTAL ASSET GROWTH
In FY2005, the Company’s net income recorded a robust 25.1% growth, which
enabled the Company to improve its return on equity (ROE) to 12.0%, marking a
1.0 percentage point gain over the previous year, despite challenging industry and
marketing conditions.
12.0%ADJUSTED RETURN ON EQUITY
10
Enhanced asset soundness
Strong and stable
Commitment to Our Stakeholders
www.meritzfire.com11
The Company’s solvency margin ratio improved a significant 14.0 percentage
points in FY2005 over the previous year to 193.1%, clearly confirming
our sound financial structure.
193.1%SOLVENCY MARGIN RATIO
12
Reaching new heights
Inspired bycustomers
Commitment to Our Stakeholders
www.meritzfire.com13
Meritz Fire focuses on maximizing customer satisfaction by development of new,
innovative products tailored to the evolving needs of customers. The Company’s
long-term lines recorded a 28.1% growth rate in gross premiums written, the
industry’s highest growth rate in this segment.
28.1%LONG-TERM LINES GROWTH RATE
14
An eye for the future
Opportunities of Blue Ocean
Commitment to Our Stakeholders
www.meritzfire.com15
The share price of Meritz Fire closed at KRW 4,570 on March 31, 2006,
representing a dramatic year-on-year surge of 130.8%, which was 1.5 times
better than the insurance industry’s average growth of 86.7%. In FY2006,
Meritz Fire will strive to enhance its entrepreneurial value.
130.8%SHARE PRICE INCREASE
Building Strong Momentum
LAUNCH OF MERITZ FIRE’S NEW CORPORATE IDENTITY
“MERITZ” combines “MERIT” which signifies excellence, merit, and
benefit, with a “Z” to form a stylized plural of MERIT. Overall,
MERITZ refers to an ideal business enterprise that creates an
abundance of value for its stakeholders, including customers,
shareholders, and employees.
Meritz Fire, therefore, refers to an enterprise that possesses a
wealth of knowledge and expertise about the insurance business,
offers high-quality products and services to its customers, and
diligently promotes the interests of its stakeholders and society
overall, along with contributing much to sound advancement of the
insurance industry.
The red bar of the Company logo signifies our ardent passion and
pioneering spirit. The white dot above the letter “I” highlights our
Insurance business as well as our International and Innovative character.
The logo lettering is written in bold type to express security and
reliability, the most essential components of an insurance firm.
NEW BRAND IDENTITY
Meritz Fire has developed “Ready,” as its service brand, to reinforce
the Company’s brand identity and value, in conjunction with the
launch of our new corporate identity (CI).
“Ready” reflects our management’s steadfast commitment to its
customers, the Company’s most valuable asset. Currently, our auto
insurance line is promoted under the “Readycar” brand, which
includes roadside emergency service.
The “R” of Ready signifies an array of ways to assure safety through
the resolution of whatever difficulties that might arise. The branding
is utilized in all media and related materials to communicate a
cohesive message. EXCELLENCE MERIT BENEFIT
MERITZ refers to an excellent enterprise that
provides an abundance of value to stakeholders,
including customers, shareholders and employees.
Building Strong Momentum 16
Management Goals for FY2006
MAXIMIZING OPERATIONAL EFFICIENCY
Meritz Fire’s management goals for FY2006 emphasize the
implementation of optimal practices and innovative marketing
strategies to maximize profitability and sound growth. The Company
seeks to optimize operational efficiency through prudent allocation
of management resources, while pursuing customer-driven
initiatives based on an in-depth understanding of the varied needs of
customers. Furthermore, the Company’s distinctive competitive
advantages will be reinforced by capitalizing on our innovative
corporate culture.
First, for the prudent allocation of management resources, we will
carefully scrutinize business line performance, in order to
restructure or discard under-achieving sectors. In this manner, the
Company can commit available resources on business areas with
the greatest long-term value.
Second, new markets will be explored under a “Blue Ocean”
strategy centered on Customer Relationship Management (CRM).
Moreover, innovative marketing channels will be aggressively
pursued to help broaden the customer base and step up marketing
of target customers, based on a streamlined sales network.
Third, customer value will be optimized through “perfect
development, perfect preparation, and perfect sales,” based on our
future-oriented corporate culture. Meritz Fire will also strive to
maintain global standards in the execution of its business through
training programs designed to bolster the professionalism and
technical expertise of employees. In addition, our brand value will be
fortified through effective implementation of public relations
activities and customer-satisfaction measures.
Ensure the best practice perfection of profitable growth
through execution of strategic management
Maximize efficiencies through prudent
allocation of management resources
Realize customer-driven management by
satisfying the varied needs of customers
Upgrade our competitive edge through
adoption of an innovative corporate culture
www.meritzfire.com17
18
>> ETHICAL MANAGEMENT WAS LAUNCHED IN FY2005
Corporate enterprises pursue management strategies and innovation to fulfill the demands and
expectations of their stakeholders. By gaining the trust of stakeholders (customers in particular),
enterprises seek to maintain a positive corporate image and assure sustained growth.
Ethical management is a future-oriented strategic initiative that provides a framework for realizing
these fundamental objectives.
As such, ethical management will be vigorously implemented through stepped-up internal controls,
which will contribute to improved profitability and firm establishment of a sound corporate culture.
Meritz Fire aspires to be the No. 1 enterprise in terms of management transparency.
In FY2005, Meritz Fire declared ethical management as a top priority, related to which all Company
officers and staff pledged to abide by a code of business ethics. In addition, the relevant parties have
conducted a self-assessment of internal controls. Moreover, an internal accounting assessment system
is now in place in preparation for shareholder lawsuits against senior executives and an internal
accounting management system. A grievance system is also now operational to help curtail irregular
practices, along with systematic management of potential legal risks.
In FY2006, the Company will focus on reinforcing its internal control processes and adopting a
self-regulatory system to assure the fairness of Company transactions. Also, the VOC (Voice of
Customer) program and effective feedback mechanisms will be fully utilized in an intensified effort to
strengthen consumer protection.
Ethical conduct
Ethical Management
MERITZ FIRE CORE MANAGEMENT:
_ Ethical Management
Customer Satisfaction Management
Employee Satisfaction Management
Sharing Management
Profit-based Management
Meritz Fire Core Management
Reinforcing internalcontrol processes
www.meritzfire.com19
People to people
Customer SatisfactionManagement
2005 Custom valueinnovation award
MERITZ FIRE CORE MANAGEMENT:
Ethical Management
_ Customer Satisfaction Management
Employee Satisfaction Management
Sharing Management
Profit-based Management
>> DEDICATED TO OPTIMIZING CUSTOMER SATISFACTION
The Company’s customer-first mindset applies to all aspects of management activities. Indeed, we are
wholly dedicated to optimizing customer satisfaction through constant adoption of innovation and
provision of differentiated products and services tailored to the particular needs of our customers. And in
doing so, we seek to sustain profitable growth.
Meritz Fire implements a wide array of innovative initiatives to upgrade its customer services. This
includes the Company’s continuing efforts to develop and manage customer-satisfaction indexes to
maximize customer value, enhance education and training programs for sales personnel, minimize
policyholder complaints, create services for premier customers, and undertake perfect sales practices
on a continuous basis to boost customer satisfaction.
Management also developed the “Ready Service” brand to reinforce on-the-spot compensation services.
In recognition of our innovative customer services, Meritz Fire received a prestigious award in FY2005
from the Korean Management Association for the Company’s creative efforts to enhance customer value.
To offer more practical benefits to customers, the Company has developed “membership services,”
expanded our capability to provide one-stop services, and installed an integrated customer-service
management system. At Meritz Fire, we put forth our utmost efforts to optimize customer satisfaction.
>> A FAMILY-LIKE WORKPLACE ATMOSPHERE
Above all, the Company’s employee-centered management strives to create a family-like workplace
atmosphere, since a self-assured employee will be capable of contributing more to our corporate
endeavors.
An environment that is conducive to creativity, productivity, and efficiency, which originates from
traditional family values, will serve as a solid foundation to support the stable growth of Meritz Fire.
In line with this principle, the Company sponsors a diversity of events, including a large-scale dinner
party to which employees and their family members are invited, as well as festivals and photo contests.
In FY2006, our family-related management will focus on enhancing a sense of pride and loyalty among
every employee of our Company. Management will also actively organize family get-togethers related to
the workplace and come up with new programs to promote the benefits of sound family relations.
Family-like workplace
Meritz Fire Core Management 20
Employee SatisfactionManagement
MERITZ FIRE CORE MANAGEMENT:
Ethical Management
Customer Satisfaction Management
_ Employee Satisfaction Management
Sharing Management
Profit-based Management
A sense of pride andloyalty among everyemployee
>> A RESPONSIBLE CORPORATE CITIZEN
The basic tenet of our “sharing management” is to return a fair share of profits to society in order to fulfill
its responsibility as an exemplary corporate citizen.
As such, a fundamental objective of Meritz Fire is to ensure advancement of the corporate sector in
parallel with enhancement of the welfare of Korean society.
In FY2005, the Company sought to upgrade its corporate image by launching “societal investment” in an
effort to boost employee morale and energize sales activities.
We thus intend to steadily increase our contributions to society and provide “volunteer activities based on
our love for everyone.”
In FY2006, our charitable activities will be expanded in cooperation with non-profit social organizations.
Accordingly, Meritz Fire will actively undertake community-minded projects under a belief that a
pre-eminent business enterprise is one that contributes generously to social welfare.Societal investment
www.meritzfire.com21
Sharing Management
Volunteer activitiesbased on our lovefor everyone
MERITZ FIRE CORE MANAGEMENT:
Ethical Management
Customer Satisfaction Management
Employee Satisfaction Management
_ Sharing Management
Profit-based Management
>> BUILDING UNDERWRITING EXPERTISE
The Company focuses on the profitability of all business activities while formulating its management
plans, along with placing a priority on those areas with the greatest growth potential.
In FY2005, Meritz Fire reported a solid profit performance, which enabled the Company to improve its
return on equity to 12.0%, marking a 1.0 percentage point gain over the previous year.
In response to an adverse market environment, due to a series of large-scale natural catastrophes, the
Company developed sophisticated and profit-based underwriting guidelines, which resulted in a
reduction of its combined loss ratio in FY2005. In fact, Meritz Fire was the only domestic insurer that
managed to record a decline in its loss ratio in FY2005.
Of particular note, the auto line’s loss ratio was limited to 75.1%, the second-best result for the industry. In
addition, the investment yield for FY2005 stood at an impressive 6.4%, thanks to an array of leading-edge
asset management systems, like SAA and TAA.The Company’s solvency margin ratio improved a significant
14.0 percentage points to 193.1%, clearly confirming our sound financial structure. Moreover, the share price
of Meritz Fire closed at KRW 4,570 on March 31, 2006, representing a dramatic year-on-year surge of
130.8%, which was 1.5 times better than the insurance industry’s average growth of 86.7%.
In FY2006, Meritz Fire intends to further promote its profit-based management, based on concerted
efforts to optimize management efficiency and offer flexible rates in response to market conditions,
while fully taking advantage of our stable capital management structure and accurate profit-and-loss
analyses of business activities.
A vision for the future
Profit-basedManagement
MERITZ FIRE CORE MANAGEMENT:
Ethical Management
Customer Satisfaction Management
Employee Satisfaction Management
Sharing Management
_ Profit-based Management
Meritz Fire Core Management 22
Diversified investmentportfolio
www.meritzfire.com23
Business Overview24 Overall business environment for FY2005
25 Strategy and operating environment by channel
27 Strategy and market environment by line
32 Asset Management
33 Risk Management
In FY2005, Meritz Fire & Marine Insurance recorded solid growth, in
line with its strategic focus on sustaining profitable results.
The Company realigned its business portfolio and committed all
available management resources to the expansion of business and
product lines with the strongest profit potential. In addition, our
underwriting expertise and risk-management have been steadily
reinforced with a view to enhancing Company profitability and
bolstering our corporate value.
Moreover, Meritz Fire stepped up efforts to attract new customers
and upgrade customer services through optimal operation of
distribution channels and development of products tailored to the
specific and evolving needs of our customers. Of note, the Company
focused on continued expansion of traditional (face to face)
distribution channels, which contributed to an exceptional
performance of the long-term insurance lines.
In FY2005, Meritz Fire diligently sought to boost customer loyalty
through a range of innovative and unique initiatives. This included
fortifying the Company’s competitive strengths in external services
through systematic CSI (Customer Satisfaction Index) management,
which includes expeditious claims handling and dedication of all
employees and sales personnel. Differentiated services are offered
to our premium clientele as well.
Moreover, a responsibility-oriented management and
performance-based mindset have taken firm root throughout the
Company. Management also continues to adopt measures to upgrade
our corporate culture through improved employee satisfaction and
the availability of more extensive education/training programs.
>> SALES AND PROFITABILITY
In FY2005, Meritz Fire recorded direct premiums written of KRW
1,876.9 billion: KRW 273.6 billion for commercial lines, KRW 622.0
billion of auto insurance, KRW 926.1 billion for long-term lines, and
KRW 55.2 billion of annuity-related products. Of significant note, the
long-term lines reported an industry-leading annual growth of
28.1%.
As for the Company’s loss ratio, the long-term and auto lines
reported improvements of 2.5 percentage points and 1.1 percentage
point, respectively. This positive outcome is even more noteworthy
in light of the fact that the industry’s overall loss ratio worsened by
3.8 percentage points. In addition, in FY 2005, investment income
surged 19.0%, over a year earlier, to KRW149.5 billion. Net income
posted strong growth as well to KRW 26.4 billion, representing an
impressive 25.1% gain from the previous year.
Business Overview 24
Overall business environment for FY2005
www.meritzfire.com25
>> KEY ACHIEVEMENTS OF FY2005
As for face-to-face channels, the Company capitalized on its Sales
Enhancement Program (SEP) to boost branch productivity, based on
the productivity gains and added mobility of marketing personnel.
Meanwhile, systematic efforts have led to successful recruitment
and cultivation of talented personnel, which contributed to
measurable improvement in employee retention. Overall, the
Company organization proceeded with restructuring measures with
a focus on retaining high-performance professionals.
In the bancassurance area, a key component of the new
market/new channel arena, Meritz Fire revamped its call center to
strengthen customer-service competitiveness. As such,
bancassurance sales in FY2005 expanded KRW 150 billion, from a
year earlier, accounting for a 17.9% market share. This marks a 1.1
percentage point gain, year on year, which confirms that the
Company remains on the right track for sustained growth.
Of special note, Meritz Fire successfully launched online operations
for auto insurance sales, while minimizing conflict with the existing
sales force. In its first year, the online operations resulted in KRW
7.6 billion of auto insurance sales, thereby securing a solid platform
for continued growth. The Company also strives to develop
large-scale cooperatives to explore new markets and upgrade our
competitive edge.
>> MARKET OUTLOOK BY CHANNEL
To assure compliance with the telecommunications marketing
guidelines now in force, “perfect sales” practices are essential when
selling insurance policies via telecommunication means, such as
telemarketing and broadcasting. As for life planners, they are
encouraged to boost their earnings through active sales of
beneficiary certificates. Moreover, continued growth is expected in
the cross-sales of non-life and life insurance products, in line with
steady expansion of the bancassurance business. Indeed,
significant institutional changes are on the horizon.
In terms of overall performance by channel, face-to-face
distribution channels are expected to see stable growth, driven by
continuous expansion of long-term insurance activities. However,
the growth rate is likely to lag behind that of the online and
bancassurance sectors. Of note, the bancassurance market is
projected to experience robust market expansion as a result of
steady growth of long-term coverage and sales of guarantee-type
products that are redeemable at maturity.
Meanwhile, leading insurance firms, including Hyundai Hicar and
Strategy and operatingenvironment by channel
Business Overview 26
LIG, are likely to aggressively promote their online auto insurance
marketing. Small- to medium-size companies are also expected to
realize stable growth by strengthening their online sales activities.
>>COMPANY STRATEGY BY CHANNEL
In FY2006, Meritz Fire will implement differentiated and innovative
strategies for the insurance market, by individual channels. Meritz
Fire will commit management resources to core marketing
operations, while at the same time striving to broaden our
customer base.
Management priority will be focused on the development of key
channels and growth engines, along with efforts to reinforce the
roles of primary channels and actively respond to specific client
needs, in order to quickly seize upon market opportunities.
As for conventional distribution channels, a win-win strategy will be
promoted by taking advantage of an outstanding specialized agency
approach. Moreover, differentiated and localized marketing
strategies will be undertaken based on an agency ranking system.
In terms of new channels, the Company will focus on mega-scale
banks, develop niche products, and launch targeted marketing, by
product type.
Meritz Fire will actively promote online sales of auto insurance, with
a focus on outbound sales, along with endeavoring to upgrade
branding efforts to expand inbound sales. The Company will
markedly step up publicity for online auto insurance sales in Seoul
and surrounding vicinity, while accelerating the development of
products designed to meet the specific and evolving needs of clients.
As for alliance channels, management intends to reinforce
marketing efforts for large-scale cooperatives, based on
partnership relations, and move aggressively to boost profitability
related to alliances by creating by-product derivatives of the
military-personnel insurance coverage.
17.9%FY2005 MARKET SHARE
(BANCASSURANCE)
www.meritzfire.com27
>> MARKETING (SALES)
Auto lines
Key achievements of FY2005
The domestic auto insurance market in FY2005 was up 2.6%, over
the previous year, to KRW 8.73 trillion, thanks to the moderate
growth of total vehicles on the road. The number of registered
vehicles at 2005 year-end stood at 15.4 million units, up 3.1% from a
year earlier. Meritz Fire’s direct premiums written declined 5.8% to
KRW 622 billion, representing a market share of 7.3%.
Market outlook for FY2006
The auto insurance market will likely experience steady growth in
FY2006. Despite anticipation of sluggish growth of registered
vehicles, hikes in premium rates and auto maintenance fees will
enable the auto insurance sector to record continuous expansion.
The direct auto insurance sector is expected to show a consistent
upward trend, as leading business groups, such as Hyundai and LIG,
have made inroads into the market, while small- and medium-sized
companies are poised to noticeably strengthen their online sales
activities.
Marketing strategy for FY2006
Meritz Fire strives to satisfy its sales targets by broadening its base
of active policyholders so as to bolster the Company’s profitability,
allocating a greater share of strategic resources to large-size cities
where the loss ratio is relatively lower, and reinforcing new channel
sales, including a focus on large-scale cooperatives.
Long-term lines
Key achievements of FY2005
FY2005 was characterized by continuous growth of the Company’s
long-term insurance activities. Of note, the growth rate of our
long-term lines reached 28.1% (No. 1 ranking in the industry), which
was notably higher than the industry average of 15.7%. Moreover,
the Company’s retention ratio was among the highest in the industry
as well, thereby laying the groundwork for sustained profits in the
years ahead.
Market outlook for FY2006
As auto and commercial lines continue to experience a slow-growth
pattern, long-term lines are poised to lead the Company’s future
growth of insurance revenue. The long-term lines are expected to
enjoy continued strong growth thanks to projected expansion of
long-term coverage related to conversion and health insurance
product sales by leading insurers. Another positive factor is the
upward trend of bancassurance sales, which is likely to result from the
launch of sales of guarantee-type insurance products that are
Strategy and marketenvironment by line
Business Overview 28
redeemable at maturity. Moreover, people’s growing needs for health
insurance will fuel robust growth of long-term insurance revenue.
Marketing strategy for FY2006
The Company’s priorities include efforts to upgrade the competitive
strengths of specialized agencies through a specialized agency
oversight system, launch marketing initiatives targeted to core
clientele, and to build a stable sales structure through “perfect
sales” practices and enhanced retention ratio of long-term lines.
Meritz Fire, which has outperformed the competition in the
long-term lines over the past two years, is looking forward to
another year of impressive growth in FY2006.
Commercial lines
Key achievements of FY2005
As for the commercial lines industry-wide, growth of fire insurance
has been adversely impacted by a slowdown of construction activity,
along with intensified price competition. Nonetheless, Meritz Fire
recorded moderate growth, backed by its stepped-up direct marketing
of casualty insurance through telemarketing and expanded sales of
group accident insurance to government employees.
In FY2005, marine insurance incurred a slight downturn in gross
premiums, as compared to the prior year. However, the Company
has strengthened its future growth potential through a realignment
of its cargo and hull insurance portfolios.
Market outlook for FY2006
The commercial lines sector is forecast to experience a slowdown in
FY2006, due primarily to the weak growth of the construction, hull,
and fire insurance segments, which comprise the mainstream of
non-life insurance operations. As a result, insurers will likely commit
their available resources to newly emerging potential markets,
including crop insurance and natural-disaster insurance coverage.
Marketing strategy for FY2006
In FY2006, the Company will focus on upgrading its competitive
advantages by promoting staff professionalism based on a
streamlined customer-driven organizational structure; allocating
more human resources to explore new market/new product
opportunities; and tapping into market niches, including the small-
to medium-sized commercial and industrial market sectors.
Meritz Fire intends to accelerate efforts to enhance underwriting
profitability as a result of the significant increase in retained
premiums based on the creation of an optimal reinsurance-processing
system.
[ STRATEGY AND MARKET ENVIRONMENT BY LINE ]
www.meritzfire.com29
>> UNDERWRITING (LOSS RATIO)
Auto lines
Key achievements in FY2005
The industry’s loss ratio for auto lines in FY2005 rose 4.1 percentage
points, over the previous year, to 76.9%. This deterioration was largely
attributable to an increase in the number of accidents due to harsh
winter conditions as well as a rise in the number of vehicles on the
road with the spread of the five-day workweek system. Consequently,
the industry’s overall profitability for auto lines worsened.
The Company’s loss ratio for auto lines stood at 75.1%, which is 1.8
percentage point below the industry-wide average. Indeed, Meritz
Fire was the only non-life insurer in Korea to report improvement in
the loss ratio for its auto lines. The key factor behind this positive
outcome was management’s efforts to upgrade the soundness of its
portfolio based on an underwriting approach that emphasizes
high-yielding products, along with profit-oriented sales strategies.
Sales target for FY2006(KRW in billions, %)
FY2006 FY2005
Direct premiums Market Direct premiums Market
written share written share
Commercial 305.0 10.0 273.6 9.3
Auto 644.8 7.1 622.0 7.3
Long-term 1,184.9 8.8 981.3 8.3
Total 2,134.7 8.4 1,876.9 7.9
Composition of direct premiums written(%)
FY2006 FY2005
Commercial 14.3 14.6
Auto 30.2 33.1
Long-term 55.5 52.3
1,876.9FY2005
(KRW in billions)
2,134.7FY2006(target)
Long-term
Auto
Commercial
8.4%FY2006 SALES GROWTH TARGET FOR
DIRECT PREMIUMS WRITTEN
FY2006(target)
Business Overview 30
Market outlook for FY2006
Despite cost-push effects, such as rate hikes and continued
increases in vehicle maintenance expenses, the loss ratio is
expected to remain at a similar level as the previous year due to
several negative factors. The adverse influences include an upward
trend in the frequency of accidents due to large-scale pardons for
violators of traffic regulations; increase in vehicles on the road due
to wider application of the five-day workweek system; rise in the loss
amount per case as a result of consumers owning ever-more
high-priced vehicles; and strengthened consumer-protection rights
in regard to claim payments.
Underwriting strategy for FY2006
Based on a pledge of “maximizing profit growth,” we will strive to
fortify rate competition through timely and accurate analysis,
differentiated underwriting based on optimal application of
underwriting processing, and efficient allocation of resources.
Overall, efforts will be accelerated to upgrade our portfolios in line
with a focus on high-yielding products.
Long-term lines
Key achievements of FY2005
Meritz Fire upgraded its portfolio quality through a keen focus on
loss ratios and collateral. Moreover, to enhance the effectiveness of
its underwriting, the Company adopted a practice of screening
beneficiaries for any pre-existing cancer so that appropriate
coverage can be extended for protection from serious illness. In
addition, underwriting margins have been reinforced by applying
differentiated criteria for the extension of coverage commensurate
with related risk factors.
Market outlook for FY2006
Since the strong growth potential of long-term lines is primarily
derived from the upward trend of new policy contracts centered on
health insurance, the loss ratio of illness-protection insurance will
inevitably increase because the incidents of debilitating illnesses,
such as cancer and various adult diseases, are on the rise. As such,
the application of the Company’s actual experience ratio, based on
its IBNR accumulation ratio from FY 2006, will result in a higher loss
ratio for our long-term insurance sector. This is due primarily to the
high compensation payout ratios for illness-coverage policies,
related to medical expenses and daily allowances.
Nonetheless, in view of the expected double-digit sales growth of
the long-term lines industry-wide, the loss ratio for the long-term
lines will be in line with the previous year’s level, despite the
influence of cost-push effects.
[ STRATEGY AND MARKET ENVIRONMENT BY LINE ]
www.meritzfire.com31
Underwriting strategy for FY2006
The FY2006 long-term insurance operation strategy calls for
upgrading underwriting margins with an emphasis on
strengthening profitability, enhancing work processes, accepting
reinsurance to improve profit-loss results, nurturing staff
professionals, and integrating service channels.
Notably, to enhance the profitability of illness-protection insurance,
which is enjoying growth at a remarkable pace, efforts are being
focused on fostering specialized underwriters.
Moreover, the Company is also reinforcing its customer-oriented
contract management process by standardizing the contract
endorsement procedure and shifting the focus of customer service
from work items to individual customers. As such, our top priority is
to maintain the industry’s highest retention ratio and maximize
operating profit.
Commercial lines
Key achievements of FY2005
The commercial lines sector has experienced a falloff in sales due to
the construction industry’s sluggishness and related developments,
as well as the continued maintenance of an acceptable loss ratio,
which have resulted in rate reductions over several consecutive
years. Consequently, earned premiums have decreased across the
industry, even while the loss ratio has been on the rise.
To prevent a worsening of the loss ratio, Meritz Fire has stepped up
its support to field personnel in the form of more detailed guidelines
for underwriting and concluding contracts. In addition, to reinforce
the effectiveness of underwriting for property insurance, a
web-based system is now in operation to access reliable data and
share due-diligence information through the Internet.
Market outlook for FY2006
The loss ratio for commercial lines is expected to improve from its
current high level, which has come about from insurers’ excessive
rate competition, by gradually increasing rates and expanding sales
through new channels.
Underwriting strategy for FY2006
In FY2006, the Company will strengthen underwriting margins by
emphasizing improved field operations in order to assure prudent
underwriting and optimize retention. Moreover, management
intends to maximize bottom-line results through cost-effective
reinsurance transactions. Intensified efforts will be exerted to
encourage policyholders to take precautionary measures in order to
minimize damage from large-scale natural disasters.
Business Overview 32
>> KEY ACHIEVEMENTS OF FY2005
In FY2005, our investment strategy focused on maturity matching
rather than market timing for special account funds. Indeed, maximum
investment returns were realized through the application of SAA.
As for the general account, the Company pursued optimal gains by
flexibly responding to changing market conditions and largely
ignoring liquidity risks, in principle. Also, for management
efficiency, the special account was divided into fixed income and AI
investment, along with 67 databases being monitored in regard to
macro-economic, securities, and stock market trends.
>> DIVERSIFICATION OF MANAGEMENT STRATEGIES
It is difficult to predict the direction of the domestic capital market in
FY2006 due to its considerable uncertainty. As such, management is
pursuing a variety of income sources for general account funds
based on the diversification of investment targets as well as
management strategies and operations.
As for the special account, undue credit risk exposure will be
avoided while increasing the share of investment in high-yield
assets. In this regard, Meritz Fire intends to expand its holdings of
overseas securities, AI assets, and loan acquisitions, along with
applying newly developed management strategies.
>> MERITZ FIRE’S ASSET MANAGEMENT STRATEGY FOR FY2006
Asset management
EXISTING MANAGEMENT STRATEGY
DIVERSIFICATION OF MANAGEMENTSTRATEGIES
■Directional trading of stocks and bonds
- Including short investment strategy
■Pair trading
- Valuation of each stock item
- Based on statistical methods
■Improving overseas investments and derivative trading
■System trading
■Improving ways to manage the portfolio
- Portfolio exposure management
- Liquidity management
- Fixed income and performance asset management
- Cash flow management
■Attracting superior human resources
■Streamlining work and processes
BOLSTERING MANAGEMENT EFFICIENCY
UPGRADING PROFESSIONALISM OF THEORGANIZATION AND HUMAN RESOURCES
www.meritzfire.com33
Risk management
Meritz Fire & Marine Insurance maintains an independent risk
management team in an effort to efficiently oversee and control
various risks, which are classified as insurance, market, credit,
liquidity, interest rate, and non-financial risks. The risk
management team operates independently of the marketing, asset
management, and business management planning units.
The team implements risk management policies and guidelines,
oversees the risk management systems, conducts and analyzes risk
assessment in real-time, and reports on the status of consolidated
risk. In addition, the risk management team supports the Risk
Management Committee by executing its decisions and ensuring
their proper implementation.
In FY2005, the Risk Management Committee adopted a number of
significant decisions in regard to overall risk management,
including amendments to risk-related regulations, the status of risk
management by business line, strategic asset allocation,
determination of acceptable risk levels, and renewal of reinsurance
contracts.
Of note, a special task force is now in operation to devise ways to
improve the management of non-financial risks. In particular,
efforts are focused on the enhancement of customer-information
management, monitoring of “non-perfect sales” practices, timely
resolution of policyholder complaints, and security of internal IT
systems, along with the prevention of financial mishaps. Moreover,
the Company operates effective risk management systems to
control market, liquidity, interest rate, insurance, and credit risks.
>> RISK MANAGEMENT STRATEGY FOR FY2006
The Company seeks to reinvigorate the participation of the Risk
Management Committee and actively implement the
risk-management improvement measures developed by the special
task force. Moreover, the Company will seriously consider
implementation of the RAAS (Remedial Action Assessment System)
and RBC (Risk-based Capital) systems. Management will also
diligently strive to further upgrade its risk management systems
and install a risk-based capital management structure.
These risk management activities are all designed to assure the
stability of our profit performance and boost client confidence in
Meritz Fire. As such, we are fully committed to continued efforts to
elevate our risk management systems to a higher plane, in line with
the demands of a changing business environment.
34Financial Highlights
Financial Section35 Management’s Discussion & Analysis
45 Financial Statements
_ Independent Auditors’ Report
_ Balance Sheets
_ Statements of Income
_ Statements of Appropriations of Retained Earnings
_ Statements of Cash Flows
54 Notes to Financial Statements
Management’s discussion and analysis may contain
forward-looking statements provided to assist in the understanding
of anticipated future financial performance and business plans.
However, such performance and plans involve risks and
uncertainties that may cause actual results to differ materially from
those expressed in forward-looking statements due to factors
beyond the Company’s control. The term ‘the Company’ and ‘Meritz’
used here without any other qualifying description will refer to
‘Meritz Fire & Marine Insurance Co., Ltd.’
>> EXECUTIVE SUMMARY
www.meritzfire.com35
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
Summary of Income Statement(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Direct premiums written 1,544 1,695 1,877 182 10.7
Net premiums earned 1,204 1,392 1,604 212 15.3
Incurred losses 984 1,147 1,315 168 14.7
Loss ratio (%) 81.5 82.2 81.9 (0.3%p)
Net expenses 298 321 391 70 21.8
Expense ratio (%) 24.7 23.1 24.4 1.3%p
Underwriting income (88) (87) (114) (27) n.a.
Investment income 120 126 150 24 19.0
Net increase in catastrophe reserves 11 12 12 1 5.7
Net income 20 21 26 5 25.0
1,877FY2005
Direct premiums written (KRW in billions)
1,695FY20041,544
FY2003
The fiscal year 2005 was an eventful one in Korea and the rest of the
world. Natural disasters such as earthquakes and hurricanes, oil
prices exceeding 60 U.S. dollars per barrel, the adverse impact of an
appreciating won on exports and weak domestic demand all
created a difficult business environment. The local non-life
insurance industry also suffered from a surge in the loss ratio on
auto insurance. The culprits were heavy snow, a hike in auto
maintenance costs and increased road traffic from the spreading
five-day workweek. On the other hand, the aging population pushed
up demand for long-term insurance products. On the whole, the
non-life insurance sector saw direct premiums written increase
9.9% year-on-year (YoY) to KRW 23.6 trillion in FY2005.
Persons aged 65 years and older already comprised 7.8% of the
Korean population in 2000. The Korean society continues to age at a
rapid pace. The 20~49 year-old age group accounts for more than
50% of the population and the birth rate is on the decline. These
trends have given a boost to long-term lines such as health
insurance and casualty insurance. Bancassurance and new
integrated insurance products are also helping to sustain growth of
the domestic non-life insurance industry.
In FY2005, Meritz Fire adopted new corporate identity and carried
out full-scale overhaul on its operations, enabling the Company to
respond more effectively to the evolving business environment and
pursue new opportunities to expand its market presence. Meritz
Financial Section 36
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
Summary of Balance Sheet(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Invested assets 2,027 2,260 2,555 295 13.0
Insurance accounts receivable 84 72 66 (6) (8.3)
Other assets 161 274 401 127 46.2
Separate account assets 60 69 88 19 27.1
Total assets 2,332 2,676 3,110 434 16.2
Policy reserves 1,797 2,091 2,447 357 17.1
Catastrophe reserves 97 108 121 12 11.3
Insurance accounts payable 100 97 109 12 12.7
Other liabilities 81 84 114 30 36.1
Separate account liabilities 60 69 88 19 26.8
Total liabilities 2,134 2,449 2,880 430 17.6
Common stock 43 43 43 - -
Capital surplus 27 27 28 1 3.6
Retained earnings 128 142 161 19 13.1
Capital adjustments 1 14 (2) (16) n.a.
Total shareholders’ equity 198 227 230 4 1.6
3,110FY2005
Total assets(KRW in billions)
2,676FY2004
2,332FY2003
>> UNDERWRITING PERFORMANCE
In FY2005, direct premiums written of the non-life insurance
industry increased by 9.5% YoY due primarily to the notable growth
in long-term lines. Despite sluggish recovery of the domestic
economy and intensifying competition in the non-life insurance
industry, Meritz Fire outperformed the industry by achieving an
increase of 10.7% in direct premiums written to KRW 1,877 billion in
FY2005. In particular, Meritz Fire boasted a remarkable growth of
28.1% in long-term lines.
Meanwhile, direct premiums written from auto lines and
commercial lines slowed down in tandem with prudent
underwriting policies.
aggressively reinforced its operations and financial stability with a
profit-oriented growth strategy. In addition, the Company
streamlined the organization to maximize efficiencies, while
developing new management strategy tailored specifically for each
business line.
In the year under review, the share price of Meritz Fire skyrocketed
130.8%, far outperforming the insurance sector index. Turning to
the operating results, direct premiums written increased by 10.7%
YoY to KRW 1,877 billion in FY2005. Even though fierce competition
deteriorated the profitability of auto lines, net income grew 25.1%
YoY to KRW 26 billion thanks to stronger underwriting activities and
improved emergency and accident assistant services. Return on
equity (ROE) stood at 12.0%, rising by 1.0%p over the previous year.
Total assets and invested assets amounted to KRW 3,110 billion and
KRW 2,555 billion, respectively, representing growth of 16.2% and
13.0% over the previous year. Adjusted shareholders’ equity went up
4.8% YoY to KRW 351 billion as of the end of FY2005. Financial
soundness also improved with the solvency margin ratio climbing
by 14.0%p to 193.1%.
www.meritzfire.com37
Adjusted net income(KRW in billions)
(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Underwriting income (88) (87) (114) (27) na
Investment income 120 126 150 24 19.0
Net income 20 21 26 5 25.0
Adjusted net income 31 33 38 5 15.2
38FY2005
33FY200431
FY2003
Direct premiums written by line (FY2005)(KRW in billions)
274 (14.6%)Commercial
622 (33.1%) Auto
981 (52.3%) Long-term
Financial Section 38
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
Meritz Fire earned total net premiums of KRW 1,604 billion in
FY2005, up by 15.3% YoY from KRW 1,392 billion in FY2004. Net
premiums written also posted a 12.8% growth to KRW 1,593 billion
in FY2005, compared with KRW 1,413 billion last fiscal year, while
direct premiums written increased by 10.7% YoY to KRW 1,877
billion from KRW 1,695 billion.
Meanwhile, incurred losses rose by 14.6% YoY to KRW 1,315 billion
with provisions of incurred but not reported (IBNR) losses in
long-term lines. However, loss ratio edged down 0.3%p to 81.9% in
FY2005 from 82.2% in FY2004 in line with improvement of loss ratios
in auto lines and long-term lines. Meritz Fire was the only non-life
insurer in Korea achieving the reduction in loss ratio in FY2005.
On the other hand, net operating expenses of Meritz Fire soared by
21.8% YoY or KRW 70 billion to KRW 391 billion in FY2005 as
management consultation as well as introduction of new corporate
identity caused a temporary surge in administrative expenses;
expense ratio gained by 1.3%p to 24.4%, as a result. All in all, the
Company suffered from an increase of 1.0%p in combined ratio to
106.3% and recorded underwriting loss of KRW 114 billion in
FY2005.
7.9FY2005
Combined M/S(%)
7.9FY20047.8
FY2003
Market share by line(%)
FY2003 FY2004 FY2005 Change
Auto lines 7.8 7.9 7.3 (0.6%p)
Long-term lines 6.8 7.5 8.3 0.8%p
Commercial lines 11.5 9.9 9.3 (0.6%p)
Combined M/S 7.8 7.9 7.9 0.0%p
(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Net premiums earned 1,204 1,392 1,604 212 15.3
Incurred losses 984 1,147 1,315 168 14.6
Loss ratio (%) 81.5 82.2 81.9 (0.3%p)
Net expenses 298 321 391 70 21.8
Expense ratio (%) 24.7 23.1 24.4 1.3%p
Combined ratio (%) 106.2 105.3 106.3 1.0%p
1,604FY2005
Net premiums earned (KRW in billions)
1,392FY20041,204
FY2003
The Company’s market share within the non-life insurance industry
remained stable at 7.9% in FY2005, solidifying its market position as
one of major five non-life insurers in Korea. By type of insurances,
Meritz Fire expanded its market share in lucrative long-term lines
by 0.8%p to 8.3% in FY2005, while keeping its careful stance in less
profitable auto lines and commercial lines.
www.meritzfire.com39
Long-term Lines
Direct premiums written for long-term lines led the overall growth
of the non-life insurance industry in FY2005, increasing 15.7% YoY to
KRW 11,888 billion, on the back of continued expansion of new
contracts and bancassurance services. As mentioned above, Meritz
Fire has strategically allotted business resources to long-term
lines, of which growth potential and profitability are outstanding,
and has achieved the significant growth in long-term lines among
non-life insurers. The Company’s direct premiums written for
long-term lines surged 28.1% YoY in FY2005, outperforming the
industry average growth rate by a large margin, to total KRW 981
billion. Accordingly, Meritz’ market share in the long-term line
segment further expanded by 0.8%p to reach 8.3% in FY2005.
Moreover, the loss ratio for long-term lines dropped by 2.5%p to
89.4% in FY2005 compared to 91.9% in FY2004.
Long-term lines
Change
FY2003 FY2004 FY2005 Amount %
Direct premiums written (KRW in billions) 632 766 981 215 28.1
Market share (%) 6.8 7.5 8.3 0.8%p
Loss ratio (%) 88.2 91.9 89.4 (2.5%p)
981FY2005
Direct premiums written (KRW in billions)
766FY2004
632FY2003
Auto Lines
Due to decelerating growth in the number of automobiles
registered and intensifying price competition caused by expansion
of online auto insurances, direct premiums written for auto lines in
the non-life insurance industry grew by 2.6% YoY to KRW 8,730
billion in FY2005. With its core business strategy of “profitable and
sustainable growth,” Meritz Fire took a prudent underwriting stance
for unprofitable auto lines. The Company’s direct premiums written
for auto lines dropped by 5.8% YoY to KRW 622 billion in FY2005, and
its market share in the auto line sector declined by 0.7%p to reach
7.1%. However, in terms of loss ratio, Meritz Fire was one of a few
non-life insurers achieving the improvement of auto line loss ratio
in FY2005. On its part, Meritz Fire improved its auto line loss ratio by
1.1%p to 75.1%, 1.8%p lower than the industry average, through a
profitability-oriented underwriting policy.
Auto lines
Change
FY2003 FY2004 FY2005 Amount %
Direct premiums written (KRW in billions) 616 660 622 (38) (5.8)
Market share (% 7.8 7.9 7.3 (0.6%p)
Loss ratio (%) 79.2 76.2 75.1 (1.1%p)
622FY2005
Direct premiums written (KRW in billions)
660FY2004616
FY2003
Financial Section 40
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
Commercial Lines
While direct premiums written for the industry’s commercial lines
recorded KRW 2,984 billion, an increase of 8.7% YoY, Meritz’s direct
premiums written for commercial lines edged up only 1.9% YoY to
KRW 274 billion in FY2005. Same as in auto lines, the industry
suffered from intensifying competition and premium rate cuts in
commercial lines. Meritz Fire’s market share in commercial lines
eroded by 0.6%p to reach 9.3% in FY2005 as the Company
committed its management resources on long-term lines.
In addition, the non-life insurance industry experienced
deteriorating profitability in commercial lines due to intensifying
competition and premium rate reductions. Meritz Fire also
recorded a 5.6%p hike in loss ratio to 49.1%.
Commercial lines
Change
FY2003 FY2004 FY2005 Amount %
Direct premiums written (KRW in billions) 296 269 274 5 1.9
Market share (%) 11.5 9.9 9.3 (0.6%p)
Loss ratio (%) 48.1 43.5 49.1 5.6%p
Direct premiums written (KRW in billions)
269FY2004
296FY2003
(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Total assets 2,332 2,676 3,110 434 16.2
Invested assets 2,027 2,260 2,555 295 13.0
2,260FY20042,027
FY2003
Invested assets(KRW in billions)
2,555 FY2005
274FY2005
>> INVESTMENT PERFORMANCE
The Company’s investment policy aims to reduce and control
market risks by maintaining a diversified investment portfolio with
high credit-rating debt securities. Total assets of Meritz Fire
amounted to KRW 3,110 billion at the end of FY2005. Invested
assets, accounting for 82.1% of total assets, reached KRW 2,555
billion, an increase of 13.0% or KRW 295 billion at the end of FY2005,
as a result of increases in interest-bearing assets and equity
investment.
www.meritzfire.com41
Invested assets in the fixed income category include cash and
deposits, loans, bonds, beneficiary certificates, and overseas
securities, while risk assets consist of equities and real estate
investments. To stabilize investment return and tighten risk
management, Meritz Fire has favored interest-bearing assets. As
part of an asset management strategy centered on profitability and
stability, the Company boosted loans by 31.2% YoY to KRW 401
billion as of March 31, 2006, accounting for 15.7% of total invested
assets. Loans, bonds, and beneficiary certificates, which ensure a
steady stream of income over the long term, formed 70.4% of
invested assets as of the end of FY2005. Separately, in an effort to
diversify its invested asset portfolio, Meritz Fire gradually expanded
its exposure to stocks, structured securities, overseas securities
and real estate in FY2005.
(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Cash & deposits 12 18 13 (5) (27.8)
Bonds 80 89 71 (18) (20.2)
Equities 15 1 47 46 4,600.0
Loans 16 21 24 3 14.3
Others (4) (4) (5) (1) n.a.
Investment income 120 126 150 24 19.0
Net investment yield (%) 6.1 6.0 6.4 0.4%p
Meritz Fire improved the quality of its investment portfolio and
investment yield in FY2005 rose by 0.4%p to 6.4%. Accordingly, net
investment income jumped 19.0% YoY to KRW 150 billion. This
outstanding performance was primarily attributable to a substantial
growth in income from equity investment. On the back of brisk stock
market movement, the Company’s equity investment generated
investment income of KRW 47 billion in FY2005 compared to mere
KRW 1 billion in the previous fiscal year. Meanwhile, investment
yield from interest-bearing assets fell down due to the prolonged
low-interest rate circumstances. Investment income from cash &
deposits and bonds decreased by 27.8% YoY and 20.2% YoY in
FY2005, respectively. As loan assets surged 31.2% YoY to KRW 401
billion as of March 31, 2006 from KRW 305 billion a year ago,
investment income from loans jumped by 14.3% YoY to KRW 24
billion in FY2005.
6.4FY2005
Net Investment yield(%)
6.0FY2004
6.1FY2003
Financial Section 42
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
>> ASSET QUALITY
The Company’s asset management has centered around bonds and
loans so as to simultaneously maximize both profitability and
stability of invested assets. In FY2005, total loans before
provisioning increased 36.1% YoY to reach KRW 406 billion. At the
same time, non-performing loans (NPL) ratio inched up by 0.1%p to
0.7%. Nonetheless, the Company’s asset soundness has continued
to improve with the coverage ratio of 203.3% as of the end of FY2005,
an increase of 11.4%p.
Invested assets portfolio(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Cash & deposits 215 228 292 64 27.8
Stock 87 85 59 (26) (30.4)
Equity applied stocks 10 7 58 51 739.1
Bonds 944 977 972 (5) (0.6)
Beneficiary certificates 235 237 219 (18) (7.5)
Structured securities - - 54 54 n.a.
Overseas securities 46 79 93 14 18.7
Other securities 30 44 37 (7) (16.4)
Loans 211 305 401 96 31.2
Real estate 249 298 370 72 24.3
Invested assets 2,027 2,260 2,555 295 13.0
NPL & Coverage ratio(KRW in billions)
Change
FY2003 FY2004 FY2005 Amount %
Loans 214 298 406 108 36.1
Normal 195 280 393 113 40.1
Precautionary 15 17 11 (6) (34.5)
Below substandard 3 2 3 1 70.2
Provisions 2 3 6 2 75.0
NPL ratio (%) 1.4 0.6 0.7 0.1%p
Coverage ratio (%) 77.9 191.9 203.3 11.4%p
406FY2005
Loans(KRW in billions)
298FY2004
214FY2003
www.meritzfire.com43
Portfolio of bonds in rating(KRW in billions)
FY2003 FY2004 FY2005 Change
A- or above 95.1 95.8 99.0 3.2%p
BBB+ or below 4.9 4.2 1.0 (3.2%p)
99.0FY2005
A- or Above (KRW in billions)
95.8FY2004
95.1FY2003
>> CAPITAL ADEQUACY & SOLVENCY MARGIN RATIO
As of March 31, 2006, the Company’s total shareholders’ equity rose
1.6% YoY to KRW 230 billion. While the Company’s capital stock
remained unchanged at KRW 43 billion with a total number of
outstanding common stocks of 85,800,000 shares, buoyant net
income made retained earnings increase by 13.1% YoY to KRW 160
billion at the end of FY2005 compared with KRW 142 billion a year
ago. In addition, in order to further solidify its asset soundness, the
Company raised catastrophe reserves by 11.3 % YoY or KRW 12
billion to KRW 121 billion as of March 31, 2006. As a result, Meritz
Fire posted adjusted shareholders’ equity of KRW 351 billion as of
the end of FY2005, and its adjusted return on equity (ROE) increased
by 1.0%p to 12.0% in FY2005 from 11.0% last fiscal year.
In FY2005, Meritz Fire has successfully enhanced its solvency
margin ratio and maintained the adequate capital structure.
Solvency margin requirements of Meritz Fire rose by 5.8% YoY to
KRW 207 billion in FY2005, whereas solvency margin jumped by
14.1% YoY to KRW 400 billion. Accordingly, the Company’s solvency
margin ratio reached 193.1% in FY2005, an increase of 14.0%p.
With respect to bonds, Meritz Fire seeks stable income through
portfolio balancing around high quality bonds with credit rating of A-
or above. As of March 31, 2006, bonds with credit rating of A- or
above accounted for 99.0% of the Company’s bond portfolio,
extremely limiting its exposure to default risk
Change
FY2003 FY2004 FY2005 Amount %
Solvency margin (KRW in billions) 320 351 400 49 14.1
Solvency margin requirements (KRW in billions) 172 196 207 11 5.8
Solvency margin ratio (%) 185.5 179.1 193.1 14.0%p
193.1FY2005
Solvency margin ratio(%)
179.1FY2004
185.5FY2003
Financial Section 44
[ MANAGEMENT’S DISCUSSION & ANALYSIS ]
>> RISK MANAGEMENT
Meritz Fire has practiced a risk management system to maximize
corporate value. The Company classifies overall risks as insurance,
market, credit, liquidity, interest rate, and non-financial risks. The
risk management team independently assesses these risks,
measures the asset portfolio through diversified investments, and
analyzes credit risk factors through a series of checks and
balances. With the establishment of an asset-liability management
system (ALM) and an Insurance Risk Management system, the
Company aims to minimize the interest rate risk on a quarterly
basis. In addition, Meritz Fire has executed Strategic Asset
Allocation and developed a Credit VaR system.
>> BUSINESS OUTLOOK FOR FY2006
Various economic and geo-political issues still linger. These include
lofty oil prices, a strong Korean currency, weak domestic
consumption and the North Korea issue. As a result, the Korean
economy is expected to lose steam in 2006. Even so, the non-life
insurance sector is positioned for sustained growth and greater
profitability. Along with top-line growth and a lower loss ratio, an
increase in invested assets should raise the investment income.
The non-life insurance sector is forecast to post around 9% growth
in FY2006 as robust performance of long-term lines offsets a
slowdown in auto and commercial lines.
The long-term insurance market should flourish as the need for
health insurance expands and the sale of risk-type products via
bancassurance is permitted. Meritz Fire reported the industry’s
highest growth in long-term insurance in FY2004 and FY2005. The
target growth rate for FY2006 is over 20%, with more competitive
branches, target marketing and a higher retention ratio serving as
the growth drivers. Moreover, a further decline in the loss ratio is
foreseen for long-term lines as the expiry of high interest rate
products will reduce the provisioning burden.
The auto insurance market is experiencing a slowdown. The
number of registered vehicles is growing at a slower pace and price
competition is set to heighten further as the major insurance firms
enter the direct auto insurance market. However, the loss ratio
should improve in view of the hike in auto insurance premiums in
FY2006 and the comprehensive measures from the government.
Meritz Fire will strive to keep the loss ratio stable, currently at the
second lowest level in the industry, by adhering to a systematic
underwriting policy centered on profits.
In terms of investment operations, the investment yield should
maintain a healthy level. While the stock market is undergoing a
correction, market interest rates are on the rise and invested assets
are expanding. Meritz Fire will strive for more efficient use of
resources, swiftly and accurately identify customer needs, and
differentiate itself with an innovative corporate culture.
www.meritzfire.com45
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of
Meritz Fire & Marine Insurance Co., Ltd. (Formerly Oriental Fire & Marine Insurance Co., Ltd.)
We have audited the accompanying balance sheet of Meritz Fire & Marine Insurance Co., Ltd. (formerly Oriental Fire & Marine Insurance Co.,
Ltd.; thereafter, the “Company”) as of March 31, 2006 and 2005, and the related statements of income, appropriations of retained earnings and
cash flows for the years then ended (all expressed in Korean won). These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
March 31, 2006 and 2005, and the results of its operations, the appropriations of its retained earnings and its cash flows for the years then
ended in conformity with financial accounting principles generally accepted in the Republic of Korea. Accounting principles and auditing
standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the
financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries
other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements
may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements
are for use by those knowledgeable about Korean accounting procedures and auditing standards and their application in practice.
May 12, 2006
NOTICE TO READERS
This report is effective as of May 12, 2006, the auditors’ report date. Certain subsequent events or circumstances may have
occurred between the auditors’ report date and the time the auditors’ report is read. Such events or circumstances could
significantly affect the accompanying financial statements and may result in modifications to the auditors’ report.
14FI., Hanwha Securities Bldg.,
23-5 Yoido-dong
Youngdeungpo-gu, Seoul
150-717, Korea
Tel : +82 2 6676 1000, 1114
Fax : +82 2 6674 2114
www.deloitteanjin.co.kr
Financial Statement 46
[ BALANCE SHEETS ]
ASSETS
Cash and deposits (Notes 2, 3, 14, 16 and 22) \ 291,642,145 \ 238,238,933
Trading securities (Notes 2, 4, 5 and 16) 174,769,976 344,952,654
Available-for-sale securities (Notes 2, 5, 9 and 16) 928,702,119 744,281,647
Held-to-maturity securities (Notes 2, 5, 6 and 16) 330,480,539 332,904,258
Securities accounted for using the equity method (Notes 2 and 7) 58,428,996 6,959,864
Loans, net of allowance for doubtful accounts
of \ 5,628,164 thousand as of March 31, 2006 and \ 3,195,022 thousand
as of March 31, 2005 (Notes 2, 8 and 10) 400,588,322 295,243,540
Real estate investments (Notes 2, 11 and 15) 1,224,635 3,892,085
Tangible assets - net (Notes 2, 10, 11, 12, 14 and 33) 382,944,608 300,244,381
Intangible assets - net (Notes 2 and 13) 2,788,698 3,645,353
Other assets:
Insurance receivables, net of allowance for doubtful accounts
of \ 1,872,335 thousand as of March 31, 2006 and \ 1,905,482 thousand
as of March, 2005 (Notes 2, 8, 10, 16 and 21) 64,118,986 69,945,140
Other accounts receivable, net of allowance for doubtful accounts
of \ 3,593,054 thousand as of March 31, 2006 and \ 2,751,278 thousand
as of March 31, 2005 (Notes 2 and 8) 17,677,232 20,543,157
Leasehold and other deposits (Note 10) 71,184,450 66,617,007
Accrued income, net of allowance for doubtful accounts of \ 9,488
thousand as of March 31, 2006 and \ 16,950 thousand as of March 31, 2005
(Notes 2 and 8) 21,923,942 19,102,008
Prepaid expenses 1,684,458 1,632,906
Compensation receivables (Notes 2 and 20) 17,974,131 17,298,102
Separate account debits (Note 2 and 19) 282,447 -
Separate account assets (Note 2 and 19) 87,974,096 69,448,206
Deferred acquisition cost (Note 2 and 30) 224,506,685 110,576,524
Notes receivable, net of allowance for doubtful accounts
of \ 4,536 thousand as of March 31, 2006 and \ 7,144 thousand
as of March 31, 2005 (Notes 2 and 8) 902,858 1,421,727
Advanced payments 1,978,506 465,348
Others 28,228,932 28,665,083
TOTAL ASSETS \ 3,110,006,761 \ 2,676,077,924
(Continued)
FY2005 FY2004
(In thousands of Korean won)
AS OF MARCH 31, 2006 AND 2005
www.meritzfire.com47
LIABILITIES AND SHAREHOLDERS’ EQUITY
Policy reserves, net (Notes 2 and 17) \ 2,447,496,146 \ 2,090,686,817
Catastrophe reserves (Notes 2 and 18) 120,742,154 108,449,306
Other liabilities:
Unpaid claims (Notes 10, 16 and 21) 109,011,086 96,761,579
Other accounts payable (Note 33) 11,906,469 8,838,278
Accrued expenses 42,443,935 30,051,192
Separate account credits (Note 2 and19) 103,586 8,858
Separate account liabilities (Note 2 and19) 87,974,096 69,448,206
Accrued severance indemnities, net of transfer to the National Pension
Fund of \ 311,154 thousand as of March 31, 2006 and \ 385,623
thousand as of March 31, 2005 and deposits for retirement insurance
of \17,722,498 thousand as of March 31, 2006 and 16,973,233 thousand
as of March 31, 2005 (Note 2) 11,943,953 11,615,281
Premiums received in advance 4,544,309 1,344,584
Bank overdraft (Notes 3 and 38) - 2,723,781
Borrowings (Notes 3 and 22) 900,000 1,300,000
Advances 3,014,852 3,438,270
Withholdings 928,992 1,122,723
Leasehold deposits received (Note 10) 20,683,097 13,125,558
Income tax payable 379,134 71,140
Deferred income tax liabilities (Notes 2 and 32) 15,987,688 9,182,178
Others 1,590,787 1,182,386
TOTAL LIABILITIES 2,879,650,284 2,449,350,136
SHAREHOLDERS’ EQUITY
Common stock (Notes 1 and 23) 42,900,000 42,900,000
Capital surplus (Note 26) 28,171,304 27,181,459
Retained earnings (Notes 25) 160,874,962 142,208,450
Capital adjustments :
Treasury stock (Notes 1 and 23) (12,231,604) (11,200,811)
Gain on valuation of available-for-sale securities (Notes 2 and 5) 9,858,909 25,563,738
Gain (loss) on valuation of securities accounted for using the equity method
(Notes 2 and 7) (320,686) 421,119
Stock option (Notes 2 and 36) 523,643 107,137
Gain (loss) on valuation of derivatives (Notes 2 and 31) 579,949 (453,303)
Total shareholders’ equity 230,356,477 226,727,788
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY \ 3,110,006,761 \ 2,676,077,924
See accompanying notes to financial statements.
FY2005 FY2004
(In thousands of Korean won)
Financial Statement 48
[ STATEMENTS OF INCOME ]
REVENUE
Premium revenue (Notes 2, 10 and 28) \ 1,856,926,566 \ 1,671,672,684
Reinsurance revenue (Notes 27) 160,284,603 146,417,913
Interest income (Notes 2, 4 and 10) 99,108,921 91,184,221
Dividend income 3,872,531 4,165,085
Gain on disposal of trading securities 19,562,647 16,065,823
Gain on valuation of trading securities (Notes 2 and 4) 1,721,840 1,996,122
Expenses recovered 52,074,301 54,927,597
Reversal of policy reserves 11,503,702 -
Others 5,206,567 2,873,526
Total 2,210,261,678 1,989,302,971
OPERATING EXPENSES
Provision for policy reserves (Notes 2 and 17) 368,313,031 294,112,095
Provision for catastrophe reserves (Notes 2 and 18) 12,292,848 11,626,542
Claims expense (Note 10) 724,232,824 670,619,903
Surrenders 382,925,827 349,192,691
Reinsurance expense (Note 27) 264,110,166 259,093,730
Interest expense 150,481 189,579
Loss on disposal of trading securities 3,796,688 6,865,424
Loss on valuation of trading securities (Notes 2 and 4) 145,938 1,429,650
Operating expenses (Notes 2, 8, 10, 12, 29, 36 and 37) 364,487,731 350,225,271
Investment administration expenses (Notes 2, 8, 12 and 37) 7,619,003 5,379,774
Others 84,038,738 27,996,782
Total 2,212,113,275 1,976,731,442
TOTAL OPERATING INCOME (LOSS) \ (1,851,597) \ 12,571,529
(Continued)
FY2005 FY2004
(In thousands of Korean won)
FOR THE YEARS ENDED MARCH 31,2006 AND 2005
www.meritzfire.com49
OTHER INCOME (EXPENSES)
Gain on disposal of available-for-sale securities - net \ 25,915,301 \ 10,818,443
Equity in earnings (losses) of affiliates (Notes 2 and 7) 12,532,553 (480,963)
Loss on disposal of securities accounted for using the equity method - (443,143)
Gain on disposal of tangible assets - net 183,118 96,559
Loss on foreign currency transactions - net (Notes 2) (83,729) (556,356)
Loss on foreign currency translation - net (Notes 2 and 16) (6,238,088) (13,969,078)
Reversal of allowance for doubtful accounts (Notes 2 and 8) 132,201 1,500,500
Gain on valuation of derivatives - net (Notes 2 and 31) 4,311,402 13,604,173
Gain on transactions of derivatives - net 261,420 1,446,683
Donations (358,204) (299,979)
Others - net (2,133,609) 2,108,184
Total other income, net 34,522,365 13,825,023
INCOME BEFORE INCOME TAX 32,670,768 26,396,553
INCOME TAX EXPENSE (Notes 2 and 32) (6,254,266) (5,283,132)
NET INCOME \ 26,416,502 \ 21,113,420
NET INCOME PER SHARE (Note 35) ( In Korean Won )
Basic \ 340 \ 272
Diluted \ 340 \ 271
See accompanying notes to financial statements.
FY2005 FY2004
(In thousands of Korean won)
Financial Statement 50
[ STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS ]
RETAINED EARNINGS BEFORE APPROPRIATIONS:
Beginning of the year \ 48,697 \ 9,181
Valuation gain using the equity method (Notes 2 and 7) - 676,085
Net income 26,416,502 21,113,420
End of the year 26,465,199 21,798,687
TRANSFER FROM RESERVES
Transfer from reserve for business stabilization 9,763 -
APPROPRIATIONS:
Legal reserve (800,000) (800,000)
Voluntary reserve (17,800,000) (13,200,000)
Cash dividends (Note 24) (7,808,668) (7,749,990)
Total appropriations (26,408,668) (21,749,990)
UNAPPROPRIATED RETAINED EARNINGS TO BE
CARRIED FORWARD TO SUBSEQUENT YEAR \ 66,294 \ 48,697
See accompanying notes to financial statements.
FY2005 FY2004
(In thousands of Korean won)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
www.meritzfire.com51
[ STATEMENTS OF CASH FLOWS ]
CASH FLOWS FROM OPERATING ACTIVITIES
Net income \ 26,416,502 \ 21,113,420
Addition of expenses not involving cash outflows :
Depreciation 11,381,497 7,471,066
Provision for severance indemnities 10,263,764 9,458,060
Bad debts 1,801,123 274,277
Reserve for outstanding claims 8,600,070 13,628,592
Long-term saving insurance premium reserves 351,743,657 254,774,208
Unearned premium reserves - 20,593,159
Policyholders’ profit dividend reserves 1,408,395 1,868,493
Policyholders’ dividend reserves 6,560,909 3,247,643
Catastrophe reserves 12,292,848 11,626,542
Loss on disposal of trading securities 3,796,688 6,865,424
Loss on valuation of trading securities 145,938 1,429,650
Loss on disposal of available-for-sale securities 4,282,547 1,132,890
Equity in earnings (losses) of affiliated companies - 480,963
Amortization of intangible assets 1,688,708 1,799,530
Amortization of deferred acquisition cost 78,734,636 25,561,230
Loss on foreign exchange translation 6,521,104 14,597,270
Others 2,485,934 3,557,268
Sub-total 501,707,818 378,366,266
Deduction of revenues not involving cash inflows :
Interest income (2,530,818) (3,248)
Gain on disposal of trading securities (19,562,647) (16,065,823)
Gain on valuation of trading securities (1,721,840) (1,996,122)
Gain on disposal of available-for-sale securities (30,197,848) (11,951,333)
Gain on disposal of tangible assets (189,065) (119,246)
Gain on foreign currency translation (296,401) (637,538)
Gain on valuation of derivatives (4,343,342) (14,066,322)
Gain on disposition of derivatives (1,843,030) (3,953,642)
Equity in earnings (losses) of affiliated companies (12,532,553) -
Reversal of unearned premium reserves (11,503,702) -
Others (5,552,624) (3,021,571)
Sub-total (90,273,870) (51,814,844)
(Continued)
FY2005 FY2004
(In thousands of Korean won)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
Financial Statement 52
[ STATEMENTS OF CASH FLOWS ]
Changes in assets and liabilities resulting from operations :
Decrease in insurance receivables \ 5,659,175 \ 11,329,992
Increase in accrued income (2,814,472) (2,022,858)
Increase in prepaid expenses (51,551) (83,014)
Increase in deferred policy acquisition cost (192,664,796) (113,729,240)
Decrease in notes receivable 521,477 405,994
Decrease (increase) in advanced payments (1,513,158) 334,181
Increase in other assets (13,187,162) (7,227,547)
Increase (decrease) in unpaid claims 12,472,698 (2,407,876)
Increase in accrued expenses 12,392,744 5,302,413
Payment of severance indemnities (9,260,296) (6,489,030)
Decrease in transfers to the National Pension Fund 74,469 118,903
Increase (decrease) in income tax payable 307,993 (6,977,310)
Increase in other liabilities 27,649,620 12,510,276
Sub-total (160,413,259) (108,935,117)
Net cash provided by operating activities 277,437,191 238,729,726
CASH FLOWS FROM INVESTING ACTIVITIES
Cash inflows from investing activities :
Withdrawal of deposits 292,227,018 518,402,468
Proceeds from sale of trading securities 2,962,920,627 3,439,404,338
Proceeds from sale of available-for-sale securities 461,810,646 237,489,450
Proceeds from sale of held-to-maturity securities 60,218,623 3,818,985
Collection of loans 1,127,566,857 844,195,398
Disposal of tangible assets 3,047,461 336,297
Decrease in other receivables 1,175,534,420 1,443,254,208
Decrease in other assets 33,378,484 23,114,386
Sub-total 6,116,704,136 6,510,015,530
Cash outflows for investing activities :
Payment of deposits (282,843,801) (609,429,250)
Acquisition of trading securities (2,775,380,937) (3,392,678,988)
Acquisition of available-for-sale securities (632,658,036) (199,459,427)
Acquisition of held-to-maturity securities (60,000,000) (141,280,059)
Extension of loans (1,233,856,299) (927,788,885)
Acquisition of tangible assets (94,278,618) (56,054,779)
Increase in other receivables (1,173,515,545) (1,446,475,794)
Increase in other assets (75,395,980) 73,721,491
Sub-total (6,327,929,216) (6,699,445,690)
Net cash used in investing activities \ (211,225,080) \ (189,430,160)
(Continued)
FY2005 FY2004
(In thousands of Korean won)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005
www.meritzfire.com53
CASH FLOWS FROM FINANCING ACTIVITIES
Cash inflows from financing activities :
Increase in other accounts payable \ 1,199,472,250 \ 1,286,822,088
Increase in bank overdraft 49,091,747 49,773,842
Collection of leasehold deposits received 9,884,038 433,859
Decrease of treasury stock 715,872 -
Sub-total 1,259,163,907 1,337,029,789
Cash outflows for financing activities :
Decrease in other accounts payable (1,196,404,059) (1,289,221,837)
Payment of dividends (7,749,990) (7,746,446)
Decrease in bank overdrafts (51,815,528) (47,050,061)
Refund of leasehold deposits received (2,371,500) (914,938)
Decrease in other liabilities (2,220,075) (2,464,632)
Sub-total (1,260,561,152) (1,347,397,914)
Net cash used in financing activities (1,397,245) (10,368,125)
NET INCREASE IN CASH 64,814,866 38,931,442
CASH AT BEGINNING OF YEAR (Note 34) 57,097,811 18,166,369
CASH AT END OF YEAR (Note 34) \ 121,912,677 \ 57,097,811
See accompanying notes to financial statements.
FY2005 FY2004
(In thousands of Korean won)
Notes to Financial Statement 54
[ NOTES TO FINANCIAL STATEMENTS ]
Meritz Fire & Marine Insurance Co., Ltd. (formerly Oriental Fire & Marine Insurance Co.,Ltd., thereafter the “Company”) was incorporated in
October 1922. On October 1, 2005, the Company changed its name from Oriental Fire & Marine Insurance Co., Ltd. to Meritz Fire & Marine
Insurance Co., Ltd. The Company is engaged in the insurance business and offers primarily property and casualty insurance products.
The Company’s shares have been listed on the Korea Stock Exchange since July 1957 and the Company’s capital stock as of March 31, 2006
amounted to \ 42,900 million.
The Company’s total issued shares are held by the following shareholders:
The accompanying financial statements for the year ended March 31, 2006 are expected to be approved by the shareholders’ meeting on May
19, 2006.
>>A. Basis Of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and prepares financial statements in the Korean language (Hangul) in
conformity with the accounting principles generally accepted in the Republic of Korea (“Korean GAAP”). Certain accounting principles applied
by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with the
generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are
informed about Korean accounting principles and practices. The accompanying financial statements have been restructured and translated
into English from the Korean language financial statements. Certain information included in the Korean language financial statements, but
not required for a fair presentation of the Company’s financial position, results of operations or cash flows, is not presented in the
accompanying financial statements.
Number of shares Percentage of
Owned total shares issued (%)
Three individuals, including Cho Jeong - Ho 19,245,240 22.43%
Meritz Fire & Marine Insurance Co., Ltd. (Treasury stock) 5,413,220 6.31%
BONYL/BONYE-MERL LHCH IN 4,403,000 5.13%
HUNTER HALL INVESTMENT M 3,400,040 3.96%
Others 53,338,500 62.17%
Total 85,800,000 100.00%
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. GENERAL
www.meritzfire.com55
The significant accounting policies followed by the Company in the preparation of its financial statements are summarized as follows:
>>B. Revenue Recognition
Revenues from premium income are recognized at the time when such premium payments become due. However, in the case of insurance
contracts of which ‘the first premium payment or lump-sum premium payment are uncollected as of the first day of the insured period due to a
payment extension allowed by the Company,’ the first premium payment or lump-sum premium payment may be recognized as revenue in the
period in which the first day of the insured period falls. If the premium income is received before the nominated collection date, the Company
records unearned insurance premium based on the calendar period calculation.
The Company recognizes interest income when earned based on the passage of time. However, interest income related to non-performing
loans is recognized when cash is collected.
>>C. Securities (Excluding Securities Accounted For Using The Equity Method)
Debt and equity securities are initially stated at their acquisition cost (fair value of considerations paid) including incidental cost incurred in
connection with acquisition of the related securities using the moving average method and classified into trading, available-for-sale and
held-to-maturity securities depending on the acquisition purpose and nature. The details the Company’s accounting treatment of securities,
except for the equity securities accounted for using the equity method, are as follows:
i) Trading Securities
Debt and equity securities bought and held for the purpose of selling in the near term are classified as trading securities. Trading
securities are recorded at fair value and valuation gain or loss from trading securities is recorded in current operations (see Note 4).
ii) Held-to-maturity Securities
Debt securities whose payment terms for principal and interest are fixed or determinable by a contract and for which the management
has an intent and an ability to hold until maturity are classified as held-to-maturity securities under non-current assets. However, if the
maturity of a held-to-maturity security is within one year from the balance sheet date, it is presented as current asset.
Notes to Financial Statement 56
[ NOTES TO FINANCIAL STATEMENTS ]
Held-to-maturity securities are recorded at their amortized cost with the difference between the acquisition cost and the par value being
amortized over the payment periods of the securities using the effective interest method. Such amortization is reflected in interest
income. When the amortized cost exceeds their recoverable value, an impairment loss in the amount of such excess is recognized in the
current operations. If the value of impaired securities subsequently recovers and the recovery objectively relates to an event arising after
the period when the impairment loss was recorded, such recovery is credited in the current operations up to the amortized cost, which
would have been recorded if the impairment loss had not been recorded (see Note 6).
iii) Available-for-sale Securities
Debt and equity securities that do not fall under the classifications of trading or held-to-maturity securities are categorized as
available-for-sale securities under non-current assets. However, if an available-for-sales security matures or is certain to be disposed
of within one year from the balance sheet date, it is presented as current asset.
Available-for-sales securities are recorded at fair value. However, available-for-sales equity securities, of which fair value cannot be
reliably measured, are recorded at cost, and the fair value of available-for-sales debt securities without the quoted market price is
estimated discounting the expected future cash flows at an interest rate commensurate with the credit rating published by independent
credit rating institutions. Unrealized gain or loss from available-for-sales securities is recorded as capital adjustments and when the
decline in fair value is not deemed recoverable, an impairment loss is recognized in the current operations. If the value of impaired
securities subsequently recovers and the recovery objectively relates to an event arising after the period when the impairment loss was
recorded, such recovery is credited in the current operations up to the previously recorded impairment loss (see Note 5).
>>D. Securities Accounted For Using The Equity Method
Investments in equity securities of companies, over which the Company exercises significant influence, are accounted for using the equity
method. Under the equity method, the Company records changes in its proportionate equity of the book value of the investee as current
operations, capital adjustments or adjustments to retained earnings, depending on the nature of the underlying changes in the investee.
The difference between the acquisition cost and the Company’s share of net asset fair value of the investee at the date of acquisition is
accounted for in accordance with Accounting Principles for Merger and Acquisition, where negative goodwill is amortized over the weighted
average useful lives of the investee’s identifiable non-monetary assets and reflected in the operations.
www.meritzfire.com57
In case the Company’s ownership percentage in the investee increases as a result of the investee’s change in capital, the difference from such
change is accounted for as a goodwill, whereas the Company’s ownership decreases, the difference is accounted for as disposal loss on
securities.
>> E. Allowance For Doubtful Accounts
In accordance with the Regulation on Supervision of Insurance Business (the “Supervisory Regulation”), the Company classifies all credits into
five categories as normal, precautionary, substandard, doubtful or estimated loss, based on the borrowers’ repayment capability and
historical financial transaction records. The Supervisory Regulation also requires the Company to provide the minimum rate of loss provision
for each category balance using the prescribed minimum percentages of 0.5 percent (0.75% for individual loan) or more, 2 percent (5% for
individual loan) or more, 20 percent or more, 50 percent or more and 100 percent, respectively.
No allowance is provided for loans to the Korean government and local government entities, and call loans.
>> F. Restructured Receivables
In case the contractual terms, such as those pertaining to the face amount and interest rate or maturity, have been modified to alleviate the
debtor’s burdens, as a result of an agreement between the creditor and debtor or through initiation of corporate reorganization procedures
under court trustee or under debtor’s management and in case of transfer of an asset or issuance of equity securities in order to restructure
troubled debts, the assets transferred or equity securities issued are accounted for at fair value by the creditor. If the fair value of the asset
received is less than the carrying amount of the receivable before subtracting relevant provisions, the carrying amount of the receivable is
written off against the relevant provisions and any remaining difference is recognized as bad debt expense. Furthermore, the difference
between the fair value and the carrying amount of the asset transferred is recognized as gain or loss on disposal of the asset by the debtor.
When a troubled debt restructuring occurs as a result of various types of modification of terms, the difference between the present value
calculated by discounting the future cash flows determined under the modified terms of the restructuring by the effective interest rate as of the
inception of the debt and the carrying amount of the debt is recognized as a discount on present valuation of debt and gain on debt
restructuring by the debtor. However, if the aggregate sum of the future cash flows contractually determined in a troubled debt restructuring
effected through modification of terms involving reduction of the maturity amount and accrued interest of a debt is less than the carrying
amount of the debt, the debtor initially writes down the carrying amount of the debt to the sum of the future cash flows and the effects resulting
from other modifications of terms are recognized.
Notes to Financial Statement 58
>>G. Property And Equipment
Property and equipment are stated at acquisition cost, except the revalued property and equipment, which are stated at appraised value. Major
renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is computed using the declining balance method (buildings: the straight-line
method) over the following useful lives as follows:
The Company does not capitalize financing cost associated with production, acquisition and development of an asset.
>>H. Intangible Assets
Intangible assets are recorded at cost, net of accumulated amortization. Development costs resulting from developing new products and other
intangible assets are amortized using the straight-line method over 5 years, beginning in the year the sale or use of the related products is
available.
>> I. Impairment Loss
The Company assesses any possible recognition of impairment loss when there is an indication that expected future economic benefits of an
asset (tangible, intangible and investment assets except for securities) is considerably less than its carrying amount, as a result of
technological obsolescence, rapid declines in market value or other causes of impairment. Impairment loss of \ 408,488 was recorded in
other loss for the year ended March 31, 2006.
>>J. Compensation Receivables
Of the amounts paid for claims during the year, amounts recoverable by exercising compensation and other rights or through disposal of
secured assets acquired in the resolution of accidents are accounted for as compensation receivables and deducted directly from insurance
reserves in the accompanying balance sheet. Compensation receivables are calculated by multiplying the average recovery ratio (recovery
amount/net claims) for the last 3 years from the prior year balance sheet date to the amount of net claims for the last year from the prior year
balance sheet date claimed.
[ NOTES TO FINANCIAL STATEMENTS ]
Account Useful lives
Buildings 40 years
Vehicles 4 years
Furniture and equipment 4 years
www.meritzfire.com59
>>K. Deferred Acquisition Costs
The Company capitalizes acquisition costs, to the extent that they are within the predetermined cost estimates, incurred from long-term and
amortizes using the straight-line method over the duration of insurance.
>> L. Insurance Reserves
(1) Policy Reserves
When an insurance contract is made, policy reserves are appropriated in consideration of the future claims, refunds, policyholder dividends
and related expenses. The amount collectible from reinsurance contracts, termed reinsurance reserves, is reported as a deduction from
policy reserves.
In accordance with the amended Regulation on Supervision of Insurance Business and its Enforcement Rules, effective from April 1, 2004,
the Company accounts for claims incurred but not reported (IBNR) related to long-term insurance policies (excluding general and auto
insurance policies) as policy reserves and changed its method of calculating IBNR for general insurance policies.
i) Reserve for outstanding claims
Reserve for outstanding claims is claims payable or estimated to be payable as of the balance sheet date.
ii) Long-term insurance premium reserves
The Company maintains a reserve for the portion of premiums (and investment income on such portion), which is refundable to
policyholders upon maturity and cancellation of the policy under long-term deposit-type insurance, unless there has been a substantial
claim for payment under the policy.
iii) Unearned premium reserves
Unearned premium reserves are premiums due, of which recognition is deferred over future periods.
Notes to Financial Statement 60
iv) Reserve for participating policyholder dividend
Reserve for participating policyholder dividend is provided for the purpose of future dividends in accordance with the laws and contract
terms.
v) Excess participating policyholder dividend reserve
Pursuant to relevant laws and contract terms, the Company may establish excess participating policyholder dividend reserve depending
on the operating results of related insurance products. The reserve may be used to pay participating policyholder dividend or additional
dividend.
(2) Catastrophe Reserves
Catastrophe reserves are required based on the regulations approved by the Governor of the Financial Supervisory Service. Non-life
insurance companies may establish a catastrophe reserve in proportion to underwriting profit for the year. These reserves can be used
against exceptionally large claims in the future.
>>M. Separate Accounts
Separate accounts representing assets and liabilities that are separately maintained for the insurance contracts, such as variable contracts
and retirement insurance contracts, are recorded as single gross amount in the balance sheet as ”separate account assets” and ”separate
account liabilities”, respectively. Separate account assets are recorded at fair value and policy reserves within separate account liabilities are
recorded as prescribed by the Financial Supervisory Services. Loss resulting from separate accounts is initially applied to excess participating
policyholder dividend reserve and remaining loss, if any, is applied to shareholders’ equity. Due from or to the separate accounts are recorded
as separate account debits and credits, respectively.
>>N. Accrued Severance Indemnities
In accordance with the Company’s policy, all employees with more than one year of service are entitled to receive severance indemnity
payments, based on their average salary during the last three months of service and length of employment at termination. The accrual for
severance indemnities is made assuming all employees were to terminate at the balance sheet date.
[ NOTES TO FINANCIAL STATEMENTS ]
www.meritzfire.com61
In accordance with the National Pension Law of Korea, the Company transferred a portion of its severance indemnities in cash to the National
Pension Fund through March 1999, which is deducted from accrued severance indemnities.
Funding of severance indemnities is not required. However, the Company maintains deposits for severance indemnities with Tongyang Life
Insurance Co., Ltd. and other insurance companies to meet the requirements for tax deduction purposes under the Korean Corporate Income
Tax Law. The deposits for severance indemnities are presented as a deduction from accrued severance indemnities.
The Company paid severance indemnities to employees amounting to \ 9,260,296 thousand and \ 6,489,030 thousand for the years ended
March 31, 2006 and 2005, respectively.
>>O. Translation Of Assets And Liabilities Denominated In Foreign Currency
Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by Seoul Money
Brokerage Services., Ltd. on the balance sheet date, which were, \ 975.90 and \ 1,024.30 to US$1.00 and \ 831.720 and \ 952.530 to ¥ 100.00 at
March 31, 2006 and 2005, respectively. Gain or loss arising from foreign currency translations is charged or credited to current operations.
>>P. Derivative Instruments
The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The
gain and loss that results from the change in the fair value of derivative instruments is reported in current operations. However, for derivative
instruments designated as hedging the exposure of variable cash flows, the effective portion of the gain or loss on the hedging instruments is
recorded as a separate component of shareholders’ equity and credited/charged to operations at the time the hedged transactions affect
earnings, and the ineffective portion of the gain or loss is credited/charged to current operations.
>>Q. Stock Options
The stock option program allows the Company’s employees to acquire shares of the Company. The option exercise price is generally fixed
below the market price of underlying shares at the date of the grant. The Company values stock options based on an option pricing model
under the fair value method and recognizes this value as an expense over the period in which the options vest. When the options are exercised,
equity is increased by the amount of the proceeds received, and the difference between the exercise price and market price is included in
compensation cost and credited to the capital adjustment account.
Notes to Financial Statement 62
>>R. Accounting For Leases
If a non-cancelable lease meets any one of the following criteria, it is accounted for as a financing lease:
a. The lease transfers ownership of the property to the lessee by the end of the lease term;
b. The lease contains an option to purchase the leased property at a bargain price;
c. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property; and
d. The present value of rental and other minimum lease payments equals or exceeds 90 percent of the fair value of the leased property.
All other leases are operating leases. For operating leases, rental expense is recognized on a straight-line basis over the lease term in the
statement of income and contingent rent is recorded as incurred.
For operating leases, straight-line lease expense is recorded over the lease term and contingent lease are charged to operations as incurred.
For financing leases, the lesser of the present value of lease payments in the future and the fair value of leased assets is recorded as a leased
asset and lease payables.
>> S. Deferred Income Taxes
Deferred tax is recognized on differences between the carrying amounts of assets and liabilities in the financial statements and the
corresponding tax bases used in the computation of taxable profits. Deferred tax liabilities are generally recognized for all taxable temporary
differences with some exceptions and deferred tax assets are recognized to the extent that it is certain that taxable profit will be available
against which the deductible temporary difference can be utilized. The carrying amount of deferred tax assets is reviewed at each balance
sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets
to be recovered.
Income tax expense is determined by adding or deducting the total income tax and surtaxes to be paid for the current period and the changes in
deferred income tax assets or liabilities.
In accordance with Statement of Korea Accounting Standards (‘SKAS’) No. 16, ‘Income Tax’ which became effective from the year ended March
31, 2006, tax effects of capital adjustment items, such as gain on valuation of available-for-sales securities, are directly adjusted to the related
capital adjustment accounts. As a result, total liabilities increased by \ 4,744,395 thousand and shareholders’ equity as of March 31, 2006
[ NOTES TO FINANCIAL STATEMENTS ]
www.meritzfire.com63
decreased by the same amount. As allowed under SKAS No. 16, the prior year financial statement which is comparatively presented, were not
restated.
>> T. Contingent Liability
The Company records liabilities when it is certain that the Company’s asset has decreased and the loss is reasonably estimable.
>>U. Accounting Changes Regarding Lapsed Contracts
Through the prior year, no liability had been recorded for lapsed contracts which the Company no longer had obligation to pay for surrenders.
From the current year, the Company started recording liabilities for such lapsed contracts as it deems constructive obligation and the industry
including the Company has actually paid for it. As a result, such obligation totaling \ 3,426,566 thousand as of March 31, 2006 has been
estimated and recorded as liability based on rates from studies of historical statistics on the payment of such lapsed contracts.
Details of restricted bank deposits as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
3. RESTRICTED BANK DEPOSITS
Account FY2005 FY2004 Remarks
Deposits \ 1,000,000 \ 1,925,358 Pledged as collateral
“ 10,500 10,500 Collateral for checking account
“ 39,036,000 40,972,000 Pledged as collateral
Total \ 40,046,500 \ 42,907,858
Notes to Financial Statement 64
(1) Details of trading securities as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
(2) Details of interest income in connection with securities are as follows (in thousands of Korean won):
Details of available-for-sale securities as of March 31, 2006 and 2005 are as follows (In thousands of Korean won):
(1) Classification
[ NOTES TO FINANCIAL STATEMENTS ]
5. AVAILABLE-FOR-SALES SECURITIES
Trading securities Available-for-sale securities Held-to-maturity securities Total
Details FY2005 FY2004 FY2005 FY2004 FY2005 FY2004 FY2005 FY2004
Government and
agency bonds \ 513,127 \ 346,735 \ 4,686,096 \ 2,984,167 \ 2,166,545 \ 2,097,595 \ 7,365,768 \ 5,428,497
Special bonds 846,753 4,827,948 16,925,308 16,581,036 12,317,241 7,047,832 30,089,302 28,456,816
Corporate bonds 96,406 291,007 15,923,570 14,973,733 2,710,038 3,237,465 18,730,014 18,502,205
Overseas bonds - - 933,637 321,023 4,493,665 4,502,282 5,427,302 4,823,305
Others - 314,274 1,611,830 219,313 - - 1,611,830 533,587
Total \ 1,456,286 \ 5,779,964 \ 40,080,441 \ 35,079,272 \ 21,687,489 \ 16,885,174 \ 63,224,216 \ 57,744,410
Classification FY2005 FY2004
Equity securities
Equity securities with readily determinable fair values \ 41,770,540 \ 61,234,027
Equity securities without readily determinable fair values 8,057,166 16,260,524
Sub total-equity securities 49,827,706 77,494,551
Contributed capital 9,511,000 524,000
Beneficiary certificate 106,987,721 21,311,852
Debt securities 762,375,692 644,951,245
Total \ 928,702,119 \ 744,281,648
4. TRADING SECURITIES
Balance before valuation Fair value Valuation gain / (loss)
Details FY2005 FY2004 FY2005 FY2004 FY2005 FY2004
Equity securities \ 37,408 \ 7,424,405 \ 40,257 \ 7,342,356 \ 2,849 \ (82,049)
Government and agency bonds - 20,185,664 - 19,929,981 - (255,683)
Special bonds 9,788,226 89,831,882 9,788,336 89,621,859 110 (210,023)
Corporate bonds 30,001,887 4,962,657 30,001,773 4,968,832 (114) 6,175
Beneficiary certificate 110,402,703 213,817,623 112,029,862 215,382,049 1,627,159 1,564,426
Overseas bonds 1,463,850 5,163,951 1,475,561 4,836,745 11,711 (327,206)
Others 21,500,000 3,000,000 21,434,187 2,870,833 (65,813) (129,167)
Total \ 173,194,074 \ 344,386,182 \ 174,769,976 \ 344,952,655 \ 1,575,902 \ 566,473
www.meritzfire.com65
(2) Equity securities
a. As of March 31, 2006
Ownership Cost/beg. Fair value Unrealized Impairment loss
Company Shares percentage balance (Note1) Book value gain (loss) FY2004 FY2005
Equity securities with readily
determinable fair values
KOCREF CR-REIT 1 2,000,000 7.52% \ 10,000,000 \ 15,300,000 \ 15,300,000 \ 5,300,000 \ - \ -
Kyobo-Meritz 500,000 2.98% 2,500,000 2,600,000 2,600,000 100,000 - -
Realty 1 1,000,000 7.58% 5,000,000 6,570,000 6,570,000 1,570,000 - -
Ures-Meritz 1 1,000,000 10.00% 5,000,000 5,220,000 5,220,000 220,000 - -
KT 160,640 0.06% 6,314,775 6,272,992 6,272,992 (41,783) - -
SK Networks (Note 1) 370,381 0.16% 2,214,786 2,214,786 2,214,786 - -
Hyundai Eng & Const
Co. Ltd. 5,277 0.00% 238,825 261,475 261,475 22,650 - -
Han Jin Transportation 10,000 0.08% 134,114 268,000 268,000 133,886 - -
Korean Air Line Co., Ltd. 10,000 0.01% 126,470 310,000 310,000 183,530 - -
Korean Air Terminal Co., Ltd. 94,660 2.99% 3,021,860 2,267,107 2,267,107 (754,753) - -
INICIS Co., Ltd. 64,800 0.51% 1,328,400 319,140 319,140 (1,009,260) - -
Dae Joo Co., Ltd. 288,000 0.81% 432,000 167,040 167,040 (264,960) - -
Sub total 36,311,230 41,770,540 41,770,540 5,459,310 - -
Equity securities without readily
determinable fair values
Shinwha Electronics Co. 8,000 2.00% 40,000 141,095 40,000 - - -
Korea Securities Depository 359 0.01% 3,160 23,199 3,160 - - -
Pusan New Port Company 775,118 1.30% 3,875,590 3,602,816 3,875,590 - - -
ARD Holdings, Inc. 320,000 2.52% 1,600,000 1,670,576 1,600,000 - - -
Pointpark Ltd. 100,000 2.32% 200,000 23,028 20,871 - 179,129 -
Final Data Inc. 25,000 0.50% 900,000 125,911 900,000 - - -
KDS 1 Preferred stock 3,193 - 6,042 - 6,042 - - -
KDS 2 Preferred stock 798 - 1,510 - 1,510 - - -
SK Networks redeemable
preferred stock (Note 2) 30,969 - 1,609,993 1,609,993 1,609,993 - - -
Sub total 8,236,295 7,196,618 8,057,166 - 179,129 -
Contributed capital
MIC2003-1 - 0.83% 500,000 552,405 500,000 - - -
Macquarie Korea OPP - 5.89% 9,011,000 8,900,282 9,011,000 - - -
Sub total 9,511,000 9,452,687 9,511,000 - - -
Beneficiary certificates
Beneficiary certificates 99,000,000 106,987,721 106,987,721 7,987,721 - -
Sub total 99,000,000 106,987,721 106,987,721 7,987,721 - -
Total \ 153,058,525 \ 165,407,566 \ 166,326,427 \ 13,447,031 \ 179,129 \ -
Notes to Financial Statement 66
[ NOTES TO FINANCIAL STATEMENTS ]
b. As of March 31, 2005
Impairment loss
Ownership Cost/beg. Fair value Unrealized
Company Shares percentage balance (Note1) Book value gain (loss) FY2003 FY2004
Equity securities with readily determinable fair valuesKyobo-Meritz 500,000 2.98% \ 2,500,000 \ 2,710,000 \ 2,710,000 \ 210,000 \ - \ -
KOCREF CR-REIT 1 2,000,000 7.52% 10,000,000 12,800,000 12,800,000 2,800,000 - -
Realty 1 1,000,000 7.58% 5,000,000 6,090,000 6,090,000 1,090,000 - -
Ures-Meritz 1 1,000,000 10.00% 5,000,000 5,380,000 5,380,000 380,000 - -
KT 229,500 0.08% 9,021,669 9,042,300 9,042,300 20,631 - -
Hyundai Eng & Const Co. Ltd. 5,277 0.01% 238,825 92,611 92,611 (146,214) -
Dae Joo Co., Ltd. 28,800 0.81% 432,000 55,872 55,872 (376,128)
Hynix Semiconductor 2,585 0.00% 25,977 33,734 33,734 7,757 - -
SK Networks (Note 2) 370,381 0.16% 2,214,786 2,214,786 2,214,786 - - -
INICIS Co., Ltd. 64,800 0.51% 1,328,400 141,264 141,264 (1,187,136) - -
CJ preferred stock 12,000 - 394,785 531,600 531,600 136,815 - -
LG Chemical preferred stock 111,000 - 2,993,862 3,191,250 3,191,250 197,388 - -
Korean Air Line Co., Ltd. 621,820 0.87% 7,864,167 12,312,036 12,312,036 4,447,869 - -
Korean Air Terminal Co., Ltd. 94,660 2.99% 3,021,860 1,666,016 1,666,016 (1,355,844) - -
Han Jin Transportation 357,738 2.99% 4,797,766 4,972,558 4,972,558 174,792 - -
Sub total 54,834,097 61,234,027 61,234,027 6,399,930 - -
Equity securities without readily determinable fair valuesShinwha Electronics Co. 8,000 2.00% 40,000 135,386 40,000 - - -
Korea Securities Depository 359 0.01% 3,160 33,934 3,160 - - -
Pusan New Port Company 642,084 1.00% 3,210,420 2,782,522 3,210,420 - - -
ARD Holdings, Inc. 320,000 2.52% 1,600,000 1,545,238 1,600,000 - - -
Pointpark Ltd. 100,000 2.32% 200,000 23,079 20,871 - 179,129 -
SK Networks redeemable
preferred stock (Note 2) 30,969 - 1,609,993 1,609,993 1,609,993 - - -
Final Data Inc. 25,000 0.50% 900,000 122,778 900,000 - - -
Sanyang Electronics. Co. 9,598 0.12% 64,595 32,615 64,595 - - -
KDS 1 Preferred stock 54,296 - 6,043 - 6,043 - - -
KDS 2 Preferred stock 13,574 - 1,511 - 1,511 - - -
PT.Asuransi Hanjin Korindo (Note 3) - 51.00% 953,955 2,295,974 953,955 - - -
Jungsuck Enterprise 44,179 2.11% 4,419,667 4,119,105 4,419,667 - - -
Hanjin Travel Service 84,532 4.99% 3,430,309 2,400,990 3,430,309 - - -
Sub total 16,439,653 15,101,614 16,260,524 - 179,129 -
Contributed capitalMIC2003-1 - 0.83% 500,000 516,641 500,000 - - -
GEO No. 7 - - 24,000 - 24,000 - - -
Sub total 524,000 516,641 524,000 - - -
Beneficiary certificatesBeneficiary certificates - - 21,000,000 21,311,852 21,311,852 311,852 - -
Sub total - - 21,000,000 21,311,852 21,311,852 311,852 - -
Total \ 92,797,750 \ 98,164,134 \ 99,330,403 \ 6,711,782 \ 179,129 \ -
www.meritzfire.com67
(Note 1) Fair value/book value of the securities presented above were based on financial data as of December 31, 2005 and 2004, except
Macquarie Korea OPP which was based on data as of March 31, 2006 and 2005.
(Note 2) The fair value of SK Networks was valuated based on Korea Bond Pricing & KR Co. as of December 2003.
(Note 3) From the current year, the equity method of accounting began to be applied as PT Asransi Hanjin Korindo has become material.
(3) Debt securities
a. As of March 31, 2006
Amortized Fair value Unrealized Impairment loss
Maturity Type Cost cost (book value) gain (loss) FY2004 FY2005
Within 1 year Special bonds \ 89,460,813 \ 89,939,973 \ 90,900,553 \ 960,580 \ - \ -
Corporate bonds 15,500,000 15,500,000 15,518,669 18,669 - -
Others 15,000,000 15,000,000 15,753,750 753,750 - -
Sub total 119,960,813 120,439,973 122,172,972 1,732,999 - -
Within 5 years Government and
public bonds 5,621,663 6,163,831 6,263,790 99,959 - -
Special bonds 109,752,403 109,911,946 111,927,186 2,015,239 - -
Corporate bonds
(Note 1) 169,144,422 168,945,818 169,207,019 261,202 - -
Overseas bonds (Note 2) 10,132,000 10,132,000 9,881,378 122,378 - -
Others 35,947,000 35,947,000 34,122,343 (1,824,657) - -
Sub total 330,597,488 331,100,595 331,401,716 674,121 - -
Within 10 years Government and
public bonds 113,939,034 114,342,299 114,703,834 361,536 - -
Special bonds 48,870,794 48,961,659 49,852,364 890,705 - -
Corporate bonds 67,765,521 68,005,592 66,069,537 (1,936,056) - -
Overseas bonds (Note 2) 25,299,300 25,299,300 23,349,091 (961,010) - -
Others 20,100,000 20,100,000 19,527,759 (572,241) - -
Sub total 275,974,649 276,708,850 273,502,585 (2,217,066) - -
Over 10 years Government and
public bonds 25,235,000 25,337,009 25,175,494 (161,516) - -
Special bonds 10,000,000 10,000,000 10,122,924 122,924 - -
Sub total 35,235,000 35,337,009 35,298,418 (38,592) - -
Total Government and
public bonds 144,795,697 145,843,139 146,143,118 299,979 - -
Special bonds 258,084,010 258,813,579 262,803,027 3,989,448 - -
Corporate bonds 252,409,943 252,451,410 250,795,225 (1,656,185) - -
Overseas bonds 35,431,300 35,431,300 33,230,469 (838,632) - -
Others 71,047,000 71,047,000 69,403,852 (1,643,148) - -
Total \ 761,767,950 \ 763,586,428 \ 762,375,691 \ 151,462 \ - \ -
Notes to Financial Statement 68
[ NOTES TO FINANCIAL STATEMENTS ]
b. As of March 31, 2005
(Note 1) Impairment loss on SK Networks Co., Ltd.’s (formerly SK Global Co., Ltd.) investment bonds of \ 1,611,307 thousand was recorded for
the year ended March 31, 2004, and reclassified into available-for-sale securities or account receivables. The reversal of impairment
loss on SK Networks Co., Ltd. of \ 836,305 thousand was recorded for the year ended March 31, 2005.
(Note 2) Certain portion of the unrealized gain/loss from overseas bonds was reflected in current operations as hedge accounting was applied
(Note 31).
Amortized Fair value Unrealized Impairment loss
Maturity Item Cost cost (book value) gain (loss) FY2003 FY2004
Within 1 year Special bonds \ 57,173,760 \ 57,036,376 \ 57,814,984 \ 778,608 \ - \ -
Corporate bonds 43,275,526 43,037,626 43,371,492 333,866 - -
Sub total 100,449,286 100,074,002 101,186,476 1,112,474 - -
Within 5 years Government and
public bonds 5,621,663 5,995,935 6,277,148 281,213 - -
Special bonds 159,194,450 159,715,718 166,686,361 6,970,643 - -
Corporate bonds
(Note 1) 153,406,833 153,888,414 156,483,124 2,594,710 - -
Others 40,000,000 40,000,000 41,605,526 1,605,526 - -
Sub total 358,222,946 359,600,067 371,052,159 11,452,092 - -
Within 10 years Government and
public bonds 39,596,280 39,698,386 41,985,067 2,286,681 - -
Special bonds 49,319,664 49,323,980 51,740,822 2,416,842 - -
Corporate bonds 64,779,711 64,464,753 66,695,121 2,230,368 - -
Overseas bonds (Note 2) 6,030,000 6,030,000 5,121,500 (646,500) - -
Sub total 159,725,655 159,517,119 165,542,510 6,287,391 - -
Over 10 years Overseas bonds
(Note 2) 7,028,800 7,028,800 7,170,100 - - -
Sub total 7,028,800 7,028,800 7,170,100 - - -
Total Government and
public bonds 45,217,943 45,694,321 48,262,215 2,567,894 - -
Special bonds 265,687,874 266,076,074 276,242,167 10,166,093 - -
Corporate bonds 261,462,070 261,390,793 266,549,737 5,158,944 - -
Others 40,000,000 40,000,000 41,605,526 1,605,526 - -
Overseas bonds 13,058,800 13,058,800 12,291,600 (646,500) - -
Total \ 625,426,687 \ 626,219,988 \ 644,951,245 \ 18,851,957 \ - \ -
www.meritzfire.com69
(4) Changes in unrealized gain (loss)
a. As of March 31, 2006
b. As of March 31, 2005
(5) Pledged securities
Details of pledged securities as of 31, March 2006 are as follows (in thousands of Korean won):
Descriptions April 1, 2005 Increase Decrease March 31, 2006
Equity securities \ 6,399,930 \ - \ 940,620 \ 5,459,310
Government and
public bonds 2,567,893 - 2,267,914 299,979
Special bonds 10,166,093 - 6,176,645 3,989,448
Corporate bonds 5,158,943 - 6,815,127 (1,656,184)
Beneficial securities 311,852 7,675,869 - 7,987,721
Overseas bonds (646,500) - 192,132 (838,632)
Others 1,605,526 - 3,248,674 (1,643,148)
Total \ 25,563,737 \ 7,675,869 \ 19,641,112 \ 13,598,494
Descriptions April 1, 2004 Increase Decrease March 31, 2005
Equity securities \ (1,392,642) \ 7,792,572 \ - \ 6,399,930
Government and
public bonds 3,473,084 - 905,191 2,567,893
Special bonds 2,986,321 7,179,772 - 10,166,093
Corporate bonds 5,358,058 - 199,115 5,158,943
Beneficial securities - 311,852 - 311,852
Overseas bonds - - 646,500 (646,500)
Others - 1,605,526 - 1,605,526
Total \ 10,424,821 \ 16,889,722 \ 1,750,806 \ 25,563,737
Descriptions Company Book value Amounts of mortgage Contents Remarks
Trading securities Industrial bank of Korea $ 1,500,000 1,463,850 Pledged as collateral Pledged for derivatives
Available-for-sale
securities “ 10,000,000 10,000,000 “ “
“ “ $ 15,000,000 14,638,500 “ “
“ $ 74,000,000 72,216,600 “ “
Held-to-maturity securities Korea Development Bank $ 20,000,000 19,518,000 “ “
“ “ $ 40,000,000 39,036,000 “ “
“ KB Futures Co., Ltd. 10,000,000 10,000,000 “ “
Notes to Financial Statement 70
[ NOTES TO FINANCIAL STATEMENTS ]
Details of held-to-maturity securities as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
March 31, 2006
March 31, 2005
6. HELD-TO-MATURITY SECURITIES
Maturity Company Cost Amortized cost Recoverable value Book value
Within 1 year Government and public bonds \ 1,571,233 \ 1,778,074 \ 1,778,074 \ 1,778,074
Within 5 years Government and public bonds 27,174,174 29,203,408 29,203,408 29,203,408
Special bonds 60,959,198 60,957,421 60,957,421 60,957,421
Corporate bonds 19,953,573 19,967,416 19,967,416 19,967,416
Sub total 108,086,945 110,128,245 110,128,245 110,128,245
Within 10 years Government and public bonds 20,220 20,220 20,220 20,220
Special bonds 150,000,000 150,000,000 150,000,000 150,000,000
Overseas bonds 69,745,000 58,554,000 58,554,000 58,554,000
Sub total 219,765,220 208,574,220 208,574,220 208,574,220
Over 10 years Special bonds 10,000,000 10,000,000 10,000,000 10,000,000
Total Government and public bonds 28,765,627 31,001,702 31,001,702 31,001,702
Special bonds 220,959,198 220,957,421 220,957,421 220,957,421
Corporate bonds 19,953,573 19,967,416 19,967,416 19,967,416
Overseas bonds 69,745,000 58,554,000 58,554,000 58,554,000
Total \ 339,423,398 \ 330,480,539 \ 330,480,539 \ 330,480,539
Maturity Company Cost Amortized cost Recoverable value Book value
Within 1 year Government and public bonds \ 171,493 \ 171,493 \ 171,493 \ 171,493
Special bonds 10,071,200 10,015,949 10,015,949 10,015,949
Corporate bonds 20,000,000 20,000,000 20,000,000 20,000,000
Sub total 30,242,693 30,187,442 30,187,442 30,187,442
Within 5 years Government and public bonds 24,183,165 30,313,218 30,313,218 30,313,218
Special bonds 40,960,271 40,958,067 40,958,067 40,958,067
Corporate bonds 10,000,000 10,000,000 10,000,000 10,000,000
Sub total 75,143,436 81,271,285 81,271,285 81,271,285
Within 10 years Government and public bonds 30,060 30,060 30,060 30,060
Special bonds 139,996,267 139,996,677 139,996,677 139,996,677
Corporate bonds 19,953,573 19,960,793 19,960,793 19,960,793
Overseas bonds 69,745,000 61,458,000 61,458,000 61,458,000
Sub total 229,724,900 221,445,530 221,445,530 221,445,530
Total Government and public bonds 24,384,718 30,514,771 30,514,771 30,514,771
Special bonds 191,027,738 190,970,693 190,970,693 190,970,693
Corporate bonds 49,953,573 49,960,793 49,960,793 49,960,793
Overseas bonds 69,745,000 61,458,000 61,458,000 61,458,000
Total \ 335,111,029 \ 332,904,257 \ 332,904,257 \ 332,904,257
www.meritzfire.com71
(1) Details of securities accounted for using the equity method of accounting as of March 31, 2006 and 2005 are as follows
(in thousands of Korean won):
March 31, 2006
March 31, 2005
(Note 1) Though the Company’s ownership was less than 20% as of March 31, 2005, the Company used the equity method on the above
securities because key directors of the Company were also a member of investee Company’s board of directors. 25.66% ownership
were additionally purchased in second half of the year.
(Note 2) From the current year, the equity method of accounting began to be applied as PT Asuransi Hanjin Korindo has become material.
(2) The changes in the difference between the cost and proportionate net asset value of investee at the time of acquisition (goodwill and
negative goodwill) for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
March 31, 2006
March 31, 2005
7. SECURITIES ACCOUNTED FOR USING THE EQUITY METHOD
Number of Ownership Market Net asset Book
Companies shares (%) Cost value value value
Meritz Securities Co.(Note 1) 10,021,285 28.78% \ 47,754,264 \ 60,829,200 \ 69,779,600 \ 56,099,142
PT.ASURANSIHANJIN KORINDO (Note 2) 7,650 51.00% 953,955 - 2,329,854 2,329,854
Total \ 48,708,219 \ 60,829,200 \ 72,109,454 \ 58,428,996
Number of Ownership Market Net asset Book
Companies shares (%) Cost value value value
Meritz Securities Co.(Note 1) 1,115,764 3.22% \ 9,029,835 \ 3,882,859 \ 7,022,480 \ 6,959,864
April 1, Increase Amortization March 31,
Company 2005 (decrease) (accretion) 2006
Meritz Securities Co. \ - \ (21,764,894) \ (8,084,436) \ (13,680,458)
April 1, Amortization March 31,
Company 2004 Increase (accretion) 2005
Korea French Banking Corp. \ 125,184 \ (104,320) \ 20,864 \ -
Meritz Securities Co. (18,347) - (18,347) -
Total \ 106,837 \ (104,320) \ 2,517 \ -
Notes to Financial Statement 72
[ NOTES TO FINANCIAL STATEMENTS ][ NOTES TO FINANCIAL STATEMENTS ]
(3) Details of valuation using the equity method for the years ended March 31, 2006 and 2005 are as follows
(in thousands of Korean won):
March 31, 2006
March 31, 2005
(4) The condensed financial information of the investees as of and for the years ended March 31, 2006 and 2005 is as follows
(in thousands of Korean won):
March 31, 2006
March 31, 2005
April 1, Equity in earnings Other increase March 31,
Companies 2005 (loss) of investee (decrease) 2006
Meritz Securities Co. \ 6,959,864 \ 10,551,699 \ 38,587,579 \ 56,099,142
PT.ASURANSIHANJIN KORINDO - 1,980,853 349,001 2,329,854
Total \ 6,959,864 \ 12,532,552 \ 38,936,580 \ 58,428,996
Companies Total assets Total liabilities Revenue Net income (loss)
Meritz Securities Co. \ 706,674,659 \ 464,216,008 \ 294,825,455 \ 20,519,277
PT.ASURANSI HANJIN KORINDO 5,399,096 830,755 5,388,348 448,524
Total \ 712,073,755 \ 465,046,763 \ 300,213,803 \ 20,967,801
Companies Total assets Total liabilities Revenue Net income (loss)
Meritz Securities Co. \ 631,526,220 \ 413,445,422 \ 178,283,045 \ (3,883,717)
PT.ASURANSI HANJIN KORINDO 5,511,403 1,023,315 5,930,585 370,249
Total \ 637,037,623 \ 414,468,737 \ 184,213,630 \ (3,513,468)
April 1, Equity in earnings Other increase March 31,
Companies 2005 (loss) of investee (decrease) 2006
Korea French Banking Corp. \ 1,897,653 \ 585,004 \ (2,482,657) \ -
Meritz Securities Co. 8,142,654 (1,065,967) (116,823) 6,959,864
Total \ 10,040,307 \ (480,963) \ (2,599,480) \ 6,959,864
www.meritzfire.com73
(1) Maturity of loans as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
(2) As of March 31, 2006 and 2005, loans to directors and employees consist of the following (in thousands of Korean won):
(3) The Company classifies loans into five different grades, “normal”, “precautionary”, “substandard”, “doubtful” and “estimated loss”,
pursuant to Article 43 of the Insurance Regulations and the Company’s own classification criteria of assets. Details of the classification
as of March 31, 2006 are as follows (in thousands of Korean won):
8. LOANS
Period FY2005 FY2004
Under 1 year \ 151,160,564 \ 71,411,200
1 year ~ 3 years 81,806,603 78,326,700
3 years ~ 5 years 37,891,720 39,173,696
Over 5 years 135,357,599 109,526,966
Total \ 406,216,486 \ 298,438,562
Descriptions Interest rate FY2005 FY2004
Unsecured loans to employees 5.0% \ 1,850,489 \ 1,577,529
Loans related to housing 2% ~ 5.0% 7,499,465 7,489,039
Loans related to employee stock purchases 4% ~ 10% - 278,482
Total \ 9,349,954 \ 9,345,050
Estimated
Descriptions Normal Precautionary Substandard Doubtful loss Total
Loans secured by insurance policy \ 149,334,415 \ - \ - \ - \ - \ 149,334,415
Loans secured by marketable securities 2,504,000 - - - - 2,504,000
Loans secured by real estate 153,994,459 270,000 1,325,000 1,400,000 - 156,989,459
Unsecured loans 2,539,476 10,496,561 13,600 4,944 26,962 13,081,543
Loans for guaranty payments 8,921,207 53,093 - - - 8,974,300
Others 75,332,769 - - - - 75,332,769
Loans total 392,626,326 10,819,654 1,338,600 1,404,944 26,962 406,216,486
Insurance receivables (Note 1) 7,624,778 6,082,205 1,162,150 426,150 1,267,064 16,562,347
Notes receivable 907,393 - - - - 907,393
Other accounts receivable 15,549,048 100,220 40,961 4,149,884 1,430,172 21,270,285
Suspense payment - - 39,629 26 3,785 43,440
Dishonored notes - - - - 6,267 6,267
Accrued income (Note 2) 21,916,437 16,993 - - - 21,933,430
Total \ 438,623,982 \ 17,019,072 \ 2,581,340 \ 5,981,004 \ 2,734,250 \ 466,939,648
Notes to Financial Statement 74
(Note 1) The Company provides an allowance for doubtful accounts on the balance of insurance receivables after deducting the unpaid claims
to the same companies.
(Note 2) The Company records accrued income for the accounts classified as “normal” or “precautionary”. The Company does not provide an
allowance for doubtful accounts for accrued income receivables from financial institutions.
(4) Details of allowance for doubtful accounts for the balances of the above receivables as of March 31, 2006 are as follows
(in thousands of Korean won):
Bad debt write-offs for the years ended March 31, 2006 and 2005 amounting to \ 25,583 thousand and \ 349,455 thousand respectively, were
offset against the allowance for doubtful accounts.
(5) As of March 31, 2006 and 2005, the allowance for doubtful accounts, based on the type of loans, is as follows
(in thousands of Korean won):
Normal Precautionary Substandard Doubtful Estimated
Descriptions (0.5~0.75%) (2~5%) (20%) (50%) loss(100%) Total
Loans \ 2,575,598 \ 1,518,612 \ 384,520 \ 1,122,472 \ 26,962 \ 5,628,164
Insurance receivables 38,123 121,644 232,429 213,075 1,267,064 1,872,335
Trade Notes receivables 4,536 - - - - 4,536
Other accounts receivables 77,745 2,004 8,192 2,074,941 1,430,172 3,593,054
Suspense payments - - 7,925 12 3,785 11,722
Dishonored notes - - - - 6,267 6,267
Accrued income 9,150 338 - - - 9,488
Total \ 2,705,152 \ 1,642,598 \ 633,066 \ 3,410,500 \ 2,734,250 \ 11,125,566
Classification Type FY2005 FY2004
Loans Loans secured by insurance policy \ 1,120,008 \ 913,934
Loans secured by marketable securities 15,780 64,439
Loans secured by real estate 2,492,644 1,844,418
Unsecured loans 1,553,507 175,631
Loans for guaranty payments 69,562 74,600
Others 376,663 122,000
Total \ 5,628,164 \ 3,195,022
[ NOTES TO FINANCIAL STATEMENTS ]
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(6) The provision ratio of allowance for doubtful accounts to total receivables for the years ended March 31, 2006, 2005 and 2004 is as follows
(in thousands of Korean won):
(7) The loans under estimated loss of which the Company’s right over such loans were still valid as of March 31, 2006 and 2005 are as
follows (in thousands of Korean won):
Receivables of SK Networks (formerly SK Global) restructured in reorganization procedures were \ 14,506 million (face value : \ 14,711
million). As of October 27, 2003, the restructuring of receivables of SK was confirmed. The Company acquired securities by converting into
equity. Securities consisted of common shares (\ 1,574 million, 460,700 shares), preferred shares (\ 1,610 million, 54,196 shares) and
convertible bonds (\ 703 million, 205,870 shares). The fair value of securities was valuated based on Korea Bond Pricing & KR Co. in
December 2003. The remainder will be classified to long-term receivables (\ 6,013 million) by December 31, 2007.
Descriptions FY2003 FY2004 FY2005
Loans \ 213,500,954 \ 298,438,562 \ 406,216,486
Insurance receivables 83,652,010 71,850,622 65,991,320
Other accounts receivables 19,897,247 23,294,435 21,270,285
Suspense payments 12,817 15,091 43,440
Accrued income 17,096,101 19,118,958 21,933,430
Notes receivables 1,834,865 1,428,871 907,393
Dishonored bills 1,082 709 6,267
Total 335,995,076 414,147,248 516,368,621
Allowance for doubtful accounts 8,147,815 7,884,452 11,125,566
Allowance ratio 2.42% 1.90% 2.15%
FY2005 FY2004
Descriptions Credit Claim Credit Claim
Loans \ 26,962 \ 26,962 \ 41,664 \ 41,664
Other accounts receivables 1,430,172 1,430,172 582,107 582,107
Suspense payments 3,785 3,785 5,976 5,976
Dishonored bills 6,267 6,267 708 708
Total \ 1,467,186 \ 1,467,186 \ 630,455 \ 630,455
9. RESTRUCTURED RECEIVABLES
Notes to Financial Statement 76
[ NOTES TO FINANCIAL STATEMENTS ]
Significant transactions and account balances with related parties as of and for the years ended March 31, 2006 and 2005 are as follows
(in thousands of Korean won):
(1) Transactions
10. RELATED PARTY TRANSACTIONS AND BALANCES
Premium income Premium expense
Related companies FY2005 FY2004 FY2005 FY2004
Keoyang Shipping Co., Ltd. \ 276,932 \ 282,900 \ 19,941 \ 247,139
InHa Hospital 266,191 344,714 190,113 (24,148)
InHa Academy 79,086 78,297 37,017 25,415
InHa Technical College 1,849 2,823 4,344 -
Jung Suck Enterprise Co., Ltd. 2,174 3,426 500 6,411
Jung Suck Academy 35,641 42,543 - 819
Total Technology Development 15,482 14,144 3,985 1,303
Korean Air Lines Co., Ltd. 2,018,357 1,913,206 7,365,710 5,196,452
Han Jin Transportation Co., Ltd. 1,387,909 3,500,057 882,898 1,967,913
Han Jin Travel Service Co., Ltd. 193,988 545,468 11,859 53,530
Hanjin Shipping Corporation 1,912,471 4,631,189 (892,087) 5,501,253
Hanjin Korindo 316,062 475,532 179,908 221,845
Korea Air Terminal Service Co., Ltd. 496,382 541,061 107,307 179,709
Korean French Banking Corp. 85,199 61,191 5,109 9,070
HanIl Leisure Co., Ltd. 37,953 31,651 4,044 1,913
Hanjin Information System &
Telecommunication 37,408 42,096 48 43
Hanjin Heavy Industries Co., Ltd. 9,408,837 6,305,892 704,206 661,764
Meritz Securities Co., Ltd. 559,204 625,460 10,849 2,315
Aviation University 221,966 188,705 114 -
Topas Co., Ltd. - 534 - 14
Our Home 80,524 - 37 -
Total \ 17,433,615 \ 19,630,889 \ 8,635,902 \ 14,052,760
www.meritzfire.com77
(2) Account balances
(3) Other
a. As of and the year ended March 31, 2006
Accounts Related companies FY2005 FY2004
(Asset)
Insurance receivables Hanjin Heavy Industries Co., Ltd. \ 568,965 \ 7,324
“ Hanjin Shipping Corporation - 20,594
“ Korean Air Lines Co., Ltd. 2,986 526,694
“ Han Jin Transportation Co., Ltd. 16,426 -
“ Hanjin Information System & Telecommunication 7,137 -
Loans KAL Hotel Network 9,687,500 10,000,000
Leasehold and other deposits Jung Suck Academy 38,740 96,148
“ Jung Suck Enterprise Co., Ltd. - 104,005
“ Korean Air Line Co., Ltd. 278,075 110,000
Total 10,599,829 10,864,765
(Liability)
Claims payable Han Jin Travel Service Co., Ltd 100 100
“ Hanjin Transportation Co., Ltd 2,111 96
“ Korea Air Terminal Service Co., Ltd. 337 337
Leasehold deposits received Korean Air Lines Co., Ltd. 280,000 280,000
“ Hanjin Information System & Telecommunication 27,520 27,520
Total \ 310,068 \ 308,053
Construction in General Other Rent Interest
Related companies progress expenses expenses income income
Hanjin Heavy Industries Co., Ltd. \ 63,553,414 \ 8,589 \ - \ 33,000 \ -
Hanjin Information System & Telecommunication - 5,134,518 - 81,818 -
Han Jin Travel Service Co., Ltd. - - 1,490 - -
Korean Air Lines Co., Ltd. - 254,987 12,904 17,140 -
Han Jin Transportation Co., Ltd. - 192,553 42,269 10,721 -
Jung Suck Enterprise Co., Ltd. - 139,168 - - -
Korea Air Terminal Service Co., Ltd. - 802 248,272 - -
HanIl Leisure Co., Ltd. - 112,481 3,122 - -
KAL Hotel Network - - - - 626,234
Meritz Securities Co., Ltd. - - 33,238 17,507 -
Our Home - 17,425 197,193 834,120 -
Total \ 63,553,414 \ 5,860,523 \ 538,488 \ 994,306 \ 626,234
Notes to Financial Statement 78
[ NOTES TO FINANCIAL STATEMENTS ]
b. As of and the year ended March 31, 2005
The book value and published value of land declared by the government for the purposes of taxes and land policy as of March 31, 2006 and 2005
are as follows (in thousands of Korean won):
Construction Equipment General Other Rent Interest
Related companies in process purchase expenses expenses income income
Hanjin Heavy Industries Co., Ltd. \ 43,529,341 \ - \ 10,818 \ - \ 91,049 \ -
Hanjin Information System
& Telecommunication - 811,940 5,528,670 - 103,215 -
Han Jin Travel Service Co., Ltd. - - 5,716 3,170 - -
Korean Air Lines Co., Ltd. - - 125,256 39,568 25,401 -
Han Jin Transportation Co., Ltd. - - 136,021 32,693 26,126 -
Jung Suck Enterprise Co., Ltd. - - 271,465 - - -
Korea Air Terminal Service Co., Ltd. - - 686 233,322 - -
HanIl Leisure Co., Ltd. - - 118,252 7,982 - -
KAL Hotel Network - - - - - 689,346
Total \ 43,529,341 \ 811,940 \ 6,196,884 \ 316,735 \ 245,791 \ 689,346
11. PUBLISHED VALUE OF LAND
Book value Published value
Descriptions FY2005 FY2004 FY2005 FY2004
Headquarters \ 43,660,468 \ 43,660,468 \ 59,321,095 \ 55,053,732
Yeuido 11,083,600 11,083,600 12,137,000 11,450,000
Annex building of headquarters 11,581,500 11,581,500 15,727,677 10,979,262
Branch buildings 30,848,506 30,848,506 20,323,799 19,922,571
Training center 20,127,005 20,127,005 26,910,982 23,291,524
Other 3,319,386 6,036,511 1,903,995 5,397,356
Total \ 120,620,465 \ 123,337,590 \ 136,324,548 \ 126,094,445
www.meritzfire.com79
(1) The Company’s tangible assets as of March 31, 2006 and 2005 are summarized as follows (in thousands of Korean won):
(2) Changes in property, plant and equipment for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
March 31, 2006
March 31, 2005
(3) The residual values of fixed assets still in usage as of March 31, 2006 and 2005 of which the depreciation have been completed, totaled
\ 48,812 thousand and \ 45,307 thousand, respectively.
12. PROPERTY, PLANT AND EQUIPMENT
Accounts Useful lives FY2005 FY2004
Loans \ 120,357,559 \ 120,407,234
Buildings 40 265,260,647 89,929,524
Construction in-progress 528,000 96,458,978
Vehicles 4 638,446 516,988
Furniture and equipment 4 54,540,517 41,630,945
Total 441,325,169 348,943,669
Less accumulated depreciation (58,380,559) (48,699,287)
Net \ 382,944,610 \ 300,244,382
Descriptions April 1, 2005 Purchases Disposals Transfer Depreciation March 31, 2006
Land \ 120,407,234 \ - \ 49,675 \ - \ - \ 120,357,559
Buildings 77,001,125 - 54,574 175,397,623 4,439,600 247,904,574
Vehicles 6,153,367 14,483,957 25,978 - 6,703,208 13,908,138
Furniture and equipment 223,678 328,015 66,664 - 238,690 246,339
Construction in-progress 96,458,978 79,466,645 - (175,397,623) - 528,000
Total \ 300,244,382 \ 94,278,617 \ 196,891 \ - \ 11,381,498 \ 382,944,610
Descriptions April 1, 2004 Purchases Disposals Depreciation March 31, 2005
Land \ 120,435,550 \ 86,333 \ 114,649 \ - \ 120,407,234
Buildings 78,645,950 671,450 66,903 2,249,372 77,001,125
Vehicles 131,080 287,376 35,500 159,278 223,678
Furniture and equipment 6,940,119 4,298,350 22,686 5,062,416 6,153,367
Construction in-progress 45,747,708 50,711,270 - - 96,458,978
Total \ 251,900,407 \ 56,054,779 \ 239,738 \ 7,471,066 \ 300,244,382
Notes to Financial Statement 80
[ NOTES TO FINANCIAL STATEMENTS ]
(1) Details of Company’s intangible assets as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
March 31, 2006
March 31, 2005
(2) Changes in property, plant and equipment for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
March 31, 2006
March 31, 2005
Accumulated amortization as of March 31, 2006 and 2005 totaled \ 5,881,117 and \ 6,339,239, respectively.
13. INTANGIBLE ASSETS
Accumulated Accumulated
Descriptions Cost depreciation impairment March 31, 2006
Development cost \ 5,769,103 \ 4,204,427 \ - \ 1,564,676
Other intangible assets 2,900,712 1,676,690 - 1,224,022
Total \ 8,669,815 \ 5,881,117 \ - \ 2,788,698
Accumulated Accumulated
Descriptions Cost depreciation impairment March 31, 2005
Development cost \ 7,233,590 \ 4,889,152 \ - \ 2,344,438
Other intangible assets 2,751,002 1,450,087 - 1,300,915
Total \ 9,984,592 \ 6,339,239 \ - \ 3,645,353
Impairment March 31,
Descriptions April 1, 2005 Purchases loss (recovery) Amortization 2006
Development cost \ 2,344,438 \ 337,053 \ - \ 1,116,815 \ 1,564,676
Other intangible assets 1,300,915 495,000 - 571,893 1,224,022
Total \ 3,645,353 \ 832,053 \ - \ 1,688,708 \ 2,788,698
Impairment March 31,
Descriptions April 1, 2004 Purchases loss (recovery) Amortization 2005
Development cost \ 2,642,876 \ 1,015,793 \ - \ 1,314,231 \ 2,344,438
Other intangible assets 1,099,473 686,741 - 485,299 1,300,915
Total \ 3,742,349 \ 1,702,534 \ - \ 1,799,530 \ 3,645,353
www.meritzfire.com81
(3) Details of amortization for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
(4) The Company’s intangible assets at March 31 are summarized as follows (in thousands of Korean won):
As of March 31, 2006, the Company has fire insurance for its buildings with Dongbu Insurance Co., Ltd. and other insurance companies with
coverage amount totaling \ 227,650,248 thousand. In addition, the Company has comprehensive insurance for its furniture and equipment
with Dongbu Insurance Co., Ltd. with coverage amount totaling \ 17,257,124 thousand and burglary insurance for its cash and securities with
Dongbu Insurance Co., Ltd. with coverage amount totaling \ 1,371,000 thousand. The Company also has directors’ insurance for its directors
and comprehensive insurance for financial institutions and its vehicles.
The Company’s other real estate owned from foreclosed collection of loans as of March 31, 2006 and 2005 is summarized as follows
(in thousands of Korean won):
Descriptions March 31, 2006 March 31, 2005
Non operating expense \ 1,688,708 \ 1,799,530
Accounts FY2005 FY2004
Land \ 262,907 \ 2,930,357
Buildings 961,728 961,728
Total \ 1,224,635 \ 3,892,085
Descriptions March 31, 2006 Useful lives Remarks
Development cost \ 1,564,676 1~4 System development cost and others
Other intangible assets 1,224,022 1~4 Software
Total \ 2,788,698
14. INSURANCE COVERAGE
15. INVESTMENTS IN REAL PROPERTIES
Notes to Financial Statement 82
[ NOTES TO FINANCIAL STATEMENTS ]
Assets and liabilities denominated in foreign currencies as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
16. FOREIGN CURRENCY ASSETS AND LIABILITIES
FY2005 FY2004
Foreign Equivalent Foreign Equivalent
Account currencies Korean won currencies Korean won
(Assets)
Insurance receivables
US$ 8,559,384.02 \ 8,353,102 8,326,521.93 \ 8,528,855
EUR 158,668.69 188,360 410,055.37 542,708
YEN 14,054,674.31 116,896 - -
Others 105,834 344,392
Sub-total 8,764,192 9,415,955
Deposits in foreign currencies
US$ 51,076,923.84 49,845,969 50,134,089.67 51,352,348
YEN 1,472,181.00 12,244 5,226,653.00 49,785
GBP 957.66 1,632 581.06 1,118
EUR 97,155.86 115,336 68,323.92 90,425
Sub-total 49,975,181 51,493,676
Overseas securities
US$ 139,000,000 135,553,193 77,000,000.00 78,586,345
Others
US$ 11,500,000 11,356,939 - -
Total 205,649,505 139,495,976
(Liabilities)
Insurance payables
US$ 10,743,539.93 10,484,620 10,523,395.78 10,779,114
YEN 110,391.54 131,049 - -
EUR 3,392,104.27 28,213 266,421.41 352,608
Others - 258,459 - 78,157
Total \ 10,902,341 \ 11,209,879
www.meritzfire.com83
As of March 31, 2006 and 2005, policy reserves consist of the followings (in thousands of Korean won):
(1) As of March 31, 2006
17. POLICY RESERVES
Descriptions April 1, 2005 Increase Decrease March 31, 2006
Long-term Insurance Premium Reserves:
Long-term \ 1,123,434,049 \ 319,916,660 \ - \ 1,443,350,709
Personal pension 413,813,940 31,826,997 - 445,640,937
Sub total 1,537,247,989 351,743,657 - 1,888,991,646
Reserve for Outstanding Claims:
General 94,162,019 - 1,549,158 92,612,861
Auto 166,158,047 - 5,801,410 160,356,637
Long-term 30,470,149 9,407,092 - 39,877,241
Personal pension 2,391,998 - 143,421 2,248,577
Reinsurance (80,363,172) - (6,686,967) (73,676,205)
Sub total 212,819,041 9,407,092 807,022 221,419,111
Unearned Premium Reserves:
General 114,915,678 4,011,061 - 118,926,739
Auto 296,613,584 - 15,781,087 280,832,497
Long-term 4,223,831 - 41,345 4,182,486
Personal pension 10,264 - 989 9,275
Reinsurance (94,314,214) - (308,660) (94,005,554)
Sub total 321,449,143 4,011,061 15,514,761 309,945,443
Reserve for Participating Policyholders’ Dividends:
Personal pension 8,122,427 6,430,247 - 14,552,674
Severance insurance - 130,663 - 130,663
Sub total 8,122,427 6,560,910 - 14,683,337
Excess Participating Policyholders’ Dividends:
Personal pension 10,827,478 1,515,191 - 12,342,669
Severance insurance 220,738 - 106,797 113,941
Sub total 11,048,216 1,515,191 106,797 12,456,610
Total \ 2,090,686,816 \ 373,237,911 \ 16,428,580 \ 2,447,496,147
Notes to Financial Statement 84
[ NOTES TO FINANCIAL STATEMENTS ]
(2) As of March 31, 2005
(Note 1) Excess Participating Policyholders’ Dividends as of April 1, 2004 include \71,873 thousands of loss on prior period error corrections.
a. Details of catastrophe reserves as of March 31, 2006 are as follows (in thousands of Korean won):
Descriptions April 1, 2004 Increase Decrease March 31, 2005
Long-term Insurance Premium Reserve:
Long-term \ 897,761,431 \ 225,672,618 \ - \ 1,123,434,049
Personal pension 384,712,350 29,101,590 - 413,813,940
Sub total 1,282,473,781 254,774,208 - 1,537,247,989
Reserve for Outstanding Claims:
General 115,319,334 - 21,157,315 94,162,019
Auto 156,280,243 9,877,804 - 166,158,047
Long-term 23,084,911 7,385,238 - 30,470,149
Personal pension 2,565,186 - 173,188 2,391,998
Reinsurance (98,059,225) - (17,696,053) (80,363,172)
Sub total 199,190,449 17,263,042 3,634,450 212,819,041
Unearned Premium Reserve:
General 115,656,245 - 740,567 114,915,678
Auto 275,719,674 20,893,910 - 296,613,584
Long-term 6,449,437 - 2,225,606 4,223,831
Personal pension 13,377 - 3,113 10,264
Reinsurance (96,982,749) - (2,668,535) (94,314,214)
Sub total 300,855,984 20,893,910 300,751 321,449,143
Reserve for Participating Policyholders’ Dividends:
Personal pension 4,874,785 3,247,642 - 8,122,427
Sub total 4,874,785 3,247,642 - 8,122,427
Excess Participating Policyholders’ Dividends:
Personal pension(Note 1) 9,179,722 1,868,494 - 11,048,216
Sub total 9,179,722 1,868,494 - 11,048,216
Total \ 1,796,574,721 \ 298,047,296 \ 3,935,201 \ 2,090,686,816
18. CATASTROPHE RESERVES
Descriptions April 1, 2005 Increase Decrease March 31, 2006
General \ 49,259,928 \ 4,688,766 \ - \ 53,948,694
Auto 59,189,378 7,604,082 - 66,793,460
Total \ 108,449,306 \ 12,292,848 \ - \ 120,742,154
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b. Details of catastrophe reserve as of March 31, 2005 are as follows (in thousands of Korean won):
The Company manages retirement insurance contracts separately from the general account. Financial information of separate account as of
and for the years ended March 31, 2006 and 2005 is as follows (in thousands of Korean won):
(1) Balance sheets of separate accounts
Descriptions April 1, 2004 Increase Decrease March 31, 2005
General \ 44,838,131 \ 4,421,797 \ - \ 49,259,928
Auto 51,984,633 7,204,745 - 59,189,378
Total \ 96,822,764 \ 11,626,542 \ - \ 108,449,306
19. SEPARATE ACCOUNTS
Descriptions FY2005 FY2004
(Assets)Ⅰ. Cash and deposits
1. Ordinary deposits \ 2,239 \ 420
2. Time deposits 10,000,000 -
3. Other deposits - 5,000,000
Sub total 10,002,239 5,000,420
Ⅱ.Marketable securities
1. Stocks 1,324,957 1,257,395
2. Government and public bonds 1,375,590 1,410,319
3. Special bonds 22,948,220 16,687,822
4. Corporate bonds 15,059,592 10,179,876
5. Investment funds 32,757,976 33,203,653
Sub-total 73,466,335 62,739,065
Ⅲ. Loans
1. Loans secured by credit 372,150 301,442
Allowance for doubtful accounts (83,516) (1,507)
2. Loans on real property 61,500 61,193
3. Other loans 2,500,000 -
Sub-total 2,850,134 361,128
Ⅳ. Other Assets
1. Other accounts receivable - 468,173
2. Accrued income 1,551,803 847,313
3. Accrued dividends - 23,250
Sub-total 1,551,803 1,338,736
Ⅴ. Due to general account 103,585 8,858
Total assets \ 87,974,096 \ 69,448,207
(Continued)
Notes to Financial Statement 86
[ NOTES TO FINANCIAL STATEMENTS ]
(2) Income statements of separate accounts
Descriptions FY2005 FY2004
(Liabilities)
Ⅰ. Other liabilities
1. Other payables \ 568 \ -
2. Accrued expenses 176,448 145,902
3. Unearned income 1,807 1,807
4. Withholding tax payables 2,278 5,588
Sub total 181,101 153,297
Ⅱ. Due to general account 282,447 -
Total liabilities 463,548 153,297
(Reserve)
Ⅰ. Reserve for participating policyholders
1. Insurance reserves 86,108,279 68,162,032
2. Reserve for participating policyholders’ dividend 553,642 559,214
3. Excess participating policyholders’ dividend
reserves 847,814 573,664
4. Retained earning for non-dividend 813 -
Sub-total 87,510,548 69,294,910
Total liabilities and reserves \ 87,974,096 \ 69,448,207
Expense Income
Descriptions FY2005 FY2004 Descriptions FY2005 FY2004
1. Policyholders’ reserves \ 18,215,639 \ 9,509,789 1. Premium income \ 36,546,705 \ 18,487,623
2. Claims paid 21,208,032 11,627,950 (Group premium)
1) Claims expense 11,964,596 9,079,346 2. Interest income 2,007,427 2,169,709
2) Refund of claims 1)Deposits interest
expense 9,243,436 2,548,604 2,996 186,086
3. Separate account 2)Marketable
operating fees 487,157 423,582 securities interest 1,883,222 1,943,747
4. Commissions paid 126 - 3)Loans interest 86,712 -
5. Taxes and dues 189 - 4)Other income interest 34,497 39,876
6. Bad debt expense 12,806 6,985 3. Dividend income 22,500 25,750
7. Property management fees 4. Gain on disposal
- 1,190 of marketable securities 1,241,226 564,626
8. Loss on disposal of 5. Gain on valuation of
marketable securities 82,074 136,236 marketable securities 434,168 573,584
9. Loss on valuation of 6. Other income
marketable securities 231,354 108,750 2,642 -
10. Interest expenses 7. Gain on foreign
17,291 6,810 currency transactions - -
Total \ 40,254,668 \ 21,821,292 Total \ 40,254,668 \ 21,821,292
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Compensation receivables as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
a. Details of compensation receivables as of March 31, 2006 are as follows:
b. Details of compensation receivables as of March 31, 2005 are as follows:
Details of insurance receivables and unpaid claims as of March 31, 2006 and 2005 are as follows (in thousands of Korean won):
(1) Insurance receivables
20. COMPENSATION RECEIVABLES
21. INSURANCE RECEIVABLES AND UNPAID CLAIMS
Descriptions April 1, 2005 Increase (decrease) March 31, 2006
General \ 2,760,059 \ 787,144 \ 3,547,203
Auto 14,491,109 (164,279) 14,326,830
Long-term 44,516 54,209 98,725
Personal pension 2,418 (1,045) 1,373
Total \ 17,298,102 \ 676,029 \ 17,974,131
Descriptions April 1, 2004 Increase (decrease) March 31, 2005
General \ 2,763,190 \ (3,131) \ 2,760,059
Auto 13,797,272 693,837 14,491,109
Long-term 50,182 (5,666) 44,516
Personal pension 2,692 (274) 2,418
Total \ 16,613,336 \ 684,766 \ 17,298,102
Description FY2005 FY2004
Premiums receivable \ 1,678,424 \ 4,031,895
Due from agents 6,330,050 13,089,861
Co-insurance accounts receivable 5,625,489 5,109,870
Due from agency receivables 7,866,077 9,671,099
Re-insurance accounts receivable 26,971,851 23,354,661
Overseas reinsurance accounts receivable 12,830,000 12,456,452
Deposits on reinsurance contracts assumed 4,689,430 4,136,785
Total \ 65,991,321 \ 71,850,623
Notes to Financial Statement 88
(2) Unpaid claims
Borrowings as of March 31, 2006 and 2005 and repayment schedule are as follows (in thousands of Korean won):
(1) Borrowings in Korean won
Certain bank deposits as of March 31, 2006 and 2005 are pledged as collateral on the above long-term borrowings.
(2) Repayment schedule of borrowings as of March 31, 2006
22. BORROWINGS
[ NOTES TO FINANCIAL STATEMENTS ]
Descriptions FY2005 FY2004
Claims payable \ 24,818,783 \ 17,397,784
Due to agents 728,573 782,752
Premiums refund payable 1,153,312 1,868,018
Co-insurance accounts payable 150,843 67,652
Due to agency business 8,416,284 11,136,001
Re-insurance accounts payable 36,222,914 31,877,092
Overseas reinsurance premiums payable 19,556,462 14,834,462
Deposit on reinsurance contracts ceded 17,963,915 18,797,817
Total \ 109,011,086 \ 96,761,578
Amount to be repaid for the year ending March 31
Total FY2005 FY2006 FY2007
\ 900,000 \ 300,000 \ 400,000 \ 200,000
Description Payable to Interest rate FY2005 FY2004 Maturity
Job training facility loans Chohung Bank 2.50% \ 900,000 \ 1,300,000 2008.6.30
www.meritzfire.com89
Details of common shares as of March 31, 2006 are as follows:
(1) Number of common shares authorized: 200,000,000 shares
(2) Par value: \ 500
(3) Number of common shares issued and outstanding: 85,800,000 shares
(4) Changes in common stock: N/A
(5) During the year ended March 31, 2006, there was a stock split, where par value previously \ 5,000 per share became \ 500 per share
and total number of shares issued increased 10 times.
(6) As of March 31, 2005, the Company had treasury stock of \ 12,232 million (7,713,320 shares) purchased in order to stabilize its stock
price and to increase management control.
(1) Dividends during the years ended March 31, 2006 and 2005 are calculated as follows (in Korean won):
(2) Dividend payout ratios for the years ended March 31, 2006 and 2005 are computed as follows (in Korean won):
23. COMMON STOCK
24. DIVIDENDS
Description FY2005 FY2004
Dividend per share (percentage of par) \ 100 (20%) \ 100 (20%)
Number of shares issued and Outstanding, excluding treasury stock 78,086,680 77,499,900
Total dividends \ 7,808,668,000 \ 7,749,990,000
Descriptions FY2005 FY2004
Dividends \ 7,808,668,000 \ 7,749,990,000
Net income 26,416,501,917 21,113,420,213
Payout ratios 29.56% 36.71%
Notes to Financial Statement 90
(3) Dividend yields for the years ended March 31, 2006 and 2005 are as follows (in Korean won):
The Korean Commercial Code requires the Company to appropriate, as a legal reserve, at least 10% of cash dividends for each accounting
period until the reserve equals 50% of outstanding capital stock. The legal reserve may not be utilized for cash dividends, but may be used to
offset a future deficit, if any, or may be transferred to capital stock.
In accordance with the Korean Asset Revaluation Act and the Insurance Business Act, the Company revalued its land and buildings in 1976 and
1994, resulting in a revaluation gain of \ 41,737 million, net of revaluation tax, which was offset entirely against the accumulated deficit in
1993. In addition, the Company revalued its land and buildings in 1998, resulting in a revaluation gain of \ 9,555 million, which was recorded as
revaluation surplus as of March 31, 2006.
Details of reinsurance claims for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
a. March 31, 2006
25. RESTRICTED RETAINED EARNINGS
26. ASSET REVALUATION
27. REINSURANCE CLAIMS
[ NOTES TO FINANCIAL STATEMENTS ]
Descriptions FY2005 FY2004
Dividend per share \ 100 \ 100
Stock price at the balance sheet date 4,570 19,800
Price-dividend yields 2.19% 5.05%
Reinsurance Cash surrender Reinsurance Reinsurance claims
Descriptions premium written value recovered claims recovered
General \ 180,052,583 \ 902,214 \ 96,094,701 \ 2,640,716
Auto 49,352,431 2,227,485 37,202,256 -
Long-term 37,151,398 74,346 29,218,512 52,056
Personal pension 757,964 165 462,134 229
Total \ 267,314,376 \ 3,204,210 \ 162,977,603 \ 2,693,001
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b. March 31, 2005
Details of premium income for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
(1) March 31, 2006
(2) March 31, 2005
Reinsurance Cash surrender Reinsurance Reinsurance claims
Descriptions premium written value recovered claims recovered
General \ 181,338,317 \ 2,163,827 \ 92,558,571 \ 851,407
Auto 49,919,893 2,203,302 32,909,120 -
Long-term 31,461,931 68,879 21,416,947 75,084
Personal pension 809,811 213 459,766 -
Total \ 263,529,952 \ 4,436,221 \ 147,344,404 \ 926,491
Direct premium Assumed reinsurance
Descriptions written premium Surrenders Total
General \ 273,634,874 \ 16,101,887 \ 4,406,685 \ 285,330,076
Auto 621,965,323 - 31,691,663 590,273,660
Long-term 926,123,989 - - 926,123,989
Personal pension 55,198,841 - - 55,198,841
Total \ 1,876,923,027 \ 16,101,887 \ 36,098,348 \ 1,856,926,566
Direct premium Assumed reinsurance
Descriptions written premium Surrenders Total
General \ 268,573,469 \ 14,432,548 \ 4,867,827 \ 278,138,190
Auto 660,095,834 - 32,681,079 627,414,755
Long-term 705,726,587 - - 705,721,587
Personal pension 60,398,152 - - 60,398,152
Total \ 1,694,789,042 \ 14,432,548 \ 37,548,906 \ 1,671,672,684
28. PREMIUM INCOME
Notes to Financial Statement 92
Details of operating expenses for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
Details of deferred acquisition cost as of March 31, 2006 and 2005 are as follows (in thousand of Korean won):
(1) March 31, 2006
(2) March 31, 2005
29. OPERATING EXPENSES
30. DEFERRED ACQUISITION COST
[ NOTES TO FINANCIAL STATEMENTS ]
Accounts FY2005 FY2004
Wages and salaries \ 85,836,249 \ 74,357,537
Retirement and severance benefits 10,128,338 9,224,035
Other employee benefits 18,736,800 16,525,878
Maintenance 108,074,599 94,450,866
Acquisition and collection 24,986,592 (15,301,599)
Agent commissions 100,960,436 156,063,190
Co-insurance commissions 680,591 655,310
Agency business commissions 519,295 658,629
Claim inspection fees 10,035,822 9,022,127
Reinsurance commissions 3,798,520 3,540,616
Reinsurance profit commissions 321,288 250,786
Interest on outward reinsurance reserve deposits 409,201 777,897
Total \ 364,487,731 \ 350,225,272
Descriptions April 1, 2005 Increase Decrease March 31, 2006
Long-term insurance (Non-participating) \ 104,839,560 \ 190,905,856 \ 76,258,917 \ 219,486,499
Personal pension 5,736,964 1,758,941 2,475,719 5,020,186
Total \ 110,576,524 \ 192,664,797 \ 78,734,636 \ 224,506,685
Descriptions April 1, 2004 Increase Decrease March 31, 2005
Long-term insurance (Non-participating) \ 17,525,150 \ 109,811,480 \ 22,497,070 \ 104,839,560
Personal pension 4,883,364 3,917,760 3,064,160 5,736,964
Total \ 22,408,514 \ 113,729,240 \ 25,561,230 \ 110,576,524
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(1) Details of derivative contracts for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
a. For the year ended March 31, 2006
The Company contracted currency forward and swap to hedge the exchange rate risk and fluctuation of currency for
overseas-investment, and index options for transaction.
The earnest money (current swap) deposit of \ 29,764,950 thousand are held for the purpose to hedge risk of fair value. The
gain/loss on valuation of available-for-sale securities, which is related to the changes in exchange rate, were reported as loss on
valuation of available-for-sale securities in the income statement. While, the earnest money (current swap) deposit of \ 53,674,500
thousand and interest swap are held for the cash-flow hedge accounting. Generated gain/loss by it, all of effective parts was
reflected to capital adjustment. And accumulated gain/loss of derivative contract were recorded to assets/liabilities of derivative.
b. For the year ended March 31, 2005
31. DERIVATIVE CONTRACTS
Notional amount Gain or loss on valuation (I/S) Gain or loss
Trading Hedging Trading Hedging on valuation
Descriptions Total purpose purpose Total purpose purpose (B/S)
Currency Currency forwards \ 26,368,818 \ - \ 26,368,818 \ 1,308,416 \ - \ 1,308,416 \ -
related Currency swaps 160,047,600 - 160,047,600 2,713,986 - 2,713,986 986,918
Sub-total 186,416,418 - 186,416,418 4,022,402 - 4,022,402 986,918
Interest rate Interest rate swaps 10,000,000 - 10,000,000 - - - (406,968)
related Stock price index
options 950,000 950,000 - 289,000 289,000 - -
Sub-total 10,950,000 950,000 10,000,000 289,000 289,000 - -
Total \ 197,366,418 \ 950,000 \ 196,416,418 \ 4,311,402 \ 289,000 \ 4,022,402 \ 579,950
Notional amount Gain or loss on valuation (I/S) Gain or loss
Trading Hedging Trading Hedging Ineffective on valuation
Descriptions Total purpose purpose Total purpose purpose hedging (B/S)
Currency Currency forwards \ 24,070,896 \ - \ 24,070,896 \ 2,355,505 \ - \ 2,355,505 \ - \ -
related Currency swaps 111,342,800 - 111,342,800 11,337,668 - 11,337,668 - -
Sub-total 135,413,696 - 135,413,696 13,693,173 - 13,693,173 -
Interest rate Interest rate swaps 10,000,000 - 10,000,000 - - - - (453,303)
related Stock price index
options 950,000 950,000 - (89,000) (89,000) - - -
Sub-total 10,950,000 950,000 10,000,000 (89,000) (89,000) - - (453,303)
Total \ 146,363,696 \ 950,000 \ 145,413,696 \ 13,604,173 \ (89,000) \ 13,693,173 \ - \ (453,303)
Notes to Financial Statement 94
The earnest money (current swap) deposit of \ 7,028,800 thousand and loss on valuation of derivatives of \ 134,683 thousand are
held for the purpose to hedge risk of fair value. The gain on valuation of available-for-sale securities of 141,300 thousand, which is
related to the changes in exchange rate, was reported as loss on valuation of available-for-sale securities in the income statement.
While, the interest swap is held for the cash-flow hedge accounting. Generated gain/loss by it, all of effective parts was reflected to
capital adjustment.
(2) Credit Linked Note
The Company invests in Credit Linked Notes (CLN) of which book value as of March 31, 2006 was \ 48,797,928 thousand. Through these
investments, the Company takes the risks of underlying assets such as corporate bonds constituting CLNs but earns interests higher than
the market rates. However, there could be a loss resulting from changes in the credit status of the underlying assets. CLNs are recorded at
fair value, which is obtained from outside independent credit rating agencies. In addition, no derivatives are recognized regarding the credit
risk inherent to such CLN, as such risk is not separable.
(1) Components of income tax expense for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
[ NOTES TO FINANCIAL STATEMENTS ]
32. INCOME TAX
Descriptions FY2005 FY2004
Current \ 4,193,914 \ 812,504
Deferred
Change in cumulative temporary differences (Note 1) (6,804,747) (4,470,628)
Related to capital adjustments 4,744,395 -
Income tax expense \ 6,254,266 \ 5,283,132
(Note 1) Net deferred income tax liabilities on temporary
differences at the end of the year \ (15,987,688) \ (9,182,178)
Net deferred income tax liabilities on temporary
differences at the beginning of the year (9,182,178) (4,711,550)
Deferred income tax assets on tax adjustment (763) -
Changes in deferred tax on temporary differences \ (6,804,747) \ (4,470,628)
www.meritzfire.com95
(2) Reconciliation of accounting income and taxable income for the years ended March 31, 2006 and 2005 are as follows
(in thousands of Korean won):
Temporary differences Permanent differences
Descriptions FY2005 FY2004 FY2005 FY2004
Additions:
Compensation receivables \ 17,298,102 \ 16,613,336 \ - \ -
Additional income tax paid - - - 51,700
Miscellaneous losses - - 76,966 152,016
Interest expenses - - 150,481 189,579
Interest on housing loans - - 508,358 494,916
Provision for severance indemnities 5,254,225 5,335,831 - -
Group-term retirement insurance 4,577,676 3,435,510 - -
Accrued income 14,474,409 11,062,372 - -
Loss on valuation of investment securities 408,488 505,311 - -
Gain on valuation of derivatives 1,336,668 - - -
Amortization of deferred acquisition cost 612,339 1,095,274 - -
Dividends - 781,035 - -
Dormancy of insurance money 3,462,566 - - -
Other additional capital surplus - - 2,904,307 -
Development costs 429,667 270,548 - -
Loss on valuation using the equity method - 480,963 - -
Loss on valuation of marketable securities - 545,060 - -
Gain on valuation of marketable securities 485,253 - - -
Stock options - - 529,379 -
Entertainment expense in excess of tax limit - - 548,509 452,781
Taxes and dues 6,574,646 6,465,491 - -
Retained earnings (valuation using the equity method) - - - 676,085
Accumulated depreciation 2,013 2,647 - -
Capital adjustments (available-for-sale securities) - - 13,598,495 -
Capital adjustments (derivatives) - - 799,930 -
Stock dividend - 310 - -
Total \ 54,916,052 \ 46,593,688 \ 19,116,425 \ 2,017,077
(Continued)
Notes to Financial Statement 96
[ NOTES TO FINANCIAL STATEMENTS ]
Temporary differences Permanent differences
FY2005 FY2004 FY2005 FY2004
Deductions:
Dividends \ - \ - \ (1,072,001) \ (2,295,570)
Investment securities (bonds) (59,409) (57,194) - -
Write-off of bad debts - (177,659) - -
Equity method securities (retained earnings) - (676,085) - -
Accrued income (16,264,586) (14,474,409) - -
Provision for severance indemnities (5,279,851) (5,310,205) - -
Stock options - (56,681) (112,873) -
Refundment - - - (535,000)
Gain on valuation of derivatives (4,311,402) (13,604,173) - -
Increase in provision for severance indemnities (4,577,676) (3,435,510) - -
Present value discount - (338,501) - -
Compensation receivables (17,974,131) (17,298,102) - -
Gain on valuation of trading securities (1,778,716) (1,031,306) - -
Gain on assets contributed (2,099,022) - - -
Capital adjustments (available-for-sale securities) (13,598,495) - - -
Capital adjustments (derivatives) (799,930) - - -
Other additional capital surplus (2,904,307) - - -
Loss on sale of treasury stock - - (50,385) -
Discipline compensation of insurance collection - - (2,898) -
Reduction of available-for- sale securities - (1,562,944) - -
Gain on valuation using the equity method (12,532,553) (2,856,020) - -
Equity method investment - (1,456,715) - -
Deemed dividends (403,269) (84,622) - -
Taxes and dues (6,465,491) (5,564,693) - -
Sub-total (89,048,838) (67,984,819) (1,238,157) (2,830,570)
Total \ (4,132,786) \ (21,391,131) \ 17,878,268 \ (813,493)
www.meritzfire.com97
(3) Changes in deferred tax assets and liabilities during the years ended March 31, 2006 and 2005 are as follows
(in thousands of Korean won):
a. For the year ended March 31, 2006
Descriptions April 1, 2005 Increase Decrease March 31, 2006
Deductible temporary differences :
Allowance for bad debts \ 6,033,119 \ - \ - \ 6,033,119
Extinguishment of stock 2,095 - - 2,095
Deemed dividends 581,987 - 403,269 178,718
Provision for severance indemnities 16,998,859 5,254,225 4,577,676 17,675,408
Loss on impairment of Available-for-sale securities 2,657,744 - - 2,657,744
Dormancy of insurance money - 3,462,566 - 3,462,566
Available-for-sale bonds 99,807 - 62,632 37,175
Loss on impairment of membership 505,311 408,488 - 913,799
Taxes and dues 6,465,491 6,574,646 6,465,491 6,574,646
Loss on valuation of available-for-sale securities 2,099,022 - 2,099,022 -
Sub-total 35,443,435 15,699,925 13,608,090 37,535,270
Additional temporary differences :
Accrued income (14,474,409) (16,264,586) (14,474,409) (16,264,586)
Gain on rotational dealing (1,797,966) - - (1,797,966)
Provision for severance indemnities (16,973,233) (5,279,851) (4,577,676) (17,675,408)
Acquisition expenses (953,324) - (612,339) (340,985)
Accumulated depreciation (675,368) - (1,729) (673,639)
Gain on valuation of the trading securities (1,513,453) (1,778,717) (485,253) (2,806,917)
Compensation receivables (17,298,102) (17,974,131) (17,298,102) (17,974,131)
Gain on valuation using the equity method - (3,144,302) - (3,144,302)
Capital adjustments (available-for-sale securities) - (13,598,495) - (13,598,495)
Capital adjustments (derivatives) - (799,930) - (799,930)
Other additional capital surplus - (2,904,307) - (2,904,307)
Amortization of development costs (1,003,408) - (429,667) (573,741)
Land (279,103) - (732) (278,371)
Gain on valuation of derivatives (13,864,807) (4,311,402) (1,336,668) (16,839,541)
Sub-total (68,833,173) (66,055,721) (39,216,575) (95,672,319)
Total (33,389,738) \ (50,355,796) \ (25,608,485) (58,137,049)
Tax effect of temporary differences (9,182,178) (15,987,688)
Deferred income tax liabilities \ (9,182,178) \ (15,987,688)
Notes to Financial Statement 98
b. For the year ended March 31, 2005
(Note 1) The marginal statutory tax rate for the year beginning April 1, 2005 was changed from 29.7% to 27.5% in accordance with the revision
of the Korean Tax Law. Accordingly, a tax rate of 27.5% was used for the temporary differences, which will be utilized after April 1,
2005, in the computation of deferred income taxes as of March 31, 2005.
(Note 2) The temporary differences of valuation using the equity method were not recognized because of its uncertainty of realization.
[ NOTES TO FINANCIAL STATEMENTS ]
Descriptions April 1, 2004 Increase Decrease March 31, 2005
Deductible temporary differences :
Allowance for bad debts \ 6,210,778 \ - \ 177,659 \ 6,033,119
Extinguishment of stock 2,095 - - 2,095
Deemed dividends 666,299 310 84,622 581,987
Provision for severance indemnities 15,098,539 5,335,831 3,435,510 16,998,860
Present value discount 338,501 - 338,501 -
Loss on impairment of Available-for-sale securities 4,220,687 - 1,562,944 2,657,743
Loss on valuation of derivatives 859,658 - 859,658 -
Available-for-sale bonds 157,001 - 57,194 99,807
Taxes and dues - 505,311 - 505,311
Loss on valuation of trading securities 5,564,693 6,465,491 5,564,693 6,465,491
Loss on valuation of available-for-sale securities 2,099,022 - - 2,099,022
Stock options cost 56,681 - 56,681 -
Sub-total 35,273,954 12,306,943 12,137,462 35,443,435
Additional temporary differences :
Accrued income (11,062,372) (14,474,409) (11,062,462) (14,474,409)
Gain on rotational dealing (1,797,966) - - (1,797,966)
Provision for severance indemnities (15,098,539) (5,310,205) (3,435,510) (16,973,234)
Acquisition expenses (2,048,599) - (1,095,274) (953,325)
Accumulated depreciation (677,148) - (1,779) (675,369)
Gain on valuation of the trading securities (2,147,501) (1,031,306) (1,665,352) (1,513,455)
Compensation receivables (16,613,336) (17,298,102) (16,613,336) (17,298,102)
Amortization of development costs (1,273,956) - (270,548) (1,003,408)
Land (279,970) - (867) (279,103)
Gain on valuation of derivatives - (13,864,807) - (13,864,807)
Sub-total (50,999,387) (51,978,829) (34,145,038) (68,833,178)
Total (15,725,433) \ (39,671,886) \ (22,007,576) (33,389,743)
Tax effect of temporary differences (4,711,550) (9,182,178)
Deferred income tax liabilities \ (4,711,550) \ (9,182,178)
www.meritzfire.com99
(4) Effective tax rates for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
The Company has financing lease agreements with IBM Co., Ltd. for certain machinery and equipment (in thousands of Korean won).
(1) Financing leased assets
(2) Future annual payments under these capital lease agreements as of March 31, 2006 are as follows:
FY2005 FY2004
Income tax expense (A) \ 6,254,266 \ 5,283,132
Net income before income taxes(B) 32,670,768 26,396,553
Effective tax rate (A)/(B) 19.1% 20.0%
33. FINANCING LEASE
Acquisition Accumulated Depreciation
cost Depreciation Book value expense
Equipment:
March 31, 2006 \ 7,571,473 \ 4,609,570 \ 2,907,903 \ 1,412,300
March 31, 2005 4,226,688 3,197,270 1,029,418 1,151,553
Amount
Year ending March 31 Total Interest Principal
FY2006 \ 2,177,573 \ 82,159 \ 2,095,414
FY2007 1,234,164 5,405 1,198,759
FY2008 574,200 4,991 569,209
Total 3,985,937 122,555 3,863,382
Less current portion 2,177,573 82,159 2,095,414
Long-term portion \ 1,808,364 \ 40,396 \ 1,767,968
Notes to Financial Statement 100
(1) Cash
Cash presented in the statements of cash flows includes cash, demand deposits and cash equivalents as follows (in thousands of Korean won):
(2) Non-cash transactions
The statements of cash flows are prepared using the indirect method. Significant non-cash transactions for the years ended March 31, 2006
and 2005 are summarized as follows (in thousands of Korean won):
34. CASH FLOW INFORMATION
[ NOTES TO FINANCIAL STATEMENTS ]
Accounts March 31, 2006 March 31, 2005
Cash \ 27,115 \ 30,360
Demand deposits 23,154,740 20,413,151
Cash equivalents 98,730,822 36,654,300
Total \ 121,912,677 \ 57,097,811
Descriptions FY2005 FY2004
Increase in available-for-sale securities from gain on
valuation of available-for-sale securities \ 7,675,869 \ 16,889,722
Decrease in available-for-sale securities from loss on
valuation of available-for-sale securities 19,641,113 1,774,206
Increase in equity securities from gain on valuation
using the equity method (741,805) 160,742
Increase in treasury stock from gain on valuation
of treasury stock fund 1,825,059 669,581
Increase in securities accounted for using the equity method
caused by change in retained earnings - 676,085
Transfer to securities accounted for using the equity method
from available-for-sale securities 953,955 -
Transfer to buildings from construction in-progress 175,397,623 -
Gain (Loss) on valuation of derivatives \ 1,253,233 \ (453,303)
www.meritzfire.com101
Income per share amounts for the years ended March 31, 2006 and 2005 are as follows (in Korean won):
(1) Basic income per share
(Note) Weighted average number of shares outstanding
(2) Diluted income per share
Details of diluted income per share amounts are as follows (in Korean won):
(Note 1) Diluted income per share for the year ended March 31, 2006 is not presented as stock options have anti-dilative effect. Diluted net
income per share and ordinary amounts as of March 31, 2005 were \ 271.
35. INCOME PER SHARE
Descriptions FY2005 FY2004
Net income \ 26,416,501,917 \ 21,113,420,213
Ordinary income 26,416,501,917 21,113,420,213
Weighted average number of shares outstanding 77,806,642 77,499,900
Ordinary income per share \ 340 \ 272
Net income per share \ 340 \ 272
FY2005
Basic ordinary income \ 26,416,501,917
Add: interest on convertible bonds (after tax) 379,641,465
Adjusted net income 26,796,143,382
Weighted average number of common shares outstanding 78,570,082
Diluted ordinary income per share (Note 1)
Diluted net income per share (Note 1)
Weighted number Weighted average
Description Number of shares Treasury stock Days of shares number of shares
FY2005 85,800,000 7,993,357 365 28,399,424,330 77,806,642
FY2004 85,800,000 8,300,100 365 28,287,463,500 77,499,900
Notes to Financial Statement 102
(1) As of March 31, 2006, total stock options granted to purchase the Company’s common shares are summarized as follows :
(2) Changes in the number of stock options granted for the year ended March 31, 2006 are as follows (unit : shares) :
(3) Computation of stock option compensation
The Company used the fair value based method in valuing the stock options granted in FY2004 in accordance with revised interpretation of
Korean GAAP. However, for stock option granted before March 31, 2005, as permitted under Korean GAAP, the Company excluded the volatility
factor in estimating the value of its stock options, which resulted in measurement at minimum value. Stock price was calculated by price in
date of granted(1st: \ 13,800 2nd: \ 20,100). While, the compensation cost in current year and thereafter recorded to income statement are as
follows (in thousands of Korean won) :
Note 1) Option granted is decided by accumulation business performance from the date of grant to second business period.
36. STOCK OPTIONS
[ NOTES TO FINANCIAL STATEMENTS ]
1st 2nd
Number of shares 2,570,000 1,500,000
Data of grant May 21, 2003 June 15, 2005
Method of grant New stock, treasury stock or difference compensation
Exercise price \ 1,220 \ 19,900
Exercise period May 21, 2005 ~ May 20, 2013 June 16, 2007 ~ June 15, 2015
1st 2nd Total
April 1, 2005 \ 2,570,000 \ 1,500,000 \ 4,070,000
Forfeited or expired 1,983,220 - 1,983,220
Exercised 586,780 - 586,780
March 31, 2006 \ - \ 1,500,000 \ 1,500,000
1st(Note 1) 2nd Total
April 1, 2005 \ 107,137 \ - \ 107,137
Compensation recorded for the year (79,128) 523,643 444,515
Compensation after this year - 733,101 733,101
March 31, 2006 \ 28,009 \ 1,256,744 \ 1,284,753
www.meritzfire.com103
(4) Details of assumptions
(5) Computation of stock option compensation (On the fair value method of stock options) for 1st stock option
(in thousands of Korean won)
Details of assumptions
Risk free interest rate : 4.3%
Expected life of option : 6.0 years
Expected stock volatility : 79.88%
Expected dividend ratio : 15%
Expected ratios of no-exercise : 0%
Weighted average exercise price : \ 12,200
Weighted average fair value : \ 674.21
1st 2nd
Risk free interest rate 4.3% : 4.08%
Expected life of option 6.0 years : 6.0 years
Expected stock volatility 0.1% : 64.90%
Expected dividend ratio 15% : 20.00%
Expected ratios of no-exercise 0% : 0%
Weighted average exercise price \ 1,220 : \ 1,990
Weighted average fair value \ 49.47 : \ 837.83
Amount
April 1, 2005 \ 1,474,301
Compensation recorded for the year 64,100
Compensation after this year -
March 31, 2006 \ 1,538,401
Notes to Financial Statement 104
(6) Details of last three years income statement are as follows (in Korean won):
Details of value-added information for the years ended March 31, 2006 and 2005 are as follows (in thousands of Korean won):
Note) Above depreciation does not include depreciation expenses of real properties. The amount of depreciation expenses of real properties
for the years ended March 31, 2006 and 2005 are \ 2,375 million and \ 893 million, respectively.
37. VALUE-ADDED INFORMATION
[ NOTES TO FINANCIAL STATEMENTS ]
Accounts FY2004 FY2003 FY2002
Ordinary income \ 25,741,831,163 \ 27,746,493,939 \ 40,128,788,679
Net income 20,458,698,793 19,306,491,945 34,058,859,389
Ordinary income per share 2,640 2,491 3,627
Net income per share \ 2,640 \ 2,491 \ 4,396
Investment administration
Operating expenses expenses Total
Descriptions FY2005 FY2004 FY2005 FY2004 FY2005 FY2004
Wages and salaries \ 85,836,249 \ 74,357,537 \ 1,337,408 \ 1,275,429 \ 87,173,657 \ 75,632,966
Provision for severance indemnities 10,128,338 9,224,035 135,427 234,025 10,263,765 9,458,060
Employee welfare 18,736,800 16,525,878 259,883 185,893 18,996,683 16,711,771
Acquisition and collection expenses 24,986,592 (15,301,599) - - 24,986,592 (15,301,599)
Agent commissions paid 100,960,436 156,063,190 - - 100,960,436 156,063,190
Rent 15,763,030 13,909,108 1,569 1,630 15,764,599 13,910,738
Depreciation (Note) 6,941,897 5,221,694 2,064,977 1,356,555 9,006,874 6,578,249
Taxes and dues 18,272,102 16,594,736 693,884 490,407 18,965,986 17,085,143
Miscellaneous 3,332,456 3,024,173 - - 3,332,456 3,024,173
Total \ 284,957,900 \ 279,618,752 \ 4,493,148 \ 3,543,939 \ 289,451,048 \ 283,162,691
www.meritzfire.com105
>>A. ReInsurance Agreements
The Company and 19 other insurance companies are engaged in mutual insurance agreements, which secure a part of their total insured
amounts. These insured amounts are additionally reinsured by Korean Reinsurance Company and any remaining amounts not covered by
Korean Reinsurance Company are reinsured by foreign insurance companies. In accordance with the reinsurance agreements, the Company
receives and pays commissions to Korean Reinsurance Company, via J&H Morsh & Mclennan Co. and other foreign insurance companies.
>>B. Outstanding Litigations
The Company is involved in litigation as a defendant in the aggregate amount of \ 81,681,537 thousand arising in the normal course of its
business related to policy coverage and claims disputes. The Company has provided reserves for the possible estimated losses resulting from
such litigations as of March 31, 2006.
>>C. Current Account Agreement
The Company has opened a current account with Woori Bank and others (within the limits of \ 2,000 million) and one-day current account
(within the limit of \ 16,000 million) as of March 31, 2006.
(1) Insurance contracts subject to insurance premium deficiency calculation are all contracts that are long-term or individual pension
insurance, which can normally incur premium income and claim payment as of February 28, 2006. According to the type of each
contract and the characteristics of coverage, the insurance contracts are classified as long-term insurance or pension insurance,
dividend insurance or non-dividend insurance, fixed interest type insurance or floating interest type insurance. To reflect characteristics
of insurance, it was divided into casualty-type, driver-type, property-type, illness-type, saving-type and pension-type and lump-sum
payment and installment payment in the calculation.
38. CONTINGENCIES AND SIGNIFICANT CONTRACTS
39. PREMIUM DEFICIENCY
Notes to Financial Statement 106
Note) Although insurance contracts subject to insurance premium deficiency calculation should be based on contracts held as of the fiscal
year end according to the Financial Supervisory Service’s guide [Report on Examples of Accounting for Insurance Companies when
Insurance Premium Deficiency is Expected (April 12, 2003)], the calculation was based on the contracts held as of December 31, 2004
because there was no significant difference between the contracts held as of March 31, 2006 and February 28, 2006 and it was almost
certain that insurance premium deficit would not be incurred.
(2) As of February 28, 2006 the calculation of insurance premium deficit was based on the following:
Note) Surrender ratio (Persistency ratio) was based on the statistical analysis using past 5-year data, removing outliers that caused enormous
errors and fitting function to reflect the trend. The interest rate as of March 31, 2006 was used as the interest rate to apply to the
products.
[ NOTES TO FINANCIAL STATEMENTS ]
Classification Criteria Calculation method
Discount rate(Interest rate) Last 3 years Asset management earning rate = asset management income ÷management asset × 100
Management asset = (Σmanagement asset at the end of previous month+Σmanagement
asset at the end of this month) ÷ 24
Asset management income = (investment income - unrealized gain on investment securities
and stocks - unrealized gain on derivatives)
Expense ratio Last 1 year Expected expense ratio = expected business expense ÷ direct premium
Actual expense ratio = actual business expense ÷ expected business expense
Surrender ratio Last 5 years Persistency ratio = Insurance premium of persisted contract ÷ insurance premium of new
(Persistency ratio) (note) contract
Surrendered ratio = Insurance premium of surrendered contract ÷ insurance premium of
new contract
Lapse ratio = Insurance premium of lapsed contract ÷ insurance premium of new contract
Extinction ratio = Insurance premium of extinct contract by accident ÷ insurance premium of
new contract
Insurance claim payment ratio Last 3 years Insurance claim payment ratio = insurance claim paid ÷ risk premium
www.meritzfire.com107
(3) As of December 31, 2004, the calculations of insurance contract amount, expected interest rate and insurance premium surplus per
insurance contract type of the Company are as follows(In billions of Korean won, %):
(1) The Company did not issue 4th quarter interim financial statements and the following shows the Company’s major financial indicators for
the three months ended March 31, 2006 (in Korean won):
Insurance Deficit
premium allocation
Insurance contract Expected surplus per insurance
Classification amount interest rate (deficiency) contract
Dividend insurance \ - \ - \ -
Non-dividend insurance 640,260 3.5~8.0 (1,225) -
Individual pension 10,744 3.5~7.5 (989) -
Total 651,004 3.5~8.0 (2,214) -
Fixed interest type 494,312 3.5~8.0 (1,695) -
Floating interest type 156,692 3.5~8.0 (519) -
Operating Net income
Sales Operating income Net income income per share per share
\ 551,599,561,388 \ 6,957,479,130 \ 8,013,055,928 \ 103 \ 103
40. INTERIM PERFORMANCE (UNAUDITED)
Financial Section 108
INTERNAL ACCOUNTING CONTROL SYSTEM REVIEW REPORT
To Representative of Meritz Fire & Marine Insurance Co., Ltd.
We have reviewed the report of management’s assessment of internal accounting control system (”IACS”) of Meritz Fire & Marine Insurance
Co., Ltd. (the “Company”) as of March 31, 2006. In accordance with Article 2-2 of the Act on External Audit for Stock Companies (the “External
Audit Law”) of the Republic of Korea, the Company’s management is responsible for assessing the design and operations of its IACS. Our
responsibility is to review management’s assessment and issue a report based on our review.
We conducted our review in accordance with Article 2-3 of the External Audit Law. Our review included inquiries of management and
employees, inspection of related documents and checking of the operations of the Company’s IACS. We did not perform an audit of the
Company’s IACS and accordingly, we do not express an audit opinion.
As this report is based on Interim Guidelines on Auditors’ Review and Report on Management’s Assessment of IACS, issued by the Korean
Audit Standards Committee on March 29, 2005, it applies only from that date until the date the Final Standard for Management’s Assessment
of IACS and Final Standard for Auditors’ Review and Report on Management Assessment of IACS becomes effective. A review performed
based on the final standards may have different results and accordingly, the content of our report may be different.
Based on our review, no material weakness in the design or operations of the Company’s IACS under Article 2-2 of the External Audit Law as of
March 31, 2006 has come to our attention.
This report applies to the Company’s IACS in existence as of March 31, 2006. We did not review the Company’s IACS subsequent to March 31,
2006. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other
purposes or for other users.
May 12, 2006
NOTICE TO READERS
This report is annexed in relation to the audit of the financial statements as of March 31, 2006 and the review of internal accounting
control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea.
www.meritzfire.com109
February 2006 10:1 stock split (Par value changed from KRW 5,000 to KRW 500)
December 2005 Total assets surpassed KRW 3 trillion
November 2005 Acquired Meritz Securities as subsidiary
November 2005 Received “Prize for Excellence for Customer Value Innovation” of Korean Customer Service Management Awards
October 2005 Company headquarters relocated to Meritz Tower in Gangnam, southeastern Seoul
October 2005 Renamed as Meritz Fire & Marine Insurance Co., Ltd. from Oriental Fire & Marine Insurance Inc.
March 2005 Disaffiliated from the Hanjin Group
November 2004 Affirmed ‘B++ (Very Good’ credit rating from A.M. Best
November 2004 Received the best outstanding award for customer service renovation of Customer Service Management Awards
October 2004 Received a special award in child/youth division of Hankyung’s Financial Product Awards
November 2004 Product “Doctor Care” received a special award of 9th Maekyung Business Daily Financial Product Awards
July 2002 Total assets surpassed KRW 2 trillion
July 2002 Received top prize for new corporate culture at the Korea Best Corporate Image KMAC Association Consulting
December 2001 Product “Soldier Insurance” received ”Excellent New Financial Product” Prize by FSS
October 2001 Ranked first among financial institutions on “Korean Standard Service Quality Index”
December 1999 Ranked 1st among non-life insurers in National Customer Satisfaction Index survey by KPC, Chosun Ilbo and the
University of Michigan (for two years in a row)
September 1999 Awarded “Grand Prize” of Korea Customer Service Management Awards
September 1999 Ranked 1st among non-life insurers in National Customer Satisfaction Index survey by KPC, Chosun Ilbo and the
University of Michigan
December 1998 Ranked 1st among non-life insurers in the National Customer Satisfaction Index (NCSI) for 1998, Korea Productivity
Center (KPC) at Korea Customer Service Management Awards
November 1998 Received first prize as conferred by Korea’s Prime Minister for second year for “successful innovations in
management’ of 1998 Best Practice Awards
January 1997 Chosen as best company for customer service in auto Insurance by Korea Consumer Protection Board
May 1996 Total assets exceeded KRW 1 trillion
January 1995 Paid-in capital increased to KRW 42.9 billion
May 1950 Renamed as Oriental Fire & Marine Insurance Inc.
October 1922 Acquired incorporation charter with KRW 5 million in capital
History in Brief
Organization
Asset ManagementDivision
PRESIDENT & CEO
Personnel/General AffairsDivision
Marketing Division
Strategic PlanningDivision
Operation Division
IT Division
Commercial LineBusiness Division
Claims Division
Private Line BusinessDivision
Private Line Sales Unit
New Distribution Channel Unit
Seoul District Division
Gyeongin District Division
Jungbu District Division
Busan District Division
Gyeongbuk District Division
Private Line Operation Unit
Commercial Line Operation Unit
Commercial Line Sales Division Part 1
Commercial Line Sales Division Part 2
Commercial Line Sales Division Part 3
Organization 110
Shareholder Information
Establishment October 1, 1922
Head Office Meritz Tower, 825-2, Yeoksam-dong, Gangnam-gu, Seoul, Korea
(postal code 135-080)
Tel.82-2-3786-2114, Fax.82-2-3786-2115
Website www.meritzfire.com
Paid in capital KRW 42.9 billion
Total number of stocks 85,800,000 shares
Investor Relations Investor Relations Department
Tel. 82-2-3786-1037, Fax. 82-2-3786-1040
Status of Affiliates
Acquisition date Equity ratio(%)
Meritz Securities Nov. 24, 2005 28.78
PT. Asuransi Hanjin Korindo Nov. 18, 1998 51.00
Contents
01 Who We Are and What We Do
02 Financial Highlights
04 A Message to Shareholders
07 Board of Directors
08 Commitment to Our Stakeholders
16 Building Strong Momentum
17 Management Goals for FY2006
18 Meritz Fire Core Management
23 Business Overview
34 Financial Section
35 Management’s Discussion & Analysis
45 Financial Statements
54 Notes to Financial Statements
109 History in Brief
110 Organization
111 Shareholder Information
ANN
UAL R
EPOR
T 2005
Meritz Tower, 825-2, Yeoksam-dong,
Gangnam-gu, Seoul, Korea
(postal code 135-080)
Telephone : 82-2-3786-2114
Facsimile : 82-2-3786-2115
www.Meritzfire.com
Act on Innovation,Creating the New Paradigm
ANNUALREPORT 2005
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